If you’re active in the crypto domain, you’ve probably noticed a fall in the popularity and usage of Ethereum. This has mostly come from the high fees that come with making transactions on the platform, moving users from once-popular areas to more favorable ones, such as BSC and SOL.
In an attempt to bring back the old glory of ETH, a thing called Layer 2 was created, and today, LI.FI is bringing you on a journey of the solutions that Layer 2 brings with it, creating new possibilities for Ethereum.
Ethereum cruptocurrency – artistic impression. Image credit: WorldSpectrum via Pixabay, free licence
What is Layer 2?
First, let’s get to know our main actor – Layer 2. We can simply describe it as being an add-on to lower blockchains, called Layer 1, with its role being a tool for better connectivity and interoperability between blockchains. Just as DeFi Saver helps you with managing your assets, Layer 2 helps the transaction of them, making the whole process faster and smoother.
We can imagine the whole of Ethereum as one big river, and its water, representing transactions, growing more and more, causing it to overload and leak. Layer 2 solutions, in this case, would represent chutes separating from the river and taking part of the leverage of water with them, making it easier for the river to flow smoothly, just as they make transactions in the crypto world.
Now that we’ve defined Layer 2, let’s see exactly how it helps Ethereum.
Types of Layer 2 solutions and how they impact Ethereum
There are several solutions that have been and are developing to help Ethereum.
The first one is a sidechain. As described above, they serve as side blockchains running parallel to Ethereum. Two of them are connected by a bridge. Sidechains have worse security systems and serve only as a roundabout way of transactions.
The next one would be rollups. Rollups are a scaling technique that executes transactions outside the main Ethereum chain (off-chain) but stores transaction data on-chain. The core idea is to “roll up” or bundle many transactions into a single one, thereby reducing the overall load on the network. Rollups can be divided into optimistic and zero-knowledge. The main difference between them is the way they do or do not decide whether the transaction is valid.
The third solution would be state channels. State channels involve two or more participants locking a portion of the blockchain’s state (e.g., a set amount of cryptocurrency) in a multi-sig contract. Transactions between these participants then occur off-chain, and only the final state is recorded on the blockchain. Transactions within a state channel are nearly instant, as they don’t require blockchain confirmation each time. State channels offer more privacy since intermediate transactions aren’t publicly recorded on the blockchain.
One limitation of state channels is that they are best suited for scenarios where participants are known and willing to engage in multiple transactions over time.
Conclusion – Layer 2 solutions run so that Ethereum can walk!
These solutions, together with many others, have over time helped Ethereum to start getting back on track by taking the role of the accelerator of the transaction processes. By covering different holes in the Ethereum operating system, these solutions make sure the platform keeps performing better and better. Thanks to them, the future of Ethereum promises a more scalable and sustainable environment for crypto lovers to roam around!