This is a translation of nobmei(@nobu_mei)’s newsletter.

Today we will discuss the Layer2 technology that enhances processing performance of Ethereum.I’ll set aside the technicalities of Layer 2 and talk about the basics.

Why Layer 2 is needed

To explain the necessity  for Layer 2, look at the following graph first. This graph shows the Gas, in other words “fee” required to make a transaction on Ethereum. The period is 5 years and the unit is Gwei.

Gwei = smallest unit of ETH.1 Gwei = 0.000000001 ETH. Fees tend to rise as ETH price rises.

Since 2020 summer, the cost of Gas on Ethereum has been getting higher which means more transactions on Ethereum. In 2020 DeFi and 2021 NFTs occupy most of the deals on Ethereum.We say "Ethereum is clogging up" when the number of transactions increases and the Gas fees are rising rapidly.

Let me explain the Ethereum clogging by comparing it with a expressway.Usually, when you drive on an expressway to reach your destination, you have to pay at a toll booth to use the expressway. And when more cars use the expressway, it gets "clogged".

The same thing happens in Ethereum, where the Ethereum blockchain is the highway, the money paid at the toll booth is the Gas, and the cars driving on it are the blocks with the transactions on Ethereum.

The difference between an expressway and Ethereum is the "traffic rules".On the expressway, if you are in a line, you can pass from the first car to the last.In Ethereum, the logic is different. The cars that pay more fees can get through first. If you are in a hurry to make a transaction, you can get through faster by paying a higher fee, and if the fee is too low, you will not be allowed to go through forever.

In the previous section, we explained that the nodes of Ethereum are highly decentralized and highly secure. It is natural to use dApps on a highly secure blockchain.But the design of Ethereum blockchain causes sharp rise in Gas fees  as the number of transactions increases thus only the rich can use.For example,  it costs a few hundred dollars  just to sell one NFT. If the price of NFT is several million dollars, the fee is small in proportion.But if you try to sell a NFT that costs only a few bucks, you will end up with a deficit  just for that trade. Since ordinary people are the majority compared to rich people, Web3 will not spread forever.

From this background, it is becoming increasingly important to use the blockchain properly.For example, use Ethereum for high-value NFTs and important transactions with high security, and use blockchain with low Gas fees for daily transactions.

When considering the use of blockchains other than Ethereum, Layer 2, sidechains, and other Layer 1 blockchains become an option.

Layer2 is a set of protocols that attempt to improve the performance of Ethereum as Layer1. Layer2 technology has been growing at a tremendous rate since late 2021.

Sidechains are a group of blockchains specialized for applications like games.,The difference from Layer2 is that they can continue without Ethereum.Layer2 can't function without Layer1 Ethereum, while sidechains can function as their own economic sphere.

The term "Layer 1" is not limited to Ethereum, and there are many other Layer 1 protocols such as BSC (Binance Smart Chain), Avalanche, Solana, and Astar. These are also called “Ethereum Killer” because they are Layer1 blockchains that provide the same BaaS function as Ethereum.

Bitcoin is described as Layer1 and the dApps that function on top of it as Layer2. Players such as Polkadot and COSMOS that are interoperable between blockchains are called Layer0.

Various blockchains have been mentioned, but it is important to note that these are not necessarily competitive relationships with Ethereum. It is impossible for Ethereum to cover all transactions when people all over the world will have access to Web3. At that time, multiple blockchains will be used and "multi-chain" will be reflected.

It is expected that other blockchains will assume the gaming and high-speed transactions that Ethereum is weak at.UX will be improved so that multiple blockchains will function as infrastructure in the future, but will not be visible to the general users.I want to cover all of them in this article, but due to the lack of pages, I will just introduce Layer 2.

Layer2 to improve scalability of Ethereum

Layer2 is the generic name for a group of protocols that attempt to improve the performance of Ethereum as Layer1. As you can see in the graph below, TVL on the Layer2 protocol has been expanding rapidly since late 2021.

Layer 2 is a very interesting area and will definitely grow in the future, but it is a "swamp" from here on. I will explain the important parts of this area with excerpts, assuming that those who are interested can do your own research(DYOR).

Relationship between Layer1 and Layer2

Layer 2 is an extension tool built on top of Layer 1(Ethereum), so it succeeds the high security and decentralization of Layer 1. In other words, it is highly secure.Especially, money transfer between Layer1 chains will be more secure.For example, when you transfer funds from Ethereum to Solana, if the Bridge between the two is attacked, the funds will be leaked.

In the case of Layer 2, even if Layer 2 has some kind of bug and stops functioning, the assets are protected by Layer 1 Ethereum and can be recovered.This is the difference between cross-chain and multi-chain.

Layer2 will improve scalability issues of Ethereum, so 2022 may be the last year to directly use Layer1. Once Layer2 with high processing performance and the same level of security as Ethereum is built , no user will directly use Layer1 because of  its high Gas fee.

Once a the method of Layer 2 is established., which is currently a hot area, will eventually be modularized and built in a deeper layer of infrastructure that is invisible to the general users. This will improve the UX of the current Web 3.0 protocol, which is currently complex and requires a high level of literacy.

You can read more about the Layer 2 project here: [Daily Topics] Translation of “The Ultimate Guide to Ethereum's L2 Solution”

Infrastructure and applications have evolved mutually

Looking back on the history of information technology, infrastructure and applications have mutually evolved by turns.

There is a cycle of mutual growth: once the infrastructure is ready to a certain degree , the era of applications with new functions will arrive, and when the limits of applications arrive, we wait for the evolution of the infrastructure.In the world of Crypto, this cycle is the same.

In 2021, NFT and layers near software and apps which the users can see have grown a lot. It is time to reach the limits of what can be done with the current NFT and infrastructure, and it is time for a full-scale revolutionary innovation happens in the deep part of infrastructure.

At present, each blockchain is not connected to each other, and the best that can be done is to use the apps to connect via Bridge. But in a few years, interoperability and scalability issues will be improved, and apps that provide a new user experience will be available. I am very much looking forward to it.

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