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What Are Ethereum Layer 2 Blockchains and How Do They Work?

Beginner
Blockchain on an orange background
KEY TAKEAWAYS:
— As the pioneering smart contract chain, Ethereum has become the second-largest blockchain network.

— Due to the network’s prioritization of decentralization and security over scalability, its increased popularity has led to major network congestion.

— Ethereum Layer 2 solutions are blockchains built with one primary purpose: to provide a faster, cheaper route to executing Ethereum transactions.    

Ethereum’s ecosystem has grown significantly in the last decade — with a surge of decentralized applications (dApps), decentralized finance (DeFi) protocols, and NFTs that you can access simply with an Ethereum wallet. While this activity brings us closer to the ultimate goal of Web3 mass adoption, the question remains: is the underlying technology equipped to handle it all? 

In Ethereum’s case, this growth has brought key scalability issues to the forefront; namely, high transaction fees (gas fees), network congestion, and slow transaction times during periods of high network activity. While core upgrades like the Merge aim to make transactions faster, Ethereum still needs a scaling solution built to handle the masses.

Enter Layer 2 solutions: blockchains that increase scalability by sharing the burden of transaction processing. In this article, you’ll learn about the different types of Ethereum Layer 2 blockchains, how they help solve the scalability issue, and which are the most popular ones. Let’s get started.

Ethereum Layer 2s Explained

Built on top of Ethereum, Layer 2 blockchains help speed up transaction processing while keeping the costs down for the L1 network. They do the heavy lifting of transactions that Ethereum cannot, simply because it wasn’t designed to prioritize speed.

What is Ethereum?

Ethereum is the second most popular blockchain network by market share, conceptualized by Vitalik Buterin in 2013, and launched two years later. Ethereum became popular due to its self-executing smart contracts.

To explain, smart contracts are essentially computer programs that execute automatically if certain conditions are met. This competent tech is what paved the way for dApps, and from there, Ethereum took off. From DeFi protocols to the NFT mania to the significant growth of Decentralized Autonomous Organizations (DAOs), the wide-ranging innovations from dApp developers have indicated a field of endless possibilities when it comes to potential crypto use cases. The network boasts the highest number of developers. In fact, 16% of all crypto developers are building on Ethereum.

What is a Layer 2 blockchain network?

A Layer 2 solution is a secondary blockchain network, which reduces the load on the parent chain by handling part of its capabilities.

Think of Ethereum as a boss whose desk is overflowing with paperwork (validating & executing transactions). A Layer 2 blockchain is an efficient assistant who takes the bulk of the workload to their desk (L2 network) to process. 

However, the final approval still comes from the boss. So, the assistant sends the processed paperwork back to the boss, who adds it to the final ledger upon approval. In other words, when approved, the transactions processed on the L2 network are added to the main Ethereum blockchain.

What are Ethereum Layer 2 blockchains for?

Ethereum developers, like all blockchain developers, faced an age-old challenge: the blockchain trilemma. The blockchain trilemma, coined by Ethereum co-founder Vitalik Buterin, states that a blockchain architecture needs to choose between decentralization, security, and scalability. Ethereum prioritizes the former two aspects, so scalability inevitably took the backseat.

However, compromising scalability comes with obvious drawbacks: slow and expensive transactions. Currently, Ethereum’s transaction processing capability stands at a mere 15 to 30 TPS. To provide context, VISA processes around 1,700 transactions per second

Moreover, transaction finality, when a transaction is added to the blockchain and becomes irreversible, takes roughly 15 minutes on Ethereum.  Furthermore, the network is often overwhelmed and congested during periods of high demand, which causes abrupt surges in gas fees. 

Ethereum layer 2 networks are, therefore, designed to tackle these issues and offer cheaper, faster transactions. They inherit Ethereum’s security and, by processing transactions of the parent chain, make the process more efficient.    

Layer 2 Solutions on Ethereum

Layer 2 solutions mainly differ in how they reduce Ethereum’s transaction load. The most common ones are sidechains and blockchain rollups.

Sidechains

Sidechains are independent blockchains with native tokens and consensus mechanisms whose purpose is to help scale the parent network. They connect to the parent blockchain using a two-way bridge that enables users to move assets to and from Ethereum. 

However, there’s no real transfer of assets between the two chains. Sidechains use something called a two-way peg. A smart contract locks up assets on the main chain and mints a mirror image of the tokens on the sidechain. The value of these new assets is pegged to the assets on the original chain. 

Let’s use the boss and assistant analogy once again. In this case, the boss (Ethereum) sets aside a bunch of the workload (locks the tokens). The assistant (sidechain) works with a copy of the workload (pegged assets) to execute transactions. Once done, the sidechain destroys its copies and unlocks the original tokens on Ethereum. 

Blockchain Rollups

Blockchain rollups are layer 2 scaling solutions that “rollup” or bundle a bunch of transactions and then send them to Ethereum as a single piece of data. This network then adds this to an Ethereum block and confirms it.

Using the earlier analogy, the assistant carries the paperwork (transactions) to their desk, processes them, and compresses a big pile of paperwork into a single file. The assistant then sends that file, instead of the whole pile, back to the boss (Ethereum). This way, the boss has to deal with a fraction of the paperwork, which occupies less space. Therefore, as a user, you pay less gas fees because your transaction is grouped with many others and occupies less data space on the block. 

There are two different types of rollups: Optimistic rollups and zero-knowledge (zk) rollups. Optimistic rollups assume that all transactions bundled together are valid unless otherwise proven. Zk rollups, on the other hand, produce a single cryptographic proof called “validity proof,” which attests to the validity of the transactions bundled together.   

Popular Ethereum Layer 2s:

Over the years, several Ethereum Layer 2 solutions have emerged — each prioritizing a specific audience, use case, or solution to Ethereum’s scaling efforts. Here are some of the most popular Ethereum Layer 2 solutions in the industry today:

Polygon

Polygon is one of the most popular Ethereum Layer 2 scaling solutions. It is an independent Ethereum sidechain faster and cheaper than its parent blockchain. Theoretically, Polygon can process up to 7,200 TPS, although the TPS currently stands around 1,000. Then for each of these transactions, the average gas is $0.01. It also plans on improving its transaction finality. Established brands like Starbucks use the network for loyalty programs due to the above benefits. 

Arbitrum

Launched by Offchain Labs, Arbitrum is an optimistic rollup that cuts down the speed and cost of transactions by bundling them and processing them off-chain. Arbitrum manages a total of  40,000 TPS, with transactions costing around two cents on average. Additionally, Arbitrum’s compatibility with Ethereum Virtual Machines (EVMs) helps Ethereum developers launch their dApps on Arbitrum without too many modifications to the code.

Base

Launched in August 2023, Base was incubated within Coinbase and built using the MIT-licensed OP Stack developed by Optimism. Notably, the total value locked (TVL) on the network surpassed $300 million by November.

Base subscribes to the vision of a ‘super-chain’, a collection of inter-connected blockchains built on the OP Stack, that will together scale Ethereum. Optimism and Base are the first two chains that will make up the super-chain.

ImmutableX

ImmutableX is a zk-rollup scaling solution focused on non-fungible tokens (NFTs) and Web3 games. To that end, ImmutableX has built out software development kits (SDKs) and application programming interfaces (APIs) for game developers to simplify the tedious backend infrastructure.

Along with fast transactions, ImmutableX aims to offer gas-free, carbon-neutral NFT minting. It also claims to offer transaction speeds of up to 9,000 TPS.

Ronin

Ronin is an Ethereum sidechain launched by Sky Mavis, which created the popular NFT game Axie Infinity. It uses a proof-of-authority (PoA) consensus mechanism where Sky Mavis and the community select network validators based on expertise and reputation. The gaming-focused blockchain boasts “near-instant” transactions with an average cost of less than half a cent.

ETH L2s: A new way to explore Ethereum

For Ethereum to become a global payment system, it must be accessible. Ethereum L2s are designed to do just that by solving the parent network’s scalability challenges. Whether you want to play Web3 games, exchange tokens, mint NFTs, or trade ETH, L2s help you do it faster and cheaper. 

If you’re ready to dive deeper into Ethereum Layer 2 networks it doesn’t need to be difficult. Through the Ledger ecosystem, you can access Polygon, Arbitrum, Base, and many other L2s.

So what are you waiting for? Enjoy the confidence of self-custody as you explore what the world of Ethereum Layer 2s has to offer through Ledger Live. After all, what is the virtue of crypto without self-custody?


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