Hello there! This post is about a new trend in the Ethereum ecosystem that is becoming more and more famous, Layer 2. Probably you heard about that already somewhere, so if you wonder what is that exactly, and if it really matters to the future of Ethereum then let me introduce you to it as much as I can in a simple way.
The common problem with big and popular blockchains until now is that they are getting congested from time to time. The cost for a single transaction on Ethereum during peak time in the last bull market was hitting even a few hundred dollars. How is that happening?
In basic terms to say, the more people want to make transactions at the same time, the more congested network begins, since the block size and time between blocks are limited due to the ability of decentralization. I might explain that further another time. In order to do something with that, the idea occurred called Layer2 and sidechain.
Layer 2 protocols are special “chains” connected to Layer1(main ETH chain) allowing us to make more, much faster, and most importantly cheaper transactions on Ethereum.
A similar example of that solution is Lightning Network on Bitcoin.
Once our funds are being sent from layer1 to layer2 they are frozen on the main chain. If we want to withdraw them, they are coming back to the original location and the final settlement is getting done to verify the final balance. The most important thing is that Layer2 protocols are inheriting security from Layer1 and are based on Optimistic Rollups and Zero-knowledge Rollups. One of the most important Layer 2 on Ethereum are Optimism, Arbitrum, or Starknet.
Sidechains as the name suggest are separate blockchains connected to Ethereum with different roadmap and history. The most important difference between sidechain and Layer2 protocols is that sidechain has a different consensus algorithm than Ethereum and they can choose any alternative consensus mechanism which makes them way less decentralized in order to get maximum throughput and least cost possible.
Although moving funds from Ethereum to the sidechain is possible through bridges, the assets are not physically moved across two chains, instead, it is being done by minting and burning mechanism.
One of the most famous sidechains today is Polygon. Their rapid expansion let them obtain partnerships with such giants as Coca-Cola, Reddit, and Starbucks as these companies see a promising future in connecting their business model with NFTs.
The technology behind those teams and invested money is enormous, future here looks very interesting, and taking a look at their growth could be wise as we may be entering so-called and even longer awaiting “mainstream adoption” in a matter of few years.