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What is Ethereum Layer-2, and why should you care?
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What is Ethereum Layer-2, and why should you care?

The Crypto Journal - Issue 005

Tudor-Radu Barbu
Jan 19
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Hello and welcome back to the new weekly report from The Crypto Journal.

I think this one will be more than a 5-minute report, but here we are.

If you work in the technology sector, you know that scalability is a big word. Of course, this also applies in Blockchain. 

🧪 What happened?

You will say: "But the Blockchain is a new and distinctive technology. It should be fast!". 

Not really.

The number of people using Ethereum has increased, and the Blockchain has reached specific capability constraints. This has caused the expense of operating the network, creating the need for "scaling solutions."

🔍  Problem

  • The decentralized design system of Ethereum is limiting the number of processed transactions to ... 15 per second.

  • More users + more transactions = high gas price + long delays.

  • The network is unaffordable for the mainstream (as one of Ethereum's goals is to enroll billions of users)

  • Network congestion: Not attractive to new developers.

💡 Solution 1 - On-chain scaling

  • Sharding: The method of breaking a database horizontally to spread the load. Sharding will ease network congestion and improve transactions per second by assembling new chains, known as "shards." Sharding is the future of Ethereum scalability.

💡 Solution 2 - Off-chain scaling

  • Sidechains: Independent blockchains that are Ethereum-compatible and operate their own consensus standards and block parameters to accurately process transactions.

  • Layer-2 scaling solutions. L2: A layer of the Ethereum network that can process transactions off-chain, reducing congestion on the mainnet. (This allows for more transactions, lower costs, and faster confirmation times.) : 🌡 Rollups, 🌡 Plasma, 🌡 State Channels.

🌡 Rollups

These are L2 solutions that seem to be the most promising solution. Rollups commit the transaction execution beyond the main Ethereum chain, and they borrow the Ethereum security (bam, it's fixed). There are two types of rollups, and verification is the most essential distinction.

  1. ZK-Rollups (Zero-knowledge rollups)

  2. Optimistic Rollups

You have to get used to this complex stuff at some point, so, long story short:

Optimistic rollups rely on fraud proofs: a new state is assumed to be valid unless proof to the contrary (a proof of fraud) is submitted to the Blockchain within some timeframe. ZK-Rollup relies on validity proofs: a new state will always be presented to the Blockchain with proof that it is, in fact, valid.

⚔️ Players

Sidechains

  • Polygon (MATIC) - The top layer-2 scaling solution.

  • Gnosis Chain (xDAI) - Provides stability, scalability, and an extendable beacon chain framework.

  • POA 

  • Loom - Platform-as-a-Service (PaaS) blockchain solution that enables sidechain development for Ethereum-based applications.

  • Most of the projects use Plasma, a chain that is a separate blockchain anchored to the main Ethereum chain and employs fraud proofs to arbitrate conflicts (Learn more here). These chains are occasionally referred to as "child" chains because they are basically more miniature replicas of the Ethereum Mainnet.

Multichain

  • Skale - Ethereum network that enables developers to bypass congestion on the mainnet by migrating development onto SKALE-administered sidechains

ZK Rollups

  • Loopring - assembles protocols, infrastructure, and user-facing products for the future of finance. Exchange & Payment protocol.

  • Hermez - scaling payments and token transfers (was acquired last year by Polygon).

  • zkTube - a Layer 2 mining network for Ethereum.

  • zkSync - a trustless Layer 2 protocol for scalable, low-cost payments.

  • Aztec - scalable Privacy on Ethereum (Identity, code, transactions)

  • STARKEx 🚨- built by StarkWare - L2 solutions using ZK-STARK (basically, a cryptographic proof technology). Scalability engine for crypto exchanges.

Optimistic Rollups

  • Some implementations of Optimistic Rollups are Arbitrum, Optimism, Boba, Fuel Network, Cartesi.

  • Lots of popular projects are using Optimistic Rollups, including Syntetix and Uniswap.

📡 New projects & Opportunities

Let's skip to the good part.

  • ImmutableX - The first Layer-2 protocol that focuses strictly on NFTs - Already partnership with OpenSea.

  • DeversiFI - DeFi on L2.

  • dydx - A trading platform on L2. Perpetual and futures exchange.

  • ZigZag - Decentralized exchange powered by ZK technology.

  • Hop protocol 

  • CowSwap

  • Plonky2 - Technology technology technology on Polygon

𝌙 Advice

For a decentralized app, the choice of which L2 to enforce should be decided by the essence of the risk it is ready to expose its users to. These types include centralization risk, game-theoretical risk, technological and implementation risk, and, of course, adoption risk.

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