Does Layer 2 really scale Ethereum?

The vision of building a secure, user-friendly decentralized web relies on the development of critical infrastructure. This vision is supported by a shared economic framework and supported by hundreds of millions of people. Layer 2 scaling solutions play a vital role in building this foundation and enhancing Ethereum’s capabilities. These projects collaborate with each other to form a powerful ecosystem that drives Ethereum to reach its full potential.

This article will take a deep dive into Layer 2 innovations, narratives, challenges, and their transformative impact on the mass adoption of Ethereum. Our analysis will be based on data from Footprint Analytics' Layer 2 research page to provide valuable insights into this growing ecosystem.

Why do we need Layer 2?

Blockchain technology has long been appreciated for its advantages such as decentralization, security, and scalability. However, the “Blockchain Trilemma” shows that achieving all three simultaneously within a simple architecture is extremely challenging. Ethereum currently handles more than 1 million transactions per day, but often faces network congestion and high transaction fees due to increasing demand. To solve this problem, Layer 2 networking emerged as an innovative solution.

The main goal of Layer 2 is to increase transaction throughput by enabling higher transactions per second (TPS) while maintaining decentralization and security. These Layer 2 achieve this by merging multiple off-chain transactions into a single Layer 1 transaction. As a result, transaction fees are significantly reduced, making Ethereum more accessible and inclusive to a wider range of users.

Types of Layer 2

Currently, there are three main types of Layer 2: Rollups, State channels and Plasma.

Rollups

As a Layer 2 solution, Rollups aggregate multiple transactions into a single Layer 1 transaction, saving users costs by distributing transaction fees among participants within the Rollup. There are two main types of Rollups: Optimistic Rollups and Zero-knowledge Rollups (ZK-Rollups). Optimistic Rollups utilize fraud proofs to ensure the validity of off-chain transactions, while ZK-Rollups use zero-knowledge proofs to enhance privacy and security.

Examples of Optimistic Rollups include Arbitrum (Arbitrum One), Optimism (OP Mainnet), and Base.

• Arbitrum was launched by the Offchain Labs team in August 2021 and has now become a leader in the industry, accounting for more than 50% of Market Share. With the Nitro upgrade, Arbitrum has achieved full EVM equivalence, allowing developers to seamlessly migrate smart contracts from Ethereum to Layer 2 with minimal or no modifications.

• Optimism is the second largest Ethereum Layer 2 solution, having a soft launch in January 2021 and becoming fully open to everyone in December of the same year. Optimism uses an EVM-equivalent architecture to provide a seamless scaling solution for Ethereum applications.

• Base is built in cooperation with Optimism and based on OP Stack, and will be launched on the mainnet in July 2023. In just a few months, it became a huge success, gaining the third-largest share in the Layer 2 market. Base was incubated by Coinbase and leverages Coinbase’s expertise in building crypto products.

On the other hand, ZK-rollup applications include zkSync Era, Starknet, Linea, and Polygon zkEVM.

• zkSync Era is the world's first zkEVM blockchain. It was released on the mainnet for all users in March 2023 and quickly occupied the fourth place in the Layer 2 market. market share. zkSync Era has become the dominant rollup solution in terms of user activity, including TPS and transaction count.

• Starknet will be launched on the mainnet in November 2021. It uses the STARK cryptographic proof system to achieve security, low cost and high performance. Starknet uses Cairo as its development language and is not EVM compatible. Efforts are currently underway to implement compatibility between Solidity and Cairo via a transpiler called Warp.

• Linea, a Layer 2 solution under ConsenSys, will be launched on the mainnet in July 2023. It provides EVM compatibility so developers can easily migrate and build applications on their network.

• Polygon zkEVM Launched in public beta in March 2023, it aims to be equivalent to EVM. Polygon (formerly Matic) is a blockchain platform that provides diverse blockchain solutions. Polygon zkEVM is one of Polygon's products.

State channels

State channels are a mechanism that allows participants to conduct fast and unrestricted off-chain transactions, with the final results settled on Ethereum. This approach reduces network congestion, fees and transaction delays.

Raiden Network is an off-chain scaling solution that focuses on researching state channels technology, defining protocols and developing reference applications. It enables near-real-time, low-fee, and scalable payment capabilities compatible with ERC20 tokens on Ethereum. The network is designed to increase scalability and usability while maintaining compatibility with the Ethereum ecosystem.

Plasma

The Plasma Chain is an independent blockchain connected to the Ethereum main chain through pegs that utilizes fraud proofs (similar to Optimistic Rollups) to resolve disputes.

OMG Network utilizes Layer 2 Plasma architecture to provide strong security guarantees and high throughput. It provides a scalable solution for third-party developers interested in building decentralized payment applications on Ethereum.

Data Insights

Consensus is forming: Ethereum will achieve mass adoption, it’s just a matter of time. So, how is it going?

Similar to the spread of other technologies, Ethereum’s adoption trajectory can be described by a classic bell curve. It begins with a small group of innovators quickly embracing the technology and subsequently attracting participation from early adopters. As Ethereum continues to develop and mature, it gradually expands its coverage, attracting the majority of people in the early and late stages, and then enters the mass adoption stage. Eventually, in the final stages of adoption, the technology will reach the remaining segments of the population, the so-called “laggards.”

Let’s explore the impact of Layer 2 on Ethereum’s mass adoption from the following aspects:

TVL (total value locked)

Total Value Locked (TVL) is considered a leading indicator of adoption.

Arbitrum leads the pack with TVL of $6.004 billion and a market share of 61.03% as of end-October 2023, consolidating its position as the dominant market player. Optimism follows closely behind with a TVL of $2.598 billion and a market share of 26.41%, showing its broad adoption and user engagement.

Other chains form the second tier, but their market share lags far behind, less than 5%. The newly added Base was launched on the mainnet on July 13, 2023, ranking firmly in third place with a TVL of $463 million. The zkSync Era ranks fourth with $451 million in locked value, while Starknet ranks fifth with $135 million in TVL.

Data source:Layer 2 Overview

Number of users and transaction volume

User activity, such as the number of unique users (bridgers) interacting with Ethereum and transaction volume, are key metrics for measuring adoption.

Among the various Layer 2 solutions, zkSync Era leads the way, amassing 2.67 million unique users, accounting for 37.10% of all rollups, and facilitating 2.23 million transactions, accounting for 50.84% ​​of rollup activity. The initial airdrop of the zkSync Era attracted a large number of users and it has remained at the top ever since. In terms of transaction volume, Starknet follows closely behind with 1.7 million transactions, accounting for 23.70% of Rollup.

Base and Linea were launched on the mainnet in July 2023 and have become very popular in the market. They surpass Optimism and Polygon zkEVM in both unique user engagement and transaction volume.

transaction throughput

Transaction throughput is one of the main scaling challenges often discussed in the blockchain community.

Currently, the Ethereum mainnet has a processing capacity of approximately 15 transactions per second (TPS). By comparison, Visa has the capacity to handle around 24,000 TPS, while Mastercard can handle 5,000 TPS.

Layer 2 is closing the gap above. In October, well-known rollup solutions such as Arbitrum and zkSync Era had an average TPS of around 9.5 to 10, the closest performance to Ethereum among existing rollups. Together, Rollups have made a significant contribution to scalability, with total transaction throughput exceeding the Ethereum mainnet by 321% in October and a scalability factor of 4.21.

Although Rollup technology helps improve scalability, currently no Rollup can surpass Ethereum in terms of throughput. In a bear market, attracting and retaining users can be challenging for both Layer 1 and Layer 2 networks. Building a thriving Layer 2 ecosystem requires not only powerful solutions but also high-traffic applications. In addition, due to the lack of seamless interaction between multiple Layer 2s and between Layer 1 and Layer 2, the user experience is affected, such as the need to switch wallets and incur liquidity costs.

cost

Layer 2 plays a vital role in reducing Ethereum network fees. By consolidating multiple off-chain transactions into a single Layer 1 transaction, Ethereum’s transaction fees have dropped significantly.

According to data from Footprint Analytics , the average Rollup transaction fee in October 2023 was 3% to 10% of Ethereum.

Number of sources:Average Gas Fee

These numbers demonstrate the growing popularity and adoption of Layer 2, highlighting their potential to ease Ethereum congestion and improve scalability.

Layer 2 Innovation

In the ever-changing landscape of blockchain technology, leading Layer 2 solutions such as Optimism, zkSync, and Arbitrum are actively pursuing innovative approaches to address ongoing challenges and maintain a focus on interoperability. These well-known players maintain a rapid pace of innovation in terms of technology and applications, and constantly strive to maintain their leading position and maintain a competitive advantage in the market.

Proposed by the Optimism ecosystem, Superchain is a network of multiple networks that share a common code base called OP Stack. The framework aims to establish an interoperable environment where various Layer 2 networks can communicate and transact with each other, similar to how the Internet enables communication between devices. By providing horizontal scalability, Superchain solves the challenges associated with traditional multi-chain architectures. These challenges include different security architectures between parachains, which may increase system risks as more chains are added, and the cost of establishing new nodes for each additional chain.

Origin:Superchain - OP Stack Docs

In June 2023, zkSync launched Hyperchains, a new type of network that runs as a fractal instance of zkEVM. These hyperchains run in parallel with Layer 1 shared settlement, with the flexibility to run as a Layer 2 network with zkSync Era, or as Layer 3 Validium. Hyperchains in the zkSync ecosystem can be developed and deployed by anyone, without permission. To ensure trust and seamless interoperability, each hyperchain must be powered by the same zkEVM engine on the ZK Stack. GRVT, the first Hyperchain in the zkSync ecosystem, is a hybrid cryptocurrency exchange that combines the advantages of centralized and decentralized exchanges. Its internal alpha version is expected to be launched in November 2023, followed by a mainnet version in the first quarter of 2024.

来源: Architecture - GRVT

Launched by Arbitrum in August 2023, Arbitrum Stylus allows smart contracts to be developed on its Layer 2 network using multiple programming languages ​​such as Rust, C and C++. In addition to Solidity, developers can now write smart contracts using languages ​​compatible with WebAssembly (WASM). WASM can run code in languages ​​like Rust and C++ on the network, and on the blockchain using Arbitrum Stylus. Stylus introduces a second equivalent virtual machine that is fully interoperable with the EVM, providing a new way to write smart contracts.

Layer 2 Narrative

Since 2022, Layer 2 itself has become an important narrative in the cryptocurrency space. In the Layer 2 space, narratives play an important role in shaping public perception and influencing market movements. These narratives provide insight into the future of Layer 2 and Ethereum as a whole.

• Full chain game. This type of game uses blockchain to replace centralized game servers and puts all aspects of the game on the chain, including assets, logic, status and storage. Starknet and COMBO (currently running on testnet) have positioned themselves as important supporters of full-chain gaming in the public chain space.

• Modular blockchain. Initially, blockchains adopted a monolithic design, with a single blockchain handling all tasks. However, the concept of modular blockchain emerged, which focuses on specific functions rather than trying to cover them all. Celestia is the first modular blockchain network. It is ready, with airdrop and launch plans announced in October 2023.

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• Zero gas fees. Gas fees have been a major barrier to mass adoption of Ethereum. To solve this pain point, GasZero (currently running on the testnet) emerged as a Layer 2 network, which provides a unique solution: no gas fees are charged for trusted end users. On GasZero, users can interact with the decentralized network and smart contracts without having to pre-deposit any tokens in their wallet.

• Layer 3. There is currently no widely accepted definition of the Layer 3 concept in the blockchain industry. Ethereum co-founder Vitalik Buterin believes that it is too early to clarify its definition, because the architecture of the multi-Rollups ecosystem is still evolving, and Most discussions remain at the theoretical level. However, Vitalik shared three possibilities for Layer 3 in the future:

  • Layer 2 is for extensions, and Layer 3 is for customization features such as privacy protection.

  • Layer 2 is for universal extensions, and Layer 3 is for custom extensions.

  • Layer 2 is used for trustless extensions (Rollups), and Layer 3 is used for weak trust extensions (Validiums).

Challenges facing Layer 2

Cost-effective Layer 2 networks are gaining traction as an alternative to the congested Ethereum network. While scaling certain capabilities carefully, it's critical to maintain a solid base layer. The Ethereum community encourages the development of technology and applications, but maintaining a delicate balance between user-friendliness and the benefits of decentralization is crucial, as Vitalik Buterin highlighted at the Ethereum Hong Kong Hackathon in October 2023 .

According to Vitalik, Layer 2 faces four key challenges:

• Prove the security and decentralization of the system. Validity (zero-knowledge) proofs and fraud proofs are used to prove the legitimacy of transactions without having to be processed on the Ethereum chain. However, validity proofs face centralization issues as they rely on specific hardware.

• Decentralization of sorters. These sequencers validate, sort, and compress transactions before transmitting them to Layer 1. However, this centralized setup has been criticized for its potential to become a single point of failure, censorship vulnerability, or vulnerable to shutdown by authorities.

• Cross Layer 2 wallets. They make it possible to interact seamlessly between multiple Layer 2 solutions without having to switch wallets.

• Data availability. It refers to on-chain data availability, the challenge of storing a complete copy of blockchain data to verify transactions. It's worth noting that solutions like Validiums and Optimiums are typically not classified as Layer 2 because they don't publish data in Layer 1. Instead, they introduce additional trust assumptions on top of Layer 1.

Additionally, as we mentioned before, no current Layer 2 network can surpass Ethereum in terms of throughput. The top priority is growing the Layer 2 ecosystem.

• Ecosystems and applications. Currently, most applications in the ecosystem of Layer 2 networks are DeFi applications. They need to introduce more types of phenomenal dApps so that Layer 2 can expand its ecosystem, attract more users, and encourage them to stay.

Conclusion

In summary, Layer 2 networks are propelling Ethereum toward mass adoption by effectively solving the scalability and cost challenges that have hindered its growth. These networks provide innovative solutions that increase transaction throughput and lower fees, making Ethereum more accessible and inclusive to a wider audience.

Furthermore, in addition to Ethereum’s Layer 2 network, opBNB has emerged as the BNB chain’s response to scalability challenges. In September 2023, opBNB successfully completed the mainnet launch. In fact, in the face of these challenges, the response measures and future development directions of other public chains are also exciting. Our focus remains on the development of the ecosystem and attracting users. Endless possibilities unfold before us, and each public chain will embark on its own unique path to scalability and mass adoption.

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The content of this article is for industry research and communication only and does not constitute any investment advice. Market risk, the investment need to be cautious.

This article was contributed by the Footprint Analytics community.

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