by The Polygon Team
Highlights
- Bitcoin and Ethereum are first movers in crypto, and together they have innovated an entirely new asset class, but they’re no longer the only coins in town.
- Both have their limitations. Bitcoin is known for a limited number of transactions per block. Ethereum is improving its green credentials but has struggled to scale for mass adoption.
- It’s time to explore scalable and environmentally-friendly Layer 2 solutions that allow for quick and cheap transactions for blockchain applications built for Ethereum.
Not long ago, Bitcoin didn’t exist. It was launched in the wake of the 2008 financial crisis because many people liked the promise of money that worked independently of banks. Ethereum is even newer, originating in 2015 as a smart contract platform. Ethereum was devised to run applications like any other computer, but with all the data recorded on a network of computers scattered around the world, owned by no single entity, and unstoppable. The architecture is made possible with blockchain technology.
More than purely speculative, the power of blockchain technology has applications across finance, regenerative finance, enterprise, business, entertainment, and many more sectors. The doors have been opened for cryptocurrencies, with distributed applications (dApps), decentralized finance (DeFi), and a host of other real-world uses backed by blockchain protocols.
But to fully open the doors to real-world adoption, we need technology that can handle a multitude of dApps, some processing millions of transactions daily. Technology that doesn’t get bogged down and can, in short, scale.
Scaling protocols in Web3 is hard
Layer 1 networks like Bitcoin and Ethereum have long acknowledged the scaling challenge, which Ethereum co-founder Vitalik Buterin eloquently expressed as the crypto trilemma. This three-pointed conundrum expresses the tension between security, decentralization, and scalability on the blockchain. Not all three can be simultaneously optimized and two are usually prioritized over the third depending on an application’s goal and remit. In the race towards real-world use cases, the balance between these three poles has continued to strain.
Bitcoin has optimized for security and decentralization at the cost of scalability. Its architecture is slow, and mining is expensive, plus it’s very hard to program applications on the network and they face many limitations. Though initially devised to be a system of payment, it soon evolved into what its users describe as a “store of value,” like digital gold.
What about Ethereum? The network is a robust software platform developers can use to integrate new blockchain applications with everyday use cases. But it struggles to scale.
Whenever the Ethereum network experiences high traffic, its performance dips, resulting in slow speeds and high fees. That’s the trade-off for robust security of the network and a framework of decentralization.
If Bitcoin stores value but with a limited ability to scale, and Ethereum has a great infrastructure but struggles with broad adoption, what do we do?
Layer 2s to the rescue
Ethereum has leaned heavily on Layer 2 solutions in the past, with core developers aware that the network will not adequately scale by itself. Instead, Layer 2 protocols are built directly on top of Ethereum as a way of increasing the amount of traffic on the network.
This is because Layer 2s batch large numbers of transactions on the network, which increases the overall number of transactions that can settle on the base layer. The batches also spread the gas fee across a large number of users, which lowers the cost.
Protocols working to scale Ethereum include: Polygon, Starkware, zkSync, Arbitrum, Loopring, and Optimism, among others. Each leverages its own technology to increase the number of user transactions the network can withstand. This means lowering fees and expanding user adoption.
There are a number of ways solutions go about implementing scaling designs, but they are all more or less aligned with the vision of Ethereum as the “execution” layer of Web3, where transactions are posted, while the Layer 2 serves as the “transaction” layer, where users, enterprises, and developers actually interact with programs on the blockchain.
This way, users draw from the security of Ethereum while also benefiting from the speed and low cost of the Layer 2.
The kinds of solutions that exist include plasma, state channels, optimistic rollups, and zero knowledge (ZK) rollups. We won’t get bogged down in the details, except to say each has its own benefits and tradeoffs.
Instead, let’s figure out what’s important in a Layer 2 and how best to evaluate them.
What makes a strong Layer 2?
What should you look for in a Layer 2 solution? Apart from determining what kind of solution protocols are using (ZK-rollups or optimistic rollups are probably the most anticipated), it’s useful to ask:
- How many developers and projects are building within the ecosystem?
- What do transaction times and fees look like?
- How far along are the core teams in developing their solutions?
- Have the core teams come up with a suite of solutions, or are they working in silos?
The answers for each of these questions will be different from project to project.
It’s worth noting the interaction between transaction fees, speed, and the number of developers on the network. If a Layer 2 is quick and cheap to use, it will likely attract more users. Take Polygon’s ecosystem, for example, with over 37,000 dApps and 164 million unique user addresses. It has an average fee of $.002 per transaction.
A successful Layer 2 should not only offer speed, low transaction fees, and a PoS sidechain ready to handle an influx of user interest in the Ethereum ecosystem. It must also prove its green credentials and commit to carbon neutrality (or even negativity!).
There are already a suite of scaling solutions that run the entire spectrum of Layer 2 technologies mentioned above. This includes plasma and optimistic rollups, but the space has also seen its first-of-its-kind zkEVM, the so-called zk-rollup “holy grail” of scaling Ethereum.
Why is ZK, in general, so important, and zkEVM specifically so revolutionary?
Here are two reasons. First, the “ZK” part, short for Zero Knowledge. Zero Knowledge allows one entity to prove to another that they know some arbitrary information, without revealing to the second party what the information actually is.
In a Web3 setting, this has a ton of really important consequences, from data management to privacy in financial transactions. Instead of posting data to a public ledger, where anyone can look up the exact details of what happened (and often trace the transaction back to a specific person, despite anonymity), the data (for example, the tokens or NFT that were transferred) wouldn’t be visible.
The EVM part stands for Ethereum Virtual Machine. This is software that sits on top of Ethereum’s hardware and node network, executes smart contracts, and computes the state of the Ethereum network after each new block is added to the chain. It allows the Ethereum network nodes to recognize dApps or tokens made by other developers that are EMV-compatible.
The “rollup” part of the “ZK-rollup” batches tons of transactions together before posting them onto Ethereum, increasing the ability of adoption, while the “EVM” aspect of zkEVM means that any dApps would work seamlessly across the Ethereum network, too, with minimal changes required.
The future of Layer 2 solutions, in our opinion, is ZK-oriented, and a strong Layer 2 solution should work to combine the know-how of three different cutting-edge ZK elements to come up with the best scaling protocols in the space. This is not to dismiss other Web3 problems that still require solutions, like data availability and Web3 identity, which complement the Layer 2 focus.
Businesses are taking note. Recent Layer 2 solution partnerships span Web2, Web3, and industry, including Meta, Starbucks, Mercedes-Benz, NFL, Dolce & Gabbana, Stripe, and many more.
Overall we see the future of blockchain evolving towards more complex and comprehensive Layer 2 solutions. The evidence is already here, with Layer 2’s exhibiting a strong network effect, superior scaling technology, and solutions that have already changed how everyday users interact with blockchains. The stage is set for these Layer 2 coins to be as important as their Layer 1 counterparts.
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