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Why Ethereum Layer-2s Like Polygon, Arbitrum Are Having a Moment

The rise in popularity of decentralized finance, on Ethereum in particular, created a big issue for users: high transaction costs, slow settlement times, and overall network congestion. This is because Ethereum in its 1.0 proof of work state can only handle around 13 transactions per second, not nearly enough throughput.

As a result, layer-2 solutions like Polygon, Arbitrum and Optimism have come to the forefront as scaling solutions for Ethereum. But what are Layer-2s, how do they work and why are they necessary?

We will examine all of that in this guide to Ethereum Layer-2s.

The Ethereum merge is complete.

Why Does Ethereum Need Layer-2s?

There are a few reasons that Ethereum needs Layer-2 solutions, but they are all related to network congestion. In its current state as a proof of work blockchain, Ethereum can only process 13 transactions per second, which is not nearly fast enough to satisfy the network demands and creates slow transactions. Layer-2 solutions take many of these transactions and settle them off the main chain, only using the main chain when necessary to finalize what is usually a batch of transactions. This allows for faster throughput on the main chain and a better overall network health as there are no hold ups.

With network congestion comes high transaction costs, because the higher your gas paid the faster the transaction will go through, you end up needing to pay an exorbitant amount to send a transaction through quickly on Ethereum’s main net. Layer-2 solutions allow you to pay much lower transaction costs and have faster settlement times on your transactions.

How Do Layer-2s Work?

There are a few different layer-2 solutions: sidechains, optimistic rollups and zero-knowledge rollups.

A sidechain is an interoperability solution to enable two blockchains to verify information about each other’s progress via light-weight proofs in order to keep congestion down and costs low. This is implemented with a bridge contract that allows assets to be moved from the main chain (Ethereum) to another blockchain network. The bridge contract for a sidechain does not verify the integrity of the other network and instead it relies on a set of parties to attest to its validity. It is assumed that at least a threshold of parties should have a financial incentive to remain honest and protect the user’s funds.

The cost of a sidechain transaction consumes no additional Ethereum resources, the trade off being that the network does not have the same security as Ethereum itself.

A rollup is still an independent blockchain network like a sidechain is, but the transacted assets that reside on Ethereum are protected by the bridge contract. It must be continuously convinced the rollup network is not compromised and the funds are not at risk. A rollup can retain the same (or very close to) the security of Ethereum.

Optimistic rollups work in parallel to the main Ethereum chain on layer 2. They can offer improvements in scalability because they do not do any computation by default. Instead, after a transaction, they propose the new state to the Ethereum main net or “notarise” the transaction. They can offer 10-100x improvements in scalability.

Zero-knowledge rollups (ZK-rollups) bundle (or “roll-up”) hundreds of transfers off-chain and generate a cryptographic proof, known as a SNARK (succinct non-interactive argument of knowledge). This is known as a validity proof and is posted on layer 1. It reduces transaction size and improves scalability. This is because ZK-rollups only need the validity proof instead of all transaction data. With a ZK-rollup, validating a block is quicker and cheaper because less data is included.

What Are the Most Popular Layer-2s?

Some of the most popular layer-2s are Polygon, Arbitrum, and Optimism.

Polygon is a platform for developing and connecting Ethereum-based blockchain networks, and projects such as AAVE, SushiSwap and 1Inch Exchange all have access via Polygon allowing users to access their services with lower transaction costs and faster speeds than accessing them directly through Ethereum.

Arbitrum allows Solidity developers to cross-compile smart contracts, which means it can support either rollups or sidechain aggregation of transactions. Projects such as Aave, Uniswap and Curve are available through Arbitrum, giving users yet another avenue to access Ethereum projects with lower costs and faster speeds.

Optimism is another layer-2 scaling solution that targets improved affordability and speed of transactions, much like the previous two. It can support any Ethereum app and projects such as Uniswap, Synthetix, and Chainlink are all integrated with Optimism as this time, allowing users to transact in milliseconds with 10-100x in savings on fees.

Will Ethereum Still Need Layer-2s After ETH 2.0 Launches?

While Ethereum 2.0 will bring proof of stake, more transactions and faster transactions to the Ethereum network, Layer-2 solutions will still be needed.

This is because they will further the ability of Ethereum 2.0 to process transactions, essentially making it even better than it is supposed to be.

Solutions like Polygon could help take Ethereum 2.0 from 3,000 transactions per second to as much as 100,000, which would make it extremely viable for all sorts of transactions such as peer-to-peer, NFTs, video games and more.

Are There Layer-2s Outside of Ethereum?

Yes! Almost all blockchain networks have multiple layers, as layer-1 is often insufficient to handle all transactions that might occur on the network.

Bitcoin has the Lightning Network as a layer-2 solution to help reduce transaction costs and improve transaction speeds, while networks such as Tezos and Cardano also have multiple layers that allow for the same function of fast, affordable transactions. Layer-2s are extremely necessary in the world of blockchain, especially as the goal of most projects is to onboard millions of users, as they give scalability that might not be possible otherwise.

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About the Author

Evan Jones

Evan Jones was introduced to cryptocurrency by fellow CryptoVantage contributor Keegan Francis in 2017 and was immediately intrigued by the use cases of many Ethereum-based cryptos. He bought his first hardware wallet shortly thereafter. He has a keen and vested interest in cryptos involving decentralized backend exchanges, payment processing, and power-sharing.

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