Blockchain technology offers tremendous benefits such as trustless interactions, and immutable record-keeping which has largely generated enormous retail and institutional interest. However, the core architectures behind public blockchains lead to a trade-off between decentralization, security, and scalability. The Blockchain Trilemma which was postulated by Vitalik Buterin fundamentally asserts that projects can only optimize two of the three core properties of a public blockchain, which are (Decentralization, Scalability, and Security). Therefore, due to technical, or other limitations, one of these three must be sacrificed.
One of the main challenges with truly decentralized blockchain networks such as Bitcoin or Ethereum is the scalability constraint which occurs whenever the amount of data passing through the blockchain hit a limitation due to the insufficient capacities of the blockchain throughput. Ideally, a public blockchain network should be able to handle an infinite number of Transaction Per Second (TPS), otherwise referred to as throughput. This is because as crypto enters its next wave of adoption, the need for scalability has increased exponentially in a bid to facilitate mass adoption and onboarding of the next billion sets of web-3 users. However, the Ethereum blockchain presently processes only about 15 TPS. This significantly lags behind centralized payment protocols such as Visa Electronic Payment Network can process roughly about 25,000 TPS.
The difference predominantly lies in the level of security and decentralization that public blockchains such as Bitcoin and Ethereum offer. In thier case, every transaction must be accepted, mined, distributed, and validated by a global network of nodes. This takes an enormous amount of time, computation and processing power. Furthermore, the advent and exponential increase in the adoption of Defi protocols and Non-Fungible Tokens (NFT) have led to a resultant increase in the network load.* *Hence, indicating that the capacity of the Ethereum network is limited. Consequently, the cost of using the Ethereum network increases prominently with more users competing with each other for backspace or to conduct transactions on the Ethereum network.
Although the Alternate (Layer-1) competitors such as Solana, Avalanche, and Aptos aim to tackle the scalability issue, it is evident that they have significantly sacrificed decentralization and security (to a large extent) in a bid to enable faster throughput and affordable fees. However, the danger of this approach is that the Alternate Layer-1 blockchains have chosen to recreate Web2 incentives in a quest for scalability. This does not in any way align with the fundamental values of Web3 because sacrificing decentralization would simply imply forgoing the purpose of crypto. Hence, scaling blockchain networks alone is not enough. Rather, there is the duty to scale in a manner that the core values of Web3 with respect to decentralization, and security are not compromised.
How Ethereum L2 work
Ethereum Layer Two (L2), is a collective terminology that is used to describe a specific set of scaling solutions, that fundamentally maintains the security measures and decentralization tenets of the Ethereum network.
In this case, the Ethereum blockchain (Layer1 network) would function as the primary Data Availability Layer (DAL) for layer 2s. This, therefore implies that Layer 2 projects would post their transaction data onto the Ethereum mainchain, thereby relying on Ethereum for data availability. In addition, Layer 2 scaling solutions inherit the underlying security and decentralization tenets of the Ethereum mainchain.
All of this requires no fundamental changes or alterations to the layer 1 protocol which in this case happens to be Ethereum. This consequently enables the Ethereum Layer-1 blockchain to handle data availability, security, and decentralization, whereas the layer 2s focuses on scaling, thereby taking the transactional load away from the Layer-1 blockchain, while the finalized proofs post back to the layer 1. Therefore, by abstracting the transactional load from the layer 1, the Ethereum blockchain, in this case, becomes less congested, and more scalable.
Similarly, Rollups have proven to be useful because they increase transaction throughput, reduce fees, and expand participation. There are two kinds of rollups with different security measures:
§ Optimistic rollups assume transactions are valid by default and primarily runs its computation through a fraud proof method.
§ Zero-knowledge rollups runs computation off-chain and submit a validity proof to the main-chain.
Some of the popular Layer 2 scalability solutions like Optimism, Starkware, and Arbitrum provide scaling for blockchains so that a growing number of exchanges and platforms are able to use the Ethereum network without the hassle of high gas fees or lengthy processing times for transactions.
In Conclusion, the Ethereum blockchain is arguably the most widely used blockchain. However, this does not imply that it doesn’t have its associated challenges, just as explained in this report primarily in terms of the slow transaction times and expensive gas fees that hinders mass adoption. Hence, Ethereum Layer 2s built on top of the Ethereum blockchain aims to keep transactions secure, speedy, and scalable. The practical use cases of Ethereum Layer 2s can already be seen on the practical horizon with systems such as mainstream photo-sharing application Instagram using the Polygon network for its upcoming in-app NFT minting functionality. Furthermore, the largest NFT marketplace Opensea recently offered support for Arbitrum in order to provide users access to NFTs without incurring high gas fees.
Each individual solution has its own pros and cons to consider such as throughput, gas fees, security, functionality, scalability, and interoperability. No single layer 2 solution currently fulfills all these needs. For example, some of the Zero Knowledge (ZK) do not offer seamless support for Ethereum Virtual Machine (EVM). In addition, validity proofs are extreme for Optimistic Rollups to compute for smaller applications with less on-chain activity.
Despite these challenges, Ethereum layer 2 solutions still have serious potentials to transform the blockchain landscape and provide the needed scalability needed to facilitate mass adoption.