The expansion of Ethereum is imminent, can Layer 2 turn the tide?

The most promising Layer 2 scaling solutions are ZK Rollup and Optimistic Rollup, which were developed to address the weaknesses of previous Plasma implementations

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Scaling Blockchain with Layer 2 Technology

This is because the data on the blockchain is extremely redundant. Transactions must be processed by every node participating in maintaining the blockchain, and ever-expanding data sets of transactions must be stored forever. Keeping the barriers to entry low in the process keeps the blockchain decentralized.

Today, the most commonly used blockchains are Bitcoin and Ethereum. Each block can process approximately 5 and 15 transactions per second, respectively. In Ethereum, transactions are not only peer-to-peer payments, but also more complex smart contract interactions that require more processing power than ordinary transactions.

According to different node implementations, the size of the Ethereum blockchain is 160GB, and the demand for decentralized financial products has recently accelerated its growth. Yesterday, users paid $3.7 million in transaction fees and $4.5 million in inflation subsidies to process and store their transactions. The rise in Gas Price has caused many of the most commonly used smart contract interaction fees to be between $5-50, and users need to pay basic interaction fees. For Bitcoin, the average fee per transaction is close to $5.

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How to scale the blockchain

Effective blockchain scaling solutions can increase data storage or computing (transaction processing) capacity without adding significant costs to the nodes maintaining the blockchain."shards"Note that making progress in scaling requires a solution that enables exponential improvements. When running at maximum capacity, the number of transactions processed by Ethereum is negligible, compared to the activity on it that can be called real and considerable economic activity.

"Layer 2 "The high-profile debate over changing Bitcoin's block size in 2015 is a good example of energy being wasted on a relatively trivial improvement in the grand scheme of things. A 2-8x improvement may be useful for relieving short-term pressure, but it also imposes higher future transaction processing costs on all nodes. This limits the group of people who can participate in consensus, thereby reducing the degree of decentralization.

The main solution to scaling the blockchain at the bottom layer should not be to (substantially) increase the cost of all nodes, but to split the transaction verification work into smaller pieces (

). Sharding is how many top blockchain projects scale — including NEAR, Ethereum 2.0, and Polkadot. By randomly sampling and rotating each shard's validators from the blockchain's global validator pool, the resulting security can be shown to be close to using the entire validator pool (the current approach).

A common definition of a scaling solution generally refers to any system connected to Ethereum that helps increase transaction processing capacity by batching transactions (by one method or another) onto the main blockchain.

However, as interoperability solutions become more common, a better classification of what is a sidechain (or another blockchain entirely) and Layer 2 technology depends on the underlying security model. Sidechains can be application-specific (like a decentralized swapchain) or general-purpose and responsible for their own security. The security of Layer 2 comes from the underlying blockchain (such as Ethereum).

Security is guaranteed by economically incentivizing participants (nodes and users) to submit correct data - or by providing complete (zero-knowledge) proofs to the underlying blockchain.

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state channel

State channels are a general form of payment channels, the technology that Bitcoin's Lightning Network is built upon.

Conceptually, state channels are simple, but their design has some inherent limitations.

State channels require users (or some trusted third party) to keep online monitoring the channel in case other users try to exit with old information. They are also less generalizable to easily build smart contracts, since interacting with these channels is more complex for developers than just deploying existing smart contract code.

Additionally, state channels are capital inefficient because they require high amounts of collateral.

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From Plasma to Rollup

Perhaps the more important class of Layer 2 scaling solutions in the long run are non-custodial sidechains. This is because they have the potential to run decentralized finance and other Web3 applications on top of them.

The key to non-custodial sidechains is that users can on-chain and off-chain with much higher performance capacity than L1 blockchains without having to trust the sidechain operator, i.e. have the same security as when transacting on the Ethereum mainchain Assure.

Data unavailability An attack where validators of a Plasma chain can publish data to the underlying chain but keep transaction data to themselves. This way, the user does not have the necessary data to challenge the information provided by the verifier.

online request. Requires that every user must remain online and monitor all transactions in case a malicious Plasma chain validator exits."Mass exit issues. If all users need to exit the Plasma chain, then the state of the entire Plasma chain must be published to the underlying blockchain. For Ethereum, this scale of proofs is practically impossible to handle."While new iterations such as Plasma Cash provide solutions to existing problems, new problems continue to arise in ensuring the safe exit of user funds. In December 2018, the pseudonym BarryWhiteHat provided a solution to this problem in the form of a zero-knowledge proof.

In ZK Rollups, sidechain validators (

This approach completely avoids the complexity of users being able to exit the Plasma chain safely. However, this approach also has two general disadvantages:

The size of zk-proofs issued on the Ethereum chain is large - meaning that zk-Rollups sacrifice maximum transaction throughput compared to Plasma.

Building concise zk-proofs to enforce smart contracts in a general way is difficult. At present, ZK Rollups are more limited to specific operations such as token transfers - although, the decentralized exchange Loopring has already launched on the main network and is built on ZK-Rollups.

Optimistic Rollups are similar to Plasma, but the difference is that all transaction data must be provided on-chain—providing more transaction data to the underlying blockchain than Plasma, and allowing anyone to build transaction validity proofs. Specifically, enough data must be published to the Ethereum chain to reconstruct the state of the entire Optimistic Rollups sidechain."Layer 1"While this approach sacrifices transaction processing another exponential (for smart contracts) because more data has to be published on-chain, compared to ZK Rollups, Optimism's approach allows for smart contract flexibility and virtual integration with Ethereum machine compatibility.

As a downside, Optimistic Rollups require a 1-2 week (depending on implementation) dispute period to ensure users have enough time to dispute invalid state transitions. The solution to expedite the exit process is to create an exit market where users can offload the risk of their sidechain holdings.

Blockchain is a pattern as a way of transferring messages between chains of specific applications.

This is the idea behind the design of Cosmos. The idea is that applications can become too valuable a parasite for base layer security compared to the base layer. Fees paid by applications (stablecoins, prediction markets, etc.) do not necessarily scale with the transfer of value they facilitate, and these applications may become more valuable than the underlying blockchain, causing e.g. Ethereum to become an application security weaknesses.

This does create an additional hurdle in terms of user experience. In an ecosystem of sidechains, users must independently trust the security of each sidechain (and its operator) with which they interact.

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Will it work in practice (and how well?)

State channels will most likely play a role in processing transactions for some applications. For example, Graph Protocol is planning to implement state channel payments for database indexing services -- and state channels are flexible enough to also encode simple rules for conditional payments.

In the specific application chain, SKALE plans to launch before the end of the year and will bring a specific application chain interoperable with Ethereum. Additionally, bridges to the NEAR Protocol and Solana promise to bring more scalability to the overall ecosystem — although both can be considered competitors to Ethereum."Both ZK Rollups and Optimistic Rollups are solutions for tethering applications to the Ethereum ecosystem because they are built on it and rely on Ethereum for security. For example, decentralized exchange Loopring, built on ZK Rollups, processed $17.6 million in volume (0.4% market share) in July."PIG "Token.

The most well-known team to develop Optimistic Rollups is the Plasma Group before Optimism, which, as the name suggests, worked on the implementation of Plasma before. In January 2020, the team raised $3.5 million in venture funding from Paradigm and IDEO. Optimistic Rollups have been demonstrated on the Ethereum testnet with Unipig, a version of Uniswap for mutual transactions

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Token.

For each of these solutions, the big question that remains centers on composability. On Ethereum, smart contracts can call each other synchronously. This lack of composability changes the end-user experience as hopping on and off the Rollup chain introduces friction for deposits and withdrawals.

This is in stark contrast to one of the best parts of the Web3 user experience today, where users can interact with all apps with a single click of Metamask.

Even at poor scalability, Optimistic Rollups still provide 10-30x the transaction processing power if the application deploys itself into its own sidechain, which should give Ethereum plenty of headroom. Ethereum 2.0 helps with these scalability solutions as it provides more room for data to be published.