The imaginative and prescient of a safe and user-friendly decentralized web, supported by a shared financial framework and embraced by billions, depends on creating crucial infrastructure. Scaling options, often called Layer 2, play a vital position in establishing this basis and enhancing Ethereum’s capabilities. These initiatives work collectively, forming a strong ecosystem that propels Ethereum in direction of its full potential.
On this article, we are going to delve into the improvements and narratives surrounding Layer 2 networks. We’ll focus on the challenges confronted by these networks and their potential transformative impression on Ethereum’s mass adoption. Our evaluation will probably be primarily based on information from Footprint Analytics’ Layer 2 analysis web page, offering helpful insights into this evolving ecosystem.
Why Do We Want Layer 2?
Blockchain expertise has lengthy been praised for its fascinating qualities of decentralization, safety, and scalability. Nonetheless, the “blockchain trilemma” means that reaching all three concurrently inside a easy structure is difficult. Ethereum, which at the moment processes over 1 million transactions per day, usually faces excessive transaction charges as a consequence of rising demand. To deal with this difficulty, Layer 2 networks have emerged as an modern answer.
The first goal of Layer 2 networks is to boost transaction throughput by reaching greater transactions per second (TPS) whereas sustaining decentralization and safety. These networks obtain this by consolidating a number of off-chain transactions right into a single layer 1 transaction. Consequently, transaction charges are considerably lowered, making Ethereum extra accessible and inclusive for a wider vary of customers.
Completely different Kinds of Layer 2
At the moment, there are three major varieties of Layer 2, together with rollups, state channels and plasma.
Rollups
Rollups are layer 2 options that mixture quite a few transactions right into a single transaction on layer 1, leading to person price financial savings by distributing transaction charges throughout members throughout the rollup. There are two major varieties of rollups: optimistic rollups and zero-knowledge rollups (ZK-rollups). Optimistic rollups make the most of fraud proofs to make sure the validity of off-chain transactions, whereas ZK-rollups make use of zero-knowledge proofs to boost privateness and safety.
Examples of optimistic rollups embody Arbitrum(Arbitrum One), Optimism(OP Mainnet), and Base.
Arbitrum, launched by the Offchain Labs staff in August 2021, has emerged as a distinguished participant within the business, capturing a market share of over 50%. With its Nitro improve, Arbitrum has achieved full Ethereum Digital Machine (EVM) equivalence, enabling builders to seamlessly migrate sensible contracts from Ethereum to Layer 2 with minimal or no modifications required.
Optimism, the second-largest Ethereum Layer 2 answer, soft-launched its mainnet in January 2021 and have become totally accessible to everybody in December 2021. Constructed with an EVM-equivalent structure, Optimism affords a seamless scaling answer for Ethereum functions with out encountering important challenges.
Base, constructed on OP Stack in collaboration with Optimism, went dwell on the mainnet in July 2023. Inside just a few months, it achieved important success, securing the third place within the Layer 2 market. Incubated by Coinbase, Base leverages Coinbase’s experience in constructing crypto merchandise.
Alternatively, ZK-rollup implementations embody zkSync Period, Starknet, Linea, and Polygon zkEVM.
zkSync Period, acknowledged because the world’s first zkEVM blockchain, launched on the mainnet for all customers in March 2023 and swiftly secured the fourth place within the Layer 2 market by way of market share. zkSync Period has established itself because the dominant rollup answer by way of person actions, together with TPS and transactions.
Starknet went dwell on mainnet in November 2021. It achieves safe low-cost transactions and excessive efficiency by utilizing the STARK cryptographic proof system. Starknet is powered by Cairo and as such will not be EVM appropriate. Efforts are underway to allow compatibility between Solidity and Cairo by the transpiler Warp.
Linea, a ConsenSys-powered Layer 2 answer, went dwell on the Ethereum mainnet in July 2023. It affords EVM compatibility, making it straightforward for builders emigrate and construct functions on its community.
Polygon zkEVM public beta was launched in March 2023 and it supplies EVM equivalence. Polygon, beforehand often called Matic, is a blockchain platform providing various blockchain options. Polygon zkEVM is among the choices from Polygon.
State channels
State channels are a mechanism that permits members to conduct quick and unrestricted off-chain transactions, settling the ultimate final result on the Ethereum blockchain. This method reduces community congestion, charges, and transaction delays.
The Raiden Community is an off-chain scaling answer that focuses on researching state channel expertise, defining protocols, and creating reference implementations. It allows near-instant, low-fee, and scalable funds, making it appropriate with any ERC20 token on Ethereum. The community goals to boost scalability and value whereas sustaining compatibility with the Ethereum ecosystem.
Plasma
A plasma chain is an unbiased blockchain that’s related to the principle Ethereum chain by anchoring, and it makes use of fraud proofs, much like optimistic rollups, to resolve disputes.
The OMG Community makes use of Layer-2 Plasma structure, which affords strong security assurances and excessive throughput. It supplies a scalable answer for third-party builders taken with constructing decentralized cost functions on the Ethereum platform.
Information Insights
A consensus is forming: Ethereum will attain mass adoption, a matter of when, not if. So, how far is it?
Just like the diffusion of different applied sciences, the adoption trajectory of Ethereum could be described by a basic bell curve. It begins with a restricted variety of innovators who’re fast to embrace the expertise, adopted by the engagement of early adopters. As Ethereum continues to evolve and mature, it steadily expands its attain to embody the early and late majority, resulting in a mass adoption section. Finally, the expertise reaches the remaining phase of the inhabitants, known as the laggards, in its last section of adoption.
Let’s discover the impression Layer 2 has on the mass adoption of Ethereum from these features:
TVL
Whole worth locked, or TVL, is anticipated to be the main indicator of the place adoption will happen.
As of October 2023, Arbitrum is main the pack, with a powerful TVL of $6.00 billion and a market share of 61.03%, solidifying its place because the dominant participant out there. Optimism follows behind with a TVL of $2.60 billion and a market share of 26.41%, showcasing its substantial adoption and person engagement.
Different chains type the second echelon however their market shares fall far behind – lower than 5%. Base, the newcomer, which was launched on the mainnet for everybody on July 13, 2023, secures the third spot with a TVL of $462.91 million. The zkSync Period community holds the fourth place with $450.87 million locked, whereas Starknet occupies the fifth place with a TVL of $135.27 million.
Supply: Layer 2 Overview
Distinctive customers and transactions
Consumer actions, such because the variety of distinctive customers (known as “bridgers” who work together with Ethereum) and the quantity of transactions, function key adoption indicators for adoption.
Among the many varied Layer 2 options, zkSync Period stands out because the frontrunner. It has collected a powerful 2.67 million distinctive customers, accounting for 37.10% of all rollups, and facilitated 2.23 million transactions, representing 50.84% of rollup exercise. zkSync Period’s preliminary airdrop exercise attracted a major variety of customers, and it has maintained its main place since then. Starknet follows carefully by way of transaction quantity, with 1.70 million transactions, constituting 23.70% of rollup exercise.
Base and Linea, each launched on the mainnet in July 2023, have gained exceptional reputation out there. They’ve surpassed Optimism and Polygon zkEVM by way of each distinctive person engagement and transaction quantity.
Throughput
One of many major scaling challenges regularly mentioned within the blockchain neighborhood pertains to transaction throughput.
At current, the Ethereum Mainnet has a capability of roughly 15 transactions per second (TPS). In distinction, Visa boasts the flexibility to deal with round 24,000 TPS, whereas Mastercard can course of 5,000 TPS.
Layer 2 is bridging the hole for Ethereum. In October, the common TPS achieved by distinguished rollups like Arbitrum and zkSync Period ranged from roughly 9.5 to 10, making them the closest in efficiency to the Ethereum community among the many rollup options out there. Rollups have collectively made important contributions to scalability, surpassing the Ethereum mainnet by 321% in throughput, with a scalability issue of 4.21 in October.
Whereas rollups contribute to scalability, no particular person rollup at the moment surpasses Ethereum by way of throughput. In a bear market, attracting and retaining customers is difficult for each Layer 1 and Layer 2 networks. Constructing a affluent Layer 2 ecosystem requires not solely strong options but additionally high-traffic functions. Moreover, the person expertise suffers because of the lack of seamless interplay between a number of Layer 2 options and between Layer 1 and Layer 2, for instance, necessitating pockets switching and incurring liquidity prices.
Value
The adoption of layer 2 networks has performed a vital position in lowering community charges on Ethereum. By consolidating a number of off-chain transactions right into a single layer 1 transaction, Ethereum has witnessed a major decline in transaction charges.
In line with Footprint Analytics, the common transaction price in October 2023 for rollups was at the moment between 3% and 10% that of Ethereum.
Supply: Common Gasoline Payment
These figures underscore the rising reputation and utilization of Layer 2 networks, highlighting their potential to alleviate congestion and improve scalability on the Ethereum blockchain.
Improvements in Layer 2
Within the dynamic panorama of blockchain expertise, main Layer 2 options reminiscent of Optimism, zkSync, and Arbitrum are actively pursuing modern approaches to handle persistent challenges whereas sustaining a deal with interoperability. These distinguished gamers keep a fast tempo of innovation, together with expertise and software, frequently striving to remain forward and retain their aggressive edge out there.
The Superchain, proposed throughout the Optimism ecosystem, is a community of rollup networks that share a typical codebase referred to as the OP Stack. This framework goals to determine an interoperable atmosphere the place varied layer 2 networks can talk and transact with one another, much like how the web allows communication between gadgets. By offering horizontal scalability, the Superchain addresses challenges related to conventional multi-chain architectures. These challenges embody differentiated safety architectures amongst parallel chains, which may result in elevated systemic threat as extra chains are added, and the price of organising new nodes for every extra chain.
Supply: Superchain – OP Stack Docs
In June 2023, zkSync launched “Hyperchains“, a novel community that operates as fractal-like cases of zkEVM. These Hyperchains run in parallel with a shared settlement on Layer 1, providing the flexibleness of functioning as Layer 2 networks alongside zkSync Period or as Layer 3 Validiums. Hyperchains throughout the zkSync ecosystem could be developed and deployed by anybody with out the necessity for permission. To make sure belief and seamless interoperability, every Hyperchain have to be powered by the identical zkEVM engine out there on the ZK Stack. GRVT, a hybrid crypto change combining centralized and decentralized change advantages, would be the first hyperchain within the zkSync ecosystem. Its closed alpha model is anticipated to launch in November 2023, adopted by the mainnet launch in Q1 2024.
Supply: Structure – GRVT
Arbitrum Stylus, launched by Arbitrum in August 2023, permits sensible contract growth in a number of programming languages reminiscent of Rust, C, and C++ on their Layer 2 community. Along with Solidity, builders can now write sensible contracts in languages appropriate with WebAssembly (WASM). WASM allows operating code from languages like Rust and C++ on the internet, and with Arbitrum Stylus, on the blockchain as properly. Stylus introduces a second, co-equal digital machine that’s totally interoperable with the EVM, providing a brand new method to writing sensible contracts.
Narratives in Layer 2
Layer 2 itself has emerged as a distinguished narrative within the cryptocurrency house since 2022. Inside the realm of Layer 2, narratives have performed a major position in shaping public notion and subsequently influencing market actions. These narratives present insights into the way forward for Layer 2 and Ethereum as an entire.
- Totally on-chain video games. These video games make the most of the blockchain as an alternative choice to centralized recreation servers, incorporating each side of the sport on-chain, together with belongings, logic, state, and storage. Starknet and COMBO(dwell on testnet at the moment) have positioned themselves as a distinguished supporter of totally on-chain video games throughout the realm of public chains.
- Modular blockchains. Initially, blockchains had been designed with a monolithic method, the place a single blockchain dealt with all duties. Nonetheless, the idea of modular blockchains emerged to specialise in particular features relatively than making an attempt to cowl the whole lot. Celestia is the primary modular blockchain community. It’s able to launch and unveiled the airdrop and launch plans in October 2023.
- Zero gasoline price. Gasoline charges have been a major hurdle for the mass adoption of Ethereum. To deal with this ache level, GasZero(dwell on testnet at the moment) has emerged as a Layer 2 blockchain community that gives a novel answer: it fees zero gasoline charges for trusted finish customers. On GasZero, customers can work together with decentralized networks and sensible contracts with out the necessity for any tokens prematurely of their wallets.
- Layer 3. The idea of “Layer 3” within the blockchain business doesn’t have a extensively accepted definition for the time being. Vitalik Buterin, co-founder of Ethereum, believes that it’s untimely to determine definitive definitions as a result of the structure of the multi-rollup ecosystem remains to be evolving, and most discussions are theoretical in nature. Nonetheless, Buterin has shared three visions of what Layer 3s may doubtlessly symbolize sooner or later.
- Layer 2 is for scaling, and Layer 3 is for custom-made performance, for instance, privateness.
- Layer 2 is for general-purpose scaling, and Layer 3 is for custom-made scaling.
- Layer 2 is for trustless scaling (rollups), and Layer 3 is for weakly trusted scaling (validiums).
Challenges Confronted by Layer 2
The rising reputation of cost-effective and environment friendly Layer 2 networks as alternate options to the congested Ethereum community has gained appreciable consideration. It’s essential to take care of a strong base layer whereas cautiously increasing sure features of its capabilities. Inside the Ethereum neighborhood, the evolution of expertise and functions is inspired, however sustaining a fragile stability between user-friendliness and the advantages of decentralization is of utmost significance, as emphasised by Vitalik Buterin throughout the Ethereum Hong Kong Hackathon in October 2023.
Layer 2 networks face 4 crucial challenges of their quest for scalability on Ethereum in keeping with Buterin.
- Proof system safety and decentralization. Validity (ZK) proofs and fraud proofs are employed to display the legitimacy of transactions with out requiring processing on the principle Ethereum chain. Nonetheless, validity proofs face centralization considerations as a consequence of their reliance on particular {hardware}.
- Sequencing decentralization. These sequencers confirm, order, and compress transactions for switch to Layer 1. Nonetheless, this centralized setup has drawn criticism for its potential as a single level of failure, censorship vulnerability, or susceptibility to shutdown by authorities.
- Cross-L2 wallets. They allow seamless interplay with a number of Layer 2 options with out the necessity for pockets switching.
- Information availability. It refers to on-chain information availability, the problem of storing a full copy of the blockchain information to validate transactions. It’s price noting that options like Validiums and Optimiums usually are not usually categorized as Layer 2s as a result of they don’t publish information on Layer 1. As a substitute, they introduce extra belief assumptions on high of Layer 1.
As well as, as we talked about earlier, no particular person Layer 2 at the moment surpasses Ethereum by way of throughput. It’s pressing to develop the ecosystem inside every community.
- Ecosystem and dApps. At the moment, Layer 2 networks host varied protocols of their ecosystems, with nearly all of them being within the DeFi house. By bringing in phenomenal dApps, Layer 2 networks can increase their ecosystem and appeal to extra customers, encouraging them to remain.
Ending Phrases
In conclusion, Layer 2 networks are propelling Ethereum one step nearer to mass adoption by successfully tackling the scalability and price challenges which have hindered its progress. These networks supply modern options that improve transaction throughput and cut back charges, making Ethereum extra accessible and inclusive for a wider viewers.
Moreover, past Ethereum’s Layer 2 networks, opBNB has emerged as BNB Chain’s response to the scalability problem. In September 2023, opBNB efficiently accomplished the general public launch of its mainnet. Certainly, the responses and future instructions of different public chains within the face of those challenges are equally tantalizing. The important thing emphasis stays on ecosystem growth and person attraction. The huge expanse of potentialities stretches out earlier than us, as every chain embarks by itself distinctive path in direction of scalability and mass adoption.
