Scaling the Ethereum Network: A Primer on Layer 2

One of the most common criticisms against blockchain, and Ethereum in particular, is their inability to scale. In other words, they have a limited transaction throughput. This can lead to disruptive network congestion with high usage. There are many different solutions to this, and this article will cover one type called layer 2 solutions.

The State of Scaling

At the time of writing, the Ethereum network could handle 13.2 transactions per second (TPS), according to Etherscan. This may be higher than Bitcoin’s 5 TPS, but it is still remarkably low. Changes to the blockchain, which can include transaction speed, are categorized into layer 1 and layer 2 solutions:

  • Layer 1 is used to describe the underlying blockchain. This means that making the difference would mean overhauling the blockchain as a whole. At the moment, Ethereum is shifting to a new version of the network called Eth2. Among other things, it will help improve the base transaction throughput by separating the workload into sub-blockchains called shards. However, this is not expected to happen for at least another one to two years, and in the meantime, other solutions are required.
  • Layer 2 refers to the overlying network that improves some aspect of the blockchain. These solutions are not part of the package, so to speak—you can use them if you want to, but you are not obliged to do so. As they do not require the whole blockchain to change, they are relatively simple to create. Right now, there are several layer 2 solutions that tackle Ethereum’s scaling problem.

Before the launch of Eth2—and possibly even some time after—users of the Ethereum network need more than it can offer at this point. Not only is the network too slow for many, but high usage can lead to higher transaction fees as users try to outbid each other so that their transactions are handled first. Layer 2 solutions offer an alternative: not just a temporary band-aid, but a way to improve the quality of life of a blockchain.

Emerging Ethereum Scaling Solutions

Examples of Ethereum L2 Solutions

There are many layer 2 solutions for Ethereum at some point in development right now. One of the most promising ones are Rollups. These are layer 2 solutions which keep funds on the blockchain, but migrate most of the work to sidechains to alleviate the workload from the main chain. Vitalik Buterin, the co-founder and inventor of Ethereum, called Rollups his favorite layer 2 solution. The two main categories are ZK Rollups and Optimistic Rollups.

While ZK Rollups use a cryptographic concept called zero knowledge proofs for state transitions. These are complex, however, and still require a lot of work to apply to the whole network. Optimistic Rollups, however, simply assume that the state transition is correct without checking it every time. If it is incorrect, the block can be reverted—but the whole process is significantly faster than the current state of the network.

Below, we will take a look at a few existing scaling solutions.

  • Polygon (formerly Matic Network). The Matic Network was a simple scaling solution. After rebranding as Polygon in February 2021, it is now an interoperable blockchain scaling framework for building interconnected Ethereum compatible blockchain networks. Polygon is designed to be an entire platform designed for launching interoperable blockchains. It aims to overcome some of the limitations of  individual blockchains —such as high fees, poor scalability, and limited security by utilising a variety of technologies including POS Chain, Plasma Chains, ZK-rollups and Optimistic rollups.
  • zkSync by Matter Labs. This solution is already live on the mainnet since mid-2020 and boasts low transaction costs with a trustless protocol. As its name implies, it is a type of ZK Rollup. Its funding round was led by Union Square Ventures (USV), notable for investing in Coinbase and Dapper Labs as well, although the amount invested was not disclosed.
  • Optimism Network (formerly Plasma Network). Plasma used to research Ethereum scalability, but with the rebranding to Optimism, the team took the plunge into a viable scalability solution—a type of Optimistic Rollup. The mainnet is expected to launch in July of this year, while a soft launch (with incremental releases) started in January this year. A Series A funding round worth USD 25 million was closed recently, led by Andreessen Horowitz.
  • SKALE Network. This project is not a Rollup—it is its own technology called elastic. Their chains are configurable and application-specific. Blockchain apps can rent SKALE shards as an Ethereum-compatible smart contract platform with a better throughput. Its mainnet launched in June 2020, with several pre-planned updates rolling out by the end of the year. The project was funded by the likes of Arrington XRP Capital, Blockchange, ConsenSys Labs, and others, for USD 7 million, and a USD 10 million contribution from its parent company, SKALE Labs.
  • Starkware. Another ZK Rollup project, Starkware’s solution is called StarkEx and its mainnet launched in mid-2020 as well, with a second version following only five months later. Its recent Series B funding round, worth USD 75 million, was led by Paradigm, as well as Sequoia, Founders Fund, and Pantera.
  • Aztec. Aztec is also a ZK Rollup-based solution, it focuses on “bank-grade” privacy on open and permissionless blockchain networks. You can use recognizable address aliases, similar to usernames, but your transaction activities are encrypted—your transaction history won’t be broadcast to the world. The company’s USD 2.1 million funding round was led by ConsenSys Labs, and included investors like Entrepreneur First, Samos Investments, Jeffrey Tarrant (Mov37) and Charlie Songhurst.
  • Loopring. Loopring is also based on ZK Rollups. They combine Ethereum’s security with low fees and high network speed, with a throughput around 1,000 times more and the cost as little as a hundredth of Ethereum’s. Aside from the protocol, the project also has an exchange and payment platform with all these advantages. Aside from its 2017 ICO, Loopring has had no other funding rounds. 
  • POA Network. POA is an open Ethereum sidechain that has interoperability at its forefront, working to create bridges between different smart contract platforms. It was initially meant as its own blockchain, which means it is more than just sidechain technology. The network uses a Proof of Authority consensus algorithm for which validators have to go through the full KYC process, making it trustable.

Summing Up

Blockchain developers have long been aware of the need for faster and cheaper transactions. This is especially true for Ethereum, as its programmability allows for many implementations that are hindered by its current state. While none of these solutions are completely ready to go, many of them can be used to some extent. Additionally, the scalability problem will be significantly eased once the network shifts to its Eth2 version.

Are you looking to learn more about deploying blockchain solutions? You can check out our This Week in Blockchain podcast (weekinblockchain.com or your preferred podcast platform). If you want to discuss it live, we’re on Clubhouse every Monday at 12pm EST / 5pm GMT. Looking forward to seeing you there!