2021-08-09 00:00:00

Ethereum layer 2 scalability solutions that every investor should know about

The miles that Ethereum’s progress has achieved through the years after its debut in 2013 are undeniable. It stands as an amiable investment both as a blockchain and cryptocurrency. Holding the keys that opened doors to smart contracts in the crypto world, Ethereum still stands with massive significance in the growth of digital currencies.

However, the entirety of its progress is not without faults. It further supports decentralized finance (DeFi), non-fungible tokens and governance tokens, which are gaining traction, constantly leading to congestion on the mainnet. This factor instigates massive issues with scalability within the network, contributing to the hike in gas fees during transactions.

It is now important for every ‘revolutionary’ DeFi solution to have a governance mechanism. One of those solutions shaping the future of the DeFi industry is YFDAI Finance. In order to become the industry’s most complete DeFi ecosystem, YFDAI launched its own decentralized exchange, SafeSwap.

In itself, this is a significant turn-off to investors who cannot keep up with the hefty gas fees. How then will the network combat these hurdles that could lead to the unpopular opinion concerning Ethereum?

Probable Ethereum Network’s Scaling Solutions

Ethereum developers have two options that could scale Ethereum: Layer 1 solutions and Layer 2 solutions. Layer 1 scaling solutions involve altering the functionality of the base layer to improve its performance. Suggestively, the network would limit the transactions’ verification to fewer nodes with more mechanical power. Nonetheless, it does not hold the best outcome as it would sacrifice decentralization and security on the network.

At this point is where Layer 2 solutions come in, being protocols built on top of the base layer to offload the mainnet. The best-proposed solution after the advancement of Ethereum from PoW to PoS consensus would be sharding. Notwithstanding, it is a long way from rolling out, necessitating more immediate answers to the pressing issue of the protocol’s scaling.

That being said, here are four Layer 2 scalability solutions that all investors should take an interest in:

Rollups

Rollups are Layer 2 scaling solutions that enable conducting transactions outside the Ethereum network, compress the data into one lot, and post them on the base layer. They depend on the security of the mainnet, making the parent chain and the rollup to be codependent.

Though the transactions’ execution is off-chain, there is transaction data that remains on the parent chain. Also, a smart contract on the mainnet ensures all implementations on the rollup are valid. Rollup participants must stake a bond, slashed in a fraudulent or invalid submission lot to the main chain.

The security measures taken to create a proof of transactions is what branches rollups into two; the optimistic rollups and the zk rollups.

Optimistic rollups submit the transactions to the parent chain, assuming their validity. However, they run a computation in case a participant challenges the validity of the submitted lot through fraud-proof. It is run by the state data on the blockchain, increasing the confirmation period, which is a disadvantage.

The protocol slashes the staked bond of a fraudulent participant while reimbursing their gas fees for pointing out fraud. Optimistic rollups support all actions that can run on the main chain as they are compatible with EVM and solidity.

ZK rollups depend on zero-knowledge proof to maintain the validity of transactions from the rollups. They generate cryptographic proof (SNARK), which is a validity proof submitted to Layer 1. It means that the computation runs off-chain, rendering the process quicker compared to optimistic rollups. The downside is that ZK rollups do not support EVMs and need heavy computing to generate validity proofs.

Sidechains

Sidechains are independent chains connected to a parent blockchain through a two-way peg. It means that users can take their asset transactions to a different chain, offloading the pressure on the parent chain. Furthermore, a user can transfer the assets back to the primary chain if necessary. Notably, the security and consensus mechanisms of the sidechains are independent of the main chain. Smart contracts enable the sidechains to communicate with the parent chain, initiating interoperability.

Plasma

Vitalik Buterin and Joseph Poon proposed this Layer 2 solution in a paper, explaining it as a protocol to build scalable solutions. Plasma enables the construction of child chains of Ethereum’s main chain, standing as its copies.

Every child chain carries out an individual role while coexisting with the others. It combines the use of smart contracts and Merkle trees, with every child chain having the ability to have smaller copies built on top of it. They differ from sidechains in that they are used exclusively for funds storage.

The secondary chains communicate with the parent chain in case of disputes. Fraud proofs enable users to flag suspicious transactions, reporting the said nodes to the parent chain. During a withdrawal, the event enters a challenging period where participants on the child chain dispute if they suspect a fraudulent exit. The transaction is completed or cancelled depending on its validity.

State Channels

State channels conduct off-chain interactions, which would have otherwise been on the main chain. In simple terms, a select number of participants lock up a blockchain state into a multisig contract or a smart contract. Depending on the transaction between the participants, they exchange and sign valid transactions with every added sign cancelling out the previous one.

Once all parties are satisfied with the transaction, they submit the state changes to the parent chain. The blockchain validates the signatures of all participants and concludes the said transaction.

While this layer 2 solution offers a lot of privacy, it limits the fund exchange to the participants off-chain. Furthermore, state channels cannot carry out many roles, mostly sticking to payments.

What to Expect in The Future of Layer 2 Scaling Solutions

While this might not be a broad outlook of all that layer 2 scaling entails, it gives you a hint of what is going on. Moreover, Ethereum scalability will remain a massive talk in town until the best solutions come to pass.

The importance of this progress within the Ethereum blockchain will be an eye-opening opportunity for other cryptocurrencies and blockchains battling scalability issues. As already established, Layer 2 solutions are a key to faster and cheaper transactions, more diverse applications, among other advantages.

Lastly, it would be wise to say that these solutions will be the future to fully maximize the potential in crypto and blockchain as a whole. As an investor, take your time to grasp the projects within Layer 2 solutions and get a chance to invest in a growing gold mine.

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