Top 5 Ethereum Layer 2 Scaling Solutions in 2023

Cindicator Team -

Learn about top Ethereum layer 2 scaling solutions and how they improve upon the Ethereum mainnet.

Blockchain technology creates a trustless environment that enables secure transaction execution, maintenance of immutable records of these transactions, and the development of secure and resilient digital identities.

With over a million transactions daily, Ethereum is one of the most popular and secure blockchains. The network emphasizes decentralization and security, which in turn attracts many users. While being majorly positive, this also results in a congested network with slow processing of transactions and high gas costs.

Ethereum mainnet has a processing rate of about 30 transactions per second (30 TPS), which hurts network throughput and the scalability of decentralized applications (dApps) built on the network.

To address these issues, Ethereum has introduced several scaling solutions, among them a set of solutions collectively known as Layer 2 scaling solutions. Also known as L2s, these solutions enable the Ethereum platform to perform cheaper and faster transactions.

In this article, we will look at types of Ethereum layer 2 scaling solutions, how they work, and examples of the best layer 2 scaling solutions to look at if you’re seeking to invest.

So, what are L2s and how do they work?

Layer 2 solutions are secondary frameworks, or protocols, built on top of a pre-existing blockchain system, in this case, Ethereum, on which they rely for security. Their goal is to solve the various transaction throughput issues that the main network encounters.

These scaling solutions, also known as off-chain techniques, involve offloading a portion of a blockchain’s transactional load to a system architecture that continues the remaining network processing off the chain. This significantly reduces the number of transactions processed on the main network, making it more stable and less congested.

Rollups, State Channels, Sidechains, and Plasma chains are some of the mechanisms developed in Layer 2. They increase scalability while decreasing transaction fees.

1. Rollups

Rollups packetize or “roll up” multiple off-chain transactions into a batch and forward it to Ethereum’s main chain. Hundreds of transactions are bundled together to reduce the transaction data that the main chain must process. Transactions in rollups are anchored to Ethereum’s main chain and thus inherit the blockchain’s security, which ensures transaction finality.

Rollups are further classified as optimistic rollups or zero-knowledge rollups based on how the final transaction data is computed and posted to the mainnet.

Optimistic rollups run parallel to the main chain to avoid its expensive computations. They assume that all posted transactions are valid and do not generate validity proofs for each transaction bundle as a result. They instead provide security by running a fault-proof if an invalid transaction is suspected.

Zero Knowledge rollups or ZK-rollups on the other hand, compute transactions off-chain and then compress hundreds of transactions before generating a cryptographic proof known as a Succinct Non-Interactive Argument of Knowledge (SNARK) or Succinct Transparent Argument of Knowledge (STARK) and posting it to the Ethereum main chain. These validity proofs reassure nodes on the main chain that transaction batch validity is maintained.

And, how do the two rollup schemes compare? ZK-rollups are more secure because they produce validity proofs but take longer than optimistic rollups. On the other hand, optimistic rollups are fully compatible with the Ethereum Virtual Machine (EVM) and Solidity, allowing users to perform any action that the Ethereum blockchain allows.

2. State Channels

A state channel, also known as a payment channel, is a multi-signature smart contract that only executes with the authorization of the transacting parties. Crypto funds are deposited in a smart contract on the main chain and signed tickets are produced on the former. This multi-signature mechanism makes state channels secure.

3. Sidechains

Sidechain layer 2 solutions are independent blockchains that run parallel to the main chain. They are linked to the layer 1 blockchain via a cross-chain bridge that allows tokens and digital assets to be transferred, used in a separate blockchain (the sidechain), and then returned to the original if necessary.

To use a cross-chain bridge, you must first lock up ETH on the main chain and then receive an equal number of tokens generated on the sidechain and deposited in your wallet. You can then transact on the sidechain, benefiting from its superior transaction processing capabilities. And since sidechains are separate from the main chain and transactions are recorded on the blockchain, security issues in the main chain won’t affect the sidechain’s operations.

Sidechains made specifically for Ethereum can support smart contracts and are compatible with the Ethereum Virtual Machine (EVM). This implies that you can use these sidechains to deploy projects and benefit from their increased scalability.

4. Plasma Chains

Plasma chains comprise of child chains that branch off from the root chain (main chain). To validate transactions, child chains send cryptographic proofs to the root chain.

Plasma chains, like sidechains, communicate with the Ethereum blockchain via smart contracts. Before receiving an equal number of tokens on the child chain, a user must first lock up ETH in a smart contract on the root chain. Although plasma chains can validate transactions, security is still provided by the root chain.

What Are the Best Ethereum Layer 2 Solutions In 2023?

1. Polygon (Sidechain)

Launched in 2017, Polygon (formerly Matic) significantly increases Ethereum’s processing from the 14 transactions per second it can achieve on its main chain to about 7000 transactions per second. This high TPS makes Polygon’s gas prices almost ten times less expensive than those on the mainnet.

As a result, the protocol has gained massive traction, with over a billion transactions and an average of 2.7 million monthly users. Big projects like Sushiswap, Chain Games, Quickswap, and Aavegotchi are among its many users.

Its native token, Matic, currently trading at $0.8, is a great long-term investment. In 2021, the token surged to a $2.7 high, and analysts claim that it will hit $10 by 2025.

2. Optimism (Optimistic Rollup)

Optimism has seen massive growth in traffic since the launch of its Alpha mainnet (Optimistic Ethereum) in January 2021. Mainly due to the project’s speedy and comparatively cheaper transactions. Optimism can support more than 2,000 transactions per second while saving a significant amount on gas fees.

The Optimistic Ethereum is a rollup chain that is EVM-compatible and designed to make it simple for people to transfer assets and conduct transactions. It is essentially a long list of transactions stored in an Ethereum smart contract.

On June 1, 2022, Optimism launched Op, its native token that quickly rose to around $4.6. However, it has since fallen to about $1.36 due to the ongoing bear market. Optimism’s relevance to Ethereum endures despite the merge, giving the token a promising future.

3. Loopring (Zk-Rollup)

The Loopring ZK-Rollup, launched in March 2020, focuses specifically on decentralized exchanges, with its main features being a payment/transfer system and a decentralized exchange (DEX).

Another creation by Loopring’s creators is zkRollups. ZkRollups powers the Loopring exchange. Users can send and receive ETH or ETH-based assets instantly and for free using the Loopring Pay facility. The zkRollup boasts a 1000x main chain throughput and 100x lower gas charges.

Loopring’s native token, LRC, began trading in 2017 at $0.13. It reached an all-time high of $3.37 in late 2021 and is currently trading at around $0.5. Loopring, like many other Layer-2 solutions, will be extremely beneficial in the ETH 2.0 era as Ethereum aims to increase its throughput to 100,000 TPS.

4. Arbitrum (Optimistic Rollup)

If you’re new to the Layer 2 scaling Ethereum platforms, Arbitrum is a great place to start. Arbitrum was launched in 2021 by Offchain Labs as an open-source platform that allows Solidity developers to easily cross-compile their smart contracts with Ethereum. The platform includes several components, such as the EthBridge, compiler, and validators.

Arbitrum’s compiler assists developers in creating Solidity smart contracts that are compatible with running on various platforms, such as the AVM (Arbitrary Virtual Machine). The EthBridge connects the protocol to the main chain.

Another great feature is the platform’s ability to import dApps from the AVM to EVM, which eliminates several steps and allows users to easily create and manage smart contracts. In addition, Arbitrum supports sidechain aggregation, a system that allows third parties to conduct sidechain transactions.

With up to 40 transactions per second, Arbitrum has recorded over 14 million transactions since its launch. As transactions in Arbitrum are verified on the Ethereum mainnet, gas costs are a little higher than in many other layer-2 solutions but still lower than on the Ethereum main chain.

Arbitrum has collaborated with projects such as Chainlink, Graph Protocol, OKEx, and many others as it strives to achieve maximum scalability.

Arbitrum, lacks a native token and therefore, no basis for analyzing its investment prospects. However, its relevance to the Ethereum network remains undeniable.

5. Immutable X(Zk-Rollup)

Launched in 2018, Immutable X is a leading Ethereum scaling solution whose main focus is on NFTs. Immutable X enables users to send NFTs between wallets in a cheaper way. The platform, unlike others, does not charge gas fees, prompting many to refer to it as a zero-gas scalability solution. This does not prevent the project from achieving an impressive 9,000 TPS and establishing itself as the best NFT-focused layer-2 solution.

Immutable X’s powerful REST APIs enable users to create and transfer NFTs without having to deal with smart contracts, a much faster and easier process. Developers can easily integrate their projects into Immutable X using the platform’s SDKs. This will enable them to create and manage NFT projects in a few hours.

Immutable X has collaborations with major companies such as GameStop, TikTok, and ESL Gaming. Owing to its partnership with GameStop, Immutable X can provide a secure and efficient marketplace for its users’ gaming transactions.

Immutable X has its native token, IMX, which has recently performed admirably in the markets. The token entered the market in mid-2021 at a price of less than $0.000000000001. At the time of writing, IMX is trading at $0.76.

Layer 2 scaling solutions have proved to be an ideal solution to the problem of slow processing speeds on the Ethereum main chain caused by the rising volume of transactions. Their various features enable them to maintain the security of the main chain while also making transactions faster and easier. However, thorough research on the various platforms available is advisable before choosing a platform to invest in.

Key Takeaways

  • Layer 2 solutions are secondary protocols built on top of a pre-existing blockchain to solve the various transaction throughput issues that the main network encounters.
  • Different Layer 2 scaling solutions apply different mechanisms to maintain the security of the Ethereum main chain while making transactions faster and easier.
  • Polygon is the most popular L2, with its token Matic serving as a solid investment choice.
  • Loopring is primarily DEX-focused, while Immutable X is more NFTs-focused.
  • If you want to stay away from network sluggishness and high gas prices, Optimism is a great investment but Arbitrum may be your best option if you’re looking for high EVM compatibility at a reasonable price.

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Author:
Ken Melendez
✍️ Head of Content @ Cindicator
📊 Certified Bitcoin Professional
🔐 Blockchain Chamber - Chapter President

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Disclaimer

Information in the article does not, nor does it purport to, constitute any form of professional investment advice, recommendation, or independent analysis.