Layer 2

Layer 2 is a concept in blockchain technology that aims to address the scalability issues faced by popular blockchains like Ethereum. By implementing layer 2 solutions, blockchain networks can significantly increase their transaction throughput without compromising on security.

Blockchain networks like Ethereum have gained popularity due to their programmability and resistance to censorship. However, their inherent design limitations restrict their transaction processing capabilities. Ethereum, for example, can only handle a limited number of transactions per second, typically ranging from 7 to 11, which pales in comparison to the Visa network’s capacity of over 20,000 transactions per second. This congestion leads to a bidding war for block space and results in high transaction fees. In 2021, it cost over $80 to send a token on the Ethereum network.

To overcome these scalability challenges, layer 2 solutions have been introduced. These solutions offer a way to scale blockchain networks while maintaining the security of the underlying blockchain. They achieve this by abstracting transactions away from the main blockchain, allowing for the processing of thousands of transactions per second.

There are two main types of layer 2 solutions: zero knowledge rollups and optimistic rollups.

What are Zero Knowledge Rollups?

Zero knowledge rollups are a type of layer 2 solution that leverages cryptographic proofs to bundle multiple transactions into a single proof. These proofs are then submitted to the main blockchain, reducing the number of on-chain transactions required to process a large number of off-chain transactions. By aggregating transactions into a single proof, zero knowledge rollups significantly reduce the transaction fees and congestion on the main blockchain.

An example of a zero knowledge rollup implementation is DeversiFi, a layer 2 decentralized finance (DeFi) trading platform powered by StarkWare’s scalable technology. DeversiFi allows users to trade ERC-20 tokens with high throughput and low fees by utilizing zero knowledge rollups. By moving the majority of transactions off-chain and only submitting proofs to the Ethereum blockchain, DeversiFi achieves scalability without compromising on security.

What are Optimistic Rollups?

Optimistic rollups, on the other hand, take a different approach to scaling blockchain networks. Instead of relying on cryptographic proofs, optimistic rollups leverage a technique called fraud proofs to ensure the validity of off-chain transactions. These fraud proofs allow users to challenge any invalid transactions on the main blockchain, ensuring that only legitimate transactions are considered valid.

Optimistic rollups offer higher scalability compared to zero knowledge rollups but require a longer validation period. This delay is necessary to allow for potential challenges and fraud proofs. However, once the validation period is complete, the confirmed transactions are settled on the main blockchain, providing the same level of security as the underlying blockchain itself.

Several layer 2 solutions, such as Arbitrum and Optimism, have implemented optimistic rollups to scale Ethereum’s transaction throughput. These solutions enable decentralized applications (dApps) to process a significantly higher volume of transactions, reducing congestion and transaction fees.

It’s important to note that layer 2 solutions like DeversiFi, StarkWare, Optimism, and Arbitrum differ from side-chains like Polygon. While both layer 2 solutions and side-chains aim to address scalability, layer 2 solutions inherit their security directly from the underlying blockchain, typically Ethereum. They do not rely on any other network, validators, or entities to secure funds.

Layer 2 solutions have emerged as a promising way to tackle the scalability challenges faced by blockchain networks. By allowing for thousands of transactions per second while maintaining the security of the underlying blockchain, layer 2 solutions enable the mass adoption of blockchain technology in various industries.

Author: Ross Middleton, co-founder and CFO at DeversiFi

Ross Middleton is the co-founder of DeversiFi, a layer 2 decentralized finance (DeFi) trading platform powered by StarkWare’s scalable technology. He oversees finances and manages DeversiFi’s project partners and major customers.

Prior to DeversiFi, Ross worked at the Ethfinex and Bitfinex exchanges. He has a decade of experience as a professional energy trader and analyst in London, working on global energy trading desks at companies like Centrica, Gazprom, and RWE. Ross brings extensive knowledge in both traditional and non-traditional asset trading, as well as connections to the alternative finance space. He is also an angel investor and Ironman triathlete. Ross holds a BSc in economics.