The realization of a secure and user-friendly decentralized internet, underpinned by a shared economic framework and embraced by billions, hinges on the development of essential infrastructure. Scaling solutions, commonly referred to as Layer 2, play a pivotal role in establishing this foundation and augmenting Ethereum’s capabilities. These initiatives collaborate to create a resilient ecosystem driving Ethereum toward its ultimate potential.
In this article, we will explore the innovations and narratives surrounding Layer 2 networks. We will address the challenges confronting these networks and their potential to bring about a transformative impact on Ethereum’s widespread adoption. Our analysis will draw upon data sourced from Footprint Analytics’ Layer 2 research page, furnishing valuable insights into the dynamic evolution of this ecosystem.
What’s the Purpose of Layer 2?
Blockchain technology has garnered praise for its appealing attributes of decentralization, security, and scalability. Nevertheless, the “blockchain trilemma” posits that achieving all three of these qualities simultaneously within a straightforward architecture is a formidable challenge. Ethereum, a platform currently processing over 1 million daily transactions, frequently grapples with elevated transaction fees spurred by rising demand. In response to this predicament, Layer 2 networks have emerged as an innovative solution.
The primary aim of Layer 2 networks is to amplify transaction throughput by increasing the number of transactions processed per second (TPS) while upholding decentralization and security. This is achieved by consolidating multiple off-chain transactions into a single layer 1 transaction. As a consequence, transaction fees see a substantial reduction, rendering Ethereum more accessible and inclusive to a broader spectrum of users.
Various Varieties of Layer 2
Presently, there exist three primary categories of Layer 2 solutions, encompassing rollups, state channels, and plasma.
Rollups
Rollups represent Layer 2 solutions that consolidate multiple transactions into a single transaction on Layer 1, thereby reducing user costs by distributing transaction fees among participants within the rollup. The two key types of rollups are optimistic rollups and zero-knowledge rollups (ZK-rollups). Optimistic rollups utilize fraud proofs to validate off-chain transactions, while ZK-rollups employ zero-knowledge proofs to enhance privacy and security.
Prominent examples of optimistic rollups include Arbitrum (Arbitrum One), Optimism (OP Mainnet), and Base.
Arbitrum, introduced by the Offchain Labs team in August 2021, has emerged as a significant player in the field, commanding over 50% of the market share. With its Nitro upgrade, Arbitrum has attained full Ethereum Virtual Machine (EVM) compatibility, allowing developers to smoothly transfer smart contracts from Ethereum to Layer 2 with minimal or no modifications required.
Optimism, the second-largest Layer 2 solution for Ethereum, initiated a soft launch of its mainnet in January 2021 and granted full accessibility to the public in December 2021. Designed with an architecture equivalent to Ethereum Virtual Machine (EVM), Optimism offers a seamless scaling solution for Ethereum applications, overcoming significant challenges.
Base, a project developed in collaboration with Optimism using the OP Stack, made its mainnet debut in July 2023. Within a few months, it achieved remarkable success, securing the third position in the Layer 2 market. As an incubated project by Coinbase, Base benefits from Coinbase’s expertise in crafting cryptocurrency products.
Conversely, ZK-rollup implementations encompass zkSync Era, Starknet, Linea, and Polygon zkEVM.
zkSync Era, recognized as the world’s first zkEVM blockchain, made its mainnet debut for all users in March 2023 and swiftly ascended to the fourth position in the Layer 2 market in terms of market share. zkSync Era has positioned itself as the leading rollup solution concerning user activities, including transactions and transactions per second (TPS).
Starknet went live on the mainnet in November 2021, employing the STARK cryptographic proof system to achieve secure, low-cost transactions and high performance. Starknet, powered by the Cairo programming language, is not initially EVM compatible. Ongoing efforts seek to establish compatibility between Solidity and Cairo through the transpiler Warp.
Linea, a Layer 2 solution driven by ConsenSys, entered the Ethereum mainnet scene in July 2023. Offering EVM compatibility, Linea simplifies the process for developers to migrate and construct applications on its network.
The Polygon zkEVM public beta was introduced in March 2023, delivering EVM equivalence. Polygon, previously known as Matic, is a multifaceted blockchain platform offering diverse blockchain solutions, with Polygon zkEVM being one of its offerings.
State Channels
State channels serve as a mechanism enabling swift and unburdened off-chain transactions among participants, culminating in the final settlement on the Ethereum blockchain. This approach effectively mitigates network congestion, transaction fees, and latency.
The Raiden Network, a dedicated off-chain scaling solution, prioritizes the research of state channel technology, the formulation of protocols, and the development of reference implementations. It facilitates nearly instantaneous, cost-effective, and scalable payments, offering compatibility with any ERC20 token on the Ethereum platform. The network’s goal is to enhance scalability and user-friendliness while preserving its interoperability within the Ethereum ecosystem.
Plasma
A plasma chain represents an autonomous blockchain linked to the primary Ethereum chain through anchoring, utilizing fraud proofs akin to optimistic rollups to resolve disputes.
The OMG Network leverages a Layer-2 Plasma architecture, offering robust security assurances and high throughput. It provides a scalable solution for third-party developers interested in creating decentralized payment applications on the Ethereum platform.
Data Insights
A consensus is emerging: Ethereum’s mass adoption is a matter of when, not if. The key question is how far along this journey the platform currently stands.
Comparable to the diffusion of other technologies, Ethereum’s adoption trajectory conforms to the classic bell curve. It commences with a limited number of innovators who swiftly embrace the technology, followed by early adopters. As Ethereum continues to evolve and mature, it gradually broadens its reach, encompassing the early and late majority, ultimately culminating in mass adoption. In its final phase, the technology reaches the remaining segment of the population, known as laggards.
Now, let’s examine the impact of Layer 2 technology on Ethereum’s path to mass adoption from various angles:
Total Value Locked (TVL)
Total value locked (TVL) is expected to be the leading indicator of where adoption is concentrated.
As of October 2023, Arbitrum leads the pack with an impressive TVL of $6.00 billion, securing a dominant market share of 61.03%. Optimism follows closely with a TVL of $2.60 billion, capturing a significant portion of adoption and user engagement.
Other chains constitute the second tier, with their market shares falling below 5%. Base, a newcomer launched on the mainnet for everyone on July 13, 2023, claims the third position with a TVL of $462.91 million. The zkSync Era network ranks fourth with $450.87 million locked, while Starknet holds the fifth place with a TVL of $135.27 million.
Distinct Users and Transactions
The metrics of unique users, often referred to as “bridgers” interacting with Ethereum, and the volume of transactions, play a pivotal role in gauging adoption.
Among the array of Layer 2 solutions, zkSync Era emerges as the frontrunner. It has amassed an impressive 2.67 million unique users, constituting 37.10% of all rollup users, and has facilitated 2.23 million transactions, accounting for 50.84% of rollup activity. zkSync Era’s initial airdrop initiative attracted a significant user base, and it has consistently maintained its leading position. Starknet closely follows in terms of transaction volume, recording 1.70 million transactions, equivalent to 23.70% of rollup activity.
Base and Linea, both launched on the mainnet in July 2023, have gained substantial popularity in the market. They have outperformed Optimism and Polygon zkEVM in both unique user engagement and transaction volume.
Throughput
Transaction throughput stands out as one of the primary scaling challenges often discussed within the blockchain community.
Currently, the Ethereum Mainnet supports around 15 transactions per second (TPS). In contrast, Visa can handle approximately 24,000 TPS, while Mastercard can process 5,000 TPS.
Layer 2 solutions are actively bridging the gap for Ethereum. In October, prominent rollups like Arbitrum and zkSync Era achieved an average TPS ranging from approximately 9.5 to 10, making them the closest in performance to the Ethereum network among available rollup solutions. Collectively, rollups have made substantial contributions to scalability, surpassing the Ethereum mainnet by 321% in throughput, boasting a scalability factor of 4.21 in October.
While rollups significantly boost scalability, none individually surpass Ethereum in terms of throughput. In a bear market, attracting and retaining users presents challenges for both Layer 1 and Layer 2 networks. The development of a thriving Layer 2 ecosystem requires not only robust solutions but also high-traffic applications. Additionally, the user experience is affected by the lack of seamless interaction between various Layer 2 solutions and between Layer 1 and Layer 2, necessitating wallet switching and incurring liquidity costs.
The integration of Layer 2 networks has been instrumental in mitigating network fees on the Ethereum platform. Through the consolidation of multiple off-chain transactions into a single Layer 1 transaction, Ethereum has experienced a noteworthy reduction in transaction fees.
As per data from Footprint Analytics, the average transaction fee for rollups in October 2023 currently ranges between 3% and 10% of that on the Ethereum mainnet.
These statistics underscore the growing acceptance and utilization of Layer 2 networks, emphasizing their capacity to alleviate congestion and boost scalability on the Ethereum blockchain.
Advancements in Layer 2
Within the ever-evolving realm of blockchain technology, prominent Layer 2 solutions such as Optimism, zkSync, and Arbitrum are actively pursuing innovative strategies to tackle persistent challenges while prioritizing interoperability. These key players maintain a rapid pace of innovation, spanning both technology and applications, as they continually strive to remain at the forefront and maintain their competitive edge in the market.
The concept of the Superchain, introduced within the Optimism ecosystem, represents a network of rollup networks united by a shared codebase known as the OP Stack. This framework aims to establish an interoperable environment where diverse Layer 2 networks can communicate and conduct transactions with one another, akin to how the internet facilitates communication between devices. By offering horizontal scalability, the Superchain addresses challenges linked to conventional multi-chain architectures. These issues encompass varying security structures among parallel chains, which can heighten systemic risk with the addition of more chains, and the expenses associated with establishing new nodes for each additional chain.
In June 2023, zkSync introduced “Hyperchains,” an innovative network that functions as fractal-like instances of zkEVM. These Hyperchains run concurrently with a shared settlement on Layer 1, offering the versatility to operate as Layer 2 networks alongside zkSync Era or as Layer 3 Validiums. The zkSync ecosystem allows for the creation and deployment of Hyperchains by anyone, without the need for permission. To ensure trust and seamless interoperability, every Hyperchain must be powered by the same zkEVM engine featured on the ZK Stack.
The first Hyperchain in the zkSync ecosystem will be GRVT, a hybrid cryptocurrency exchange that combines the advantages of both centralized and decentralized exchanges. Its closed alpha version is anticipated to debut in November 2023, followed by the mainnet release in Q1 2024.
Arbitrum Stylus, launched by Arbitrum in August 2023, introduces a versatile approach to smart contract development by allowing the use of multiple programming languages like Rust, C, and C++ on their Layer 2 network. In addition to Solidity, developers now have the freedom to write smart contracts in languages compatible with WebAssembly (WASM), which empowers code execution from languages such as Rust and C++ on both the web and the blockchain, thanks to Arbitrum Stylus. Stylus introduces a second, co-equal virtual machine that seamlessly interoperates with the Ethereum Virtual Machine (EVM), offering a fresh perspective on smart contract creation.
Trends in Layer 2
Layer 2 has indeed emerged as a significant trend in the cryptocurrency landscape since 2022. Within the Layer 2 domain, prevailing narratives have played a pivotal role in shaping public opinion and subsequently influencing market dynamics. These narratives offer a glimpse into the future of Layer 2 and the broader Ethereum ecosystem.
- Fully On-Chain Games: These games leverage blockchain technology as a decentralized alternative to centralized game servers, encompassing all aspects of the game on-chain, including assets, logic, state, and storage. Prominent supporters of fully on-chain games within the public chain sector include Starknet and COMBO, which is currently in a live testnet phase.
- Modular Blockchains: Initially, blockchains followed a monolithic approach, where a single blockchain handled all functions. However, the concept of modular blockchains has arisen to specialize in specific functions, rather than attempting to encompass every aspect. Celestia stands out as the inaugural modular blockchain network, poised for launch and unveiling its airdrop and launch plans in October 2023.
Zero Gas Fees
Gas fees have posed a substantial barrier to Ethereum’s widespread adoption. To address this concern, GasZero, which is currently live on the testnet, has emerged as a Layer 2 blockchain network that offers a distinctive solution: it imposes no gas fees on trusted end users. On GasZero, users can engage with decentralized networks and smart contracts without the requirement of holding tokens in their wallets in advance.
Layer 3 Concept
In the blockchain industry, the concept of “Layer 3” lacks a universally accepted definition at this juncture. Vitalik Buterin, co-founder of Ethereum, believes it is premature to establish definitive definitions due to the evolving architecture of the multi-rollup ecosystem, with most discussions remaining theoretical. However, Buterin has shared three potential visions of what Layer 3s may represent in the future:
- Layer 2 focuses on scaling, while Layer 3 caters to tailored functionalities, such as privacy.
- Layer 2 is geared towards general-purpose scaling, and Layer 3 specializes in customized scaling.
- Layer 2 is dedicated to trustless scaling (rollups), while Layer 3 pertains to weakly trusted scaling (validiums).
Challenges Faced by Layer 2
The rising prominence of cost-efficient and efficient Layer 2 networks as Ethereum alternatives has garnered considerable attention. Maintaining a robust base layer while cautiously expanding certain aspects of its capabilities is of utmost importance. In the Ethereum community, the evolution of technology and applications is encouraged, but striking a delicate balance between user-friendliness and decentralization is emphasized, as highlighted by Vitalik Buterin during the Ethereum Hong Kong Hackathon in October 2023.
Layer 2 networks encounter four pivotal challenges in their quest for Ethereum scalability, according to Buterin:
- Proof System Security and Decentralization: Validity (ZK) proofs and fraud proofs validate transactions without necessitating main Ethereum chain processing. However, validity proofs face centralization concerns due to their hardware reliance.
- Sequencing Decentralization: Sequencers validate, order, and compress transactions for Layer 1 transfer, but their centralized setup raises concerns regarding single points of failure, censorship vulnerability, or potential shutdown by authorities.
- Cross-L2 Wallets: These facilitate seamless interaction with multiple Layer 2 solutions without requiring wallet changes.
- Data Availability: Data availability pertains to storing a full blockchain data copy for transaction validation. Notably, solutions like Validiums and Optimiums may not be classified as Layer 2s because they don’t publish data on Layer 1, introducing additional trust assumptions.
Furthermore, it is essential to note that no single Layer 2 currently surpasses Ethereum in terms of throughput. Ecosystem development within each network is a pressing concern.
Ecosystem and dApps: Presently, Layer 2 networks encompass diverse protocols in their ecosystems, with a predominant focus on DeFi. The introduction of compelling dApps can further expand their ecosystem and attract a broader user base, encouraging them to remain.
In Conclusion
In summary, Layer 2 networks are advancing Ethereum closer to widespread adoption by effectively addressing scalability and cost challenges that have hindered its progress. These networks offer innovative solutions to enhance transaction throughput and reduce fees, rendering Ethereum more accessible and inclusive to a broader audience.
Additionally, beyond Ethereum’s Layer 2 networks, opBNB has emerged as BNB Chain’s response to scalability challenges. In September 2023, opBNB successfully launched its mainnet to address these concerns. Responses and future directions of other public chains in the face of these challenges are equally promising. The key focus remains on ecosystem development and user attraction, as each chain embarks on its unique path toward scalability and mass adoption.