The growth of DeFi, NFTs, and gaming has congested the Ethereum (ETH) network, which is now developing scaling solutions to meet demand without compromising on security. In this article, we explore the benefits of layer 2 solutions like Sidechains, Plasma, State Channels, Validium, etc.

But before that, let's understand what Layer 1 and Layer 2 solutions are.

What are Layer 2 scaling solutions?

While Layer 1 is the base network infrastructure of every blockchain, Layer 2 is built on the base network to help scale transactions and data.

While the main network validates and finalises all on-chain transactions without depending on other networks, Layer 2 is an extension or a secondary framework of the main networks.

Every base network has its own node mechanism, either proof-of-work (PoW) or proof-of-stake (PoS). Also, Layer 1 protocols have their native tokens, which are often used for gas fees or transaction fees.

Now that Ethereum has transitioned into PoS, it alleviates the pressure on Layer 1 as new chains share the load and reduce congestion. However, it would take years to fully deploy it, and meanwhile, Layer 2 solutions are scaling up the blockchain.

Layer 2 solutions like sidechains, optimistic rollups, etc. provide certain benefits for Ethereum scaling, which we will discuss here. But before that, let's learn how layer 2 works, which is by processing transactions in large bundles before submitting proof of the transactions to the base layer in a process called “off-chain calling," taking the load off the base network.

So, while L1 takes care of data availability, security, and decentralisation, L2 focuses on scalability.

Sidechains

When it comes Later 2 sidechains are independent Ethereum Virtual Machine (EVM) blockchains which run parallel to the main chain. They have validator nodes which confirm and process transactions, add blocks and maintain their own consensus rules like Proof-of-Stake or Proof-of-authority for more efficient transactions.

Although sidechains support more complex transactions with their EVM compatibility, they are not that decentralized and have their own consensus mechanism, making them not rely on Layer 1 or Layer 2 solutions.

Crypto projects like xDai chain and POA Network offer sidechains.

State Channels and Payment Channels

This is perhaps the most important layer 2 solution for Ethereum scaling as they are multi-signature contracts which lets participants to do transactions quickly and frequently go off-chain, settling back to layer 1 for finality as required.

This makes the State Channels capable of handling more complex interactions like games while payment channels manage payments made by two participants. The former allows high-throughput transactions at a low cost, which is ideal for micro payments

Projects like Raiden, Perun, and Celer use state channels on Ethereum.

Plasma

Plasma chains, or child chains, are smaller chains that are anchored to the Ethereum blockchain to operate as smaller copies of the ETH Mainnet. They use cryptographic verification combined with smart contracts to offload transactions into the main network.

Although they have their own block validation mechanism, they periodically report to the Ethereum main chain to settle disputes using its security. They make high throughput lost cost transactions like token snaps and transfers possible.

Several projects like LeapDAO, OMG Network, etc provide implementations of Plasma for dApp integration.

Optimistic Rollups

These Layer 2 solutions are found parallel to the Ethereum main chain as they let transactions happen in cheap scalable batches outside Layer 1 while still using the base layer’s security for transaction submission

Optimistic rollups offers 100x scalability as it doesn't run any computation, which is a very expensive element of the Ethereum blockchain. When Ethereum sharding a introduced this scalability number will increase further.

Optimistic rollups run computation if transactions are challenged via fraud-proof; otherwise, it assumes that they are valid. It uses a bonding system and when fraudulent transactions are proven, the account behind it forfeits the bond. While some bonds are slashed, others are incentivised for the correct party.

Since it supports both smart contracts and simple payments, it is suitable for DeFi applications. Hence, projects like Cartesi, Arbitrum, and Optimism use this Layer 2 solution.

ZK-Rollups

Zero Knowledge rollups are known to bundle transactions off-chain to generate a cryptographic proof called SNARK. This roll-up runs computation off-chain, and the validity proofs are submitted to the Layer 1 chain.

The smart contracts of Zero Knowledge rollups maintain all transactions on Layer 2, which is updated with validity proofs. However, validating a block is cheaper and faster as it only needs proof of validity, not transaction data. Hence, it uses less gas and data.

Since the Zero Knowledge rollups’ smart contracts verify the transactions, the transfer from Layer 2 to Layer 1 isn't delayed. This results in offering faster finality times with security and decentralization. But some of them don't have EVM support and might be unsuitable for dApps because of intensive computing.

This is implemented by multiple projects like ZKSwap and zkSync. While the first one is a layer 2 DEX with high transaction throughput and zero gas fees, zkSync is a trustless protocol for scalable, low-cost payments on Ethereum, which makes DeFi wallets scale up like PayPal.

Both these rollups seem ideal for layer 2 scaling on Ethereum but Harmony is better as it gives broader DeFi access with its Horizen bridge feature that connects Ethereum with the Binance smart chain

Validium

This validity-proof user chain doesn't store data on Ethereum Layer 1, making way for 10,000 transactions per second per Validium chain, run in parallel with the main chain in multiple.

Unlike high-value dApps, it doesn't face any economic attacks as it only improves capital efficiency and doesn't have any withdrawal delays. But these chains have limited smart contract ability.

Projects like StarkWare and Loopring use the Validium chain for Ethereum Layer 2 scaling. One example is the first layer 2 scaling solution for NFTs, Immutable X, which has both Validium and ZK-rollup for 9,000 per second transaction speed without gas fees.