Gate.io Blog: Ethereum Layer 2: An Upgrade of Scalability
Mining efficiency is low because Ethereum uses full node mining with numerous nodes all in the bookkeeping. As the most popular smart contract blockchain, The Ethereum network has a huge trading volume, which often leads to congestion and high fees. It greatly affects the experience of traders and the promotion of projects. In improving the Ethereum network, Layer 2, a brand-new concept, was born.
Limitations of Blockchain Layer 1 and the Solution
There is an “impossible triangle” in blockchain, namely, scalability, decentralization, and security, and only two of them can be obtained. This is based on the “impossible triangle” of the traditional financial and monetary theory that a country cannot achieve monetary policy independence, exchange rate stability, and free capital mobility at the same time.
Whether it is Bitcoin, Ether, or other cryptocurrencies, most of them have an independent and unique public chain, namely Layer 1. It is the standard for the basic consensus layer on which all transactions are settled. Layer 1 focuses on security and decentralization in order to protect all related transactions and clearing records, resulting in limited scalability.
There is no doubt that when all transactions and applications are settled through layer 1, the only main chain, it will cause inefficiency, especially in the Ethereum network, where there are various coins and huge business volumes. Network congestion will occur if you are not careful. In order to solve the congestion problem of the main chain, developers have proposed various solutions to expand it.
There are generally two types of expansion solutions, namely on-chain scaling and off-chain scaling. On-chain scaling occurs in Layer 1. It targets the scaling in the protocol layer, and “transforms” the underlying blockchain itself to increase the capacity of the blockchain. The specific solutions include SegWit, DPOS, block scaling, etc. The goal is to enable the main chain to support more and faster on-chain transactions. Off-chain scaling refers to the scaling through Layer 2.
Layer 2 Focuses on Efficiency and Application
Layer 2, or off-chain scaling, is a solution to the performance that scales outside the main chain. It is complementary to Layer 1, i.e. Layer 2 is an infrastructure built on top of the underlying blockchain to provide better scalability, availability, and privacy for the blockchain. Compared with Layer 1, which pursues security and decentralization, Layer 2 pursues the ultimate efficiency and performance. After several years of development, several different Layer 2s have been developed.
Common types of Ethereum Layer 2
The initial solution of Layer 2 is the side chain. That is a chain that operates independently, only for the operation of a certain transaction, and returns the result to Layer 1. The main chain only receives and registers the trading result without verification, so as to reduce the operating pressure of the main chain.
However, the side chain has a fatal drawback. If the node is attacked or codified, it will mislead the trading with wrong instructions, and the result reported to Layer 1 will also be wrong.
To prevent codification attacks as happened on the side chain, developers designed plasma technology, which is essentially a tree-structured side chain with non-hosting features. The plasma chain is responsible for specific trading settlements, while the main chain is only responsible for storage. In the operation of the plasma chain, users need to lock their assets in the contract of the corresponding root chain and submit the corresponding proof to the verifier When a participant is unable to provide proof, the plasma block will not be confirmed. Other users, however, can safely exit from the chain without suffering losses.
However, in the operation of the plasma chain, each sub-chain has its own mechanism to validate blocks and provide forgery-proof verification. If all users try to exit at the same time, all states have to be submitted for validation, causing network congestion as well.
Although the plasma chain improves the security in the operation of the sidechain, it returns to Layer 1 only the trading results, but no specific trading information. Therefore, developers devised Rollup schemes, and the common ones are ZK Rollups, Optimistic Rollups, Arbitrum, etc. In these schemes, all Layer 2 transactions are aggregated, packaged into blocks, and submitted to Layer 1 for the record. Rollups do not require data availability assumptions as plasma chains do.
State Channels means that both parties of trading construct a channel under the chain, sign with their respective private keys, and lock the funds on this channel. They will send the payment status (including rounds, amounts, and signatures), complete the off-chain trading, and finally record the result on the main chain. At present, the status channel has been widely used in payments and games.
However, if one of the parties withdraws before the trading is completed, it will enter a “challenge period” and wait for the latest round of status update from the other party. The main chain will verify the signature and the balance to confirm the validity of the status update. To ensure that a counterparty has not exited using a previous state, traders may need to monitor the main chain frequently.
Prospects for the Ecosystem of Ethereum Layer 2
With the development of the Ethereum network and the promotion of DeFi’s popularity, the trading volume of the Ethereum blockchain is still growing, putting more and more pressure on the main chain. A number of Ethereum-based DeFi projects, including decentralized exchanges, are starting to work with different Layer 2 solutions to provide more efficient and low-cost services and features. In the coming time, it is worth waiting for how developers will continue to improve the Ethernet network through Layer 2.
By Gazer. C, Gate.io Researcher
*This article represents the views of the researcher only and does not constitute any investment advice.