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Introduction: Layer 2 Scaling on Ethereum

Polygon and Binance Chain thrusted Layer 2 into the spotlight. Now the community has its eyes set on Arbitrum, Optimism, and the other Layer 2 releases.

DeFi Slate 📈

Jun 9, 2021

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DeFi Slate Fam:

Tired of debating whether to sell a kidney every time you want to make an Ethereum transaction? You’re in luck! We are in the midst of the roll out of several Ethereum layer 2 scaling solutions which promise to make transactions exponentially cheaper (and faster!) than on layer 1.

Today we are going to take a look at what makes it all possible, what the main projects are, and next week in part two we will take a look at which specific applications are set to benefit the most from improved transaction possibilities.

While there are several scaling solutions of the more distant and experimental variety, we are going to stay focused on ones that could have a real impact in the near term.

Enjoy!

- Roshi, DeFi Slate DAO Contributor

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Introduction: Layer 2 Scaling on Ethereum

Guest Post: Roshi, DeFi Slate DAO Contributor

Layer 2’s are a fork of the Ethereum blockchain that either create their own asset (Polygon / Matic) or retain ETH as the native asset of the protocol (Optimism, Arbitrum, Zk Sync). How layer 2 works, in simple terms, is that it leaves 99% of the bulky data of applications that is unnecessary for transactions on the Ethereum layer 1, while only retaining the much smaller set of data needed to settle transactions. As you can imagine, this drastically reduces the CPU required from miners which lowers the cost of a transaction proportionally.

To give a sense of the differences between L1 and L2s, the average transaction on L1 consistently ranges up to $50 - $100, and only 15 transactions can go through per second. L2 on the other hand is expected to cost below $1 per transaction and can handle roughly 2000-4000 transactions per second. Quite an upgrade.

Optimistic Roll Ups

What separates optimistic roll ups from the alternative, Zk Rollups, is their ability to retain the function of smart contracts from L1. This is incredibly important because smart contracts go through rigorous battle testing before being deployed, and having to start over would be a major hurdle. Being able to port smart contracts from L1 is referred to as being EVM-compatible (Ethereum Virtual Machine).

Arbitrum Vs. Optimism

Arbitrum and Optimism are the two key optimistic roll up projects. Arbitrum will be the first optimistic L2 to launch, currently in testnet as of the beginning of June, with mainnet expected to launch in two weeks. Optimism originally was going to be but they pushed their release date back by a few months to “roughly” July.

From an end user standpoint, Arbitrum and Optimism are basically identical. The only difference lies in a technological difference in how they resolve disputed blocks.

Side Chains

As mentioned previously, a key difference between side chains and rollups is that side chains have their own native assets instead of ETH as well as their own consensus mechanism and security layer.

What this basically means is that side chains could be said to be half Ethereum and half its own entity, whereas roll ups are just an extension of Ethereum.

Polygon / Matic

The bridge used to send assets to the polygon network

Polygon (previously known as Matic), has been quite popular this year, a big reason for this is that it was the first functioning L2 to release. Polygon has seen the market cap of its native asset, MATIC, 100x since the beginning of the year, going from $91M USD to $9B USD. Similar to other L2s, users use bridges to send their assets across chains (from Eth to Polygon), and once the assets are there they use MATIC to pay gas fees that are 1/1000th of what they are on the Ethereum mainnet.

The way a sidechain like Polygon works is that not only does it have interoperability with the Ethereum layer but it has its own network on top. This means it’s possible to build applications directly on Polygon that aren’t then available on Ethereum.

One thing that will be interesting to track once rollups like Arbitrum and Optimism launch is how that affects Polygon's user base. Currently it is the only option in town for cheap Ethereum transactions, but that will change soon.

ZK Rollups

ZK roll ups are the other kind of L2 roll ups that go along with optimistic roll ups. Because they are both rollups, Optimistic roll ups and ZK roll ups have a lot of similarities, but they also have many differences. If I had to sum up the separation between Optimistics and ZKs from a practical standpoint, I would say that ZKs have a higher potential as far as speed and cost, but also face greater roadblocks.

As we mentioned earlier, for Zk Rollups to work all smart contracts need to be recreated to work on the L2 chain. As you can imagine this creates many difficulties, but we are already seeing some innovation that circumvents this issue.

ZK Sync

Zk Sync is currently the premier project in the Zk rollups space. Like Arbitrum, it recently launched it’s testnet, but will likely launch it’s mainnet a bit later, probably in the early part of the second half of 2021, as their testnet is not yet open to developers but that is expected soon.

To try and tackle the problems I’ve mentioned with Zk rollups, Zk sync has created a solidity (the programming language Ethereum runs on) compiler, that to my understanding is currently only able to translate simple smart contracts onto their platform. Their aim by the time they have a full launch is to have the compiler ready for any and all smart contracts.

Conclusion

As you can see, there are many groups and technologies vying to be the project that successfully scales Ethereum, and that’s without even mentioning some of the farther out and less imminent ones. This is unquestionably a great thing for Ethereum as a whole, because competition brings out the best in each project. Also, the more projects there are the greater likelihood there is that one will really stick.

L2s will be a pivotal moment for Ethereum and we are all about to get the chance to watch it go down.

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⚠️ DISCLAIMER: Investing into cryptocurrency and DeFi platforms comes with inherent risk including technical risk, human error, platform failure and more. At certain points throughout this post, we might get commission for promoting certain projects, if this is the case we will always make sure it is clear. We are strictly an educational content platform, nothing we offer is financial advice. We are not professionals or licensed advisors.

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