Ethereum 1.0 has found a killer application in the DeFi ecosystem. However, as the adoption rate increases, the scalability, robustness, and economic viability of the infrastructure layer have become critical to the long-term success of Ethereum and its dApps.
If the user only needs to pay $80 in gas to withdraw $60 in rewards, then it doesn’t make sense to click the “Withdraw” button. Although it is true that this will only happen if the Ethereum network is blocked due to the current limitations of the network and the temporary increase in usage, this does not affect the fact that it will still happen.
Therefore, it is clear that both Ethereum and the projects built on top of it need scalability solutions to meet the needs of the growing DeFi community.
Generally, there are two main scalability approaches: (i) extend the base layer itself-L1, or (ii) expand the network by offloading some work to another layer-L2.
The first option is to extend the basic Ethereum layer in the form of an Ethereum 2.0 upgrade, which will greatly help applications built on Ethereum’s current foundation (such as PlotX) to expand their services to meet the needs of the growing DeFi community.
Although this update is a good solution for projects that want to stay on the basic Ethereum layer, the phased rollout over the next two years may be too long to meet the growing application demand. So the most straightforward solution will be Layer2.
What exactly is L2?
The scalability of Layer 2 is the general term for solutions that can help improve the functionality of the basic Ethereum blockchain by processing transactions on the primary Ethereum blockchain and secondary chains. The two main functions improved using L2 extensions are (i) transaction speed and (ii) transaction throughput. It does not require any changes to the Ethereum base layer, and can be built on top of it using existing components (such as smart contracts).
Ethereum can currently process about 15 transactions per second (TPS) on its base layer. With the help of layer2, it can greatly increase the number; from 15 TPS to several thousand TPS.
This not only helps the transaction processing time, but also reduces the gas fee required for each transaction performed on layer2, thereby greatly improving the economic feasibility of the network.
In addition, the concept of layers is not even an Ethereum-specific concept, other blockchains have already used it extensively, for example, Bitcoin!
How does it do it?
When discussing scaling solutions, there are multiple options. Some people propose to increase the throughput of the Ethereum network in the near to mid-term, while others are targeting mid- to long-term solutions. And some are application-specific, while others are general.
Therefore, in order to better understand the differences between all these solutions, let’s explore some of the most popular types of layer2 extension solutions:
- In terms of scaling solutions, Channel is one of the earliest widely discussed solutions. They enable participants to exchange x transactions offline, and only submit two transactions for the base layer. The most popular channel type is the national channel and its sub-type-payment channel.
- Although Channel has the potential to easily handle thousands of TPS, some of their disadvantages are that when using Channel, participants must lock their funds in a multi-signature contract, which actually means that public participation is not supported. Moreover, this extended solution is application-specific and cannot be used to extend general smart contracts.
- Plasma is a Layer 2 scaling solution proposed by Joseph Poon and Vitalik Buterin. This is a framework for building scalable applications on Ethereum. The framework uses smart contracts and Merkle trees to create an unlimited number of child chains, which are copies of the parent Ethereum chain.
- Transfer transactions from the main chain to the sub-chains to achieve fast and cheap transactions. The disadvantage is that users must wait a few days before they can withdraw funds from the sub-chain. In addition, like channels, Plasma does not support general smart contract execution.
- The side chain is an independent blockchain compatible with Ethereum, with its own block parameters and consensus model. These side chains are connected to the Ethereum main chain through a two-way bridge. Therefore, contracts deployed to the base layer of Ethereum can also be deployed directly to the side chain.
- Rollups provides scaling through bundling (ie rolling), side chain transactions are bound into a single transaction, and an crypto proof (also known as SNARK (succinct non-interactive argument of knowledge)) submitted to the base layer is generated to provide scaling. Through Rollups, all transaction status and execution are carried out on the side chain, while the Ethereum main chain only stores transaction data.
- There are two types of Rollups: (i) ZK Rollups and (ii) Optimistic Rollups. Although ZK Rollups is faster and more efficient than Optimistic Rollups, it cannot provide an easy way for existing smart contracts to migrate to Layer 2. Optimistic Rollups can run a virtual machine compatible with EVM, called Optimistic Virtual Machine (OVM), which allows the execution of the same smart contracts that can be executed on Ethereum.
These are the most popular methods for L2 expansion, and users will find that most DeFi projects will adopt them when migrating to L2.
Ethereum 2.0 will introduce proof of equity and sharding, which will greatly improve the transaction speed and transaction throughput of the basic layer. But does this mean that once Ethereum 2.0 is launched, we don’t need L2 extensions? not really. This is because, even with such a large-scale update, Ethereum will still be unable to meet the tens of thousands or even millions of TPS demands that will eventually be faced by the increase in adoption.
At this point, someone might argue that we should skip L2 scaling and just concentrate on scaling the basic layer. However, this will require highly specialized nodes to handle the increased workload, which will eventually lead to a higher degree of concentration, thereby reducing the security and censorship resistance of the network.