Blockchain continues to gain traction, with Ethereum reaching a record 2 million daily transactions in January, 2024. Still, a lack of scalability among Layer 1 (L1) chains like Bitcoin and Ethereum hinders its widespread adoption.

Enter Layer 2 (L2) solutions: a range of technologies designed to speed up transactions and cut costs, without compromising the security and decentralization of leading L1 networks. L2 scaling solutions have already transformed Ethereum, processing 11-12 times more transactions than on Ethereum itself, according to L2Beat.

Source: L2beat.com

This article explores the L2 ecosystem, including its key innovations, challenges, and future direction.

The genesis of L2s

As more users transact on L1s, these networks become slower and more expensive. Fixing that scalability issue on L1s directly has historically meant compromising on either security or decentralization, the two other characteristics all blockchains aspire to have. This tradeoff of having to choose only two of the three desired blockchain characteristics—scalability, decentralization, and security—is known as the “blockchain trilemma.”

Solving the blockchain trilemma is of particular interest to Ethereum, which has become the go-to L1 for building decentralized applications (dApps). Out of the three desired characteristics, Ethereum has opted for security and decentralization, at the expense of scalability.

In order to expand the number and type of use cases for Ethereum, building more complex dApps must become economically feasible.

L2 solutions emerged as a way to address these issues by offloading most of the heavy computation associated with processing transactions from the base layer to a secondary layer. By doing so, L2s can significantly enhance transaction throughput, reduce costs, and improve user experience. The goal is to do so while still leveraging the security and decentralization of the underlying L1 blockchain.

Core technologies and frameworks

The L2 ecosystem, now with a TVL of over $46 billion, encompasses a variety of technologies and frameworks, each with its own unique characteristics. Let’s take a closer look at some of the most prominent ones:

• Rollups – Rollups come in two flavors: optimistic rollups and validity rollups. Optimistic rollups assume transactions are valid by default. Their mechanism for preventing fraud enables network participants to challenge transactions expected to be fraudulent with “fraud proofs,” which prove them to be invalid. In contrast, validity rollups use “validity proofs” to attest to the validity of every transaction in the batch submitted to the base layer. Both types of rollups offer higher throughput and lower fees compared to L1.
• State channels – State channels allow participants to transact offchain by locking a portion of the blockchain state into a multi-signature contract. Participants can then transact freely off-chain, with the final state being settled onchain. State channels offer near-instant transactions and low fees but are limited in terms of functionality and the number of participants.
• Plasma – Plasma is a framework for creating hierarchical sidechains that are anchored to the main chain. Plasma chains can process transactions offchain and only submit periodic updates to the main chain, reducing the burden on the L1 network. Like optimistic rollups, plasma chains employ fraud proofs to challenge suspicious transactions.

Reviewing the L2 ecosystem

The L2 ecosystem is rapidly evolving, with numerous projects and initiatives working to scale the major L1 blockchains. While there are solutions working to bring scalability to Bitcoin, such as the famous Lightning Network, a solution that leverages state channels to offer faster and cheaper transactions on the network, there has yet to emerge a general computation L2 on Bitcoin.

Ethereum, on the other hand, already fosters a thriving ecosystem of L2 solutions. We’ll focus on those here, offering brief descriptions of the major players.

Validity rollups (also known as zero-knowledge rollups):

1. Starknet: The validity rollup with the fastest-growing developer community, native account abstraction, and its own programming language (Cairo) that optimizes for leveraging validity proofs.
2. zkSync: Another leading validity rollup with native account abstraction that runs on the Ethereum Virtual Machine (EVM).
3. Scroll: An EVM-compatible validity rollup that focuses on native-level compatibility with existing Ethereum dApps and tools.
4. Polygon zkEVM: Built by L2 scaling veteran Polygon, zkEVM is an EMV-compatible validity rollup.
5. Linea: Powered by Consensys, the company behind MetaMask, Linea is a validity rollup available directly via MetaMask.

Optimistic rollups

1. Arbitrum: The largest optimistic rollup in terms of TVL, and EMV-compatible.
2. Optimism: The second-largest optimistic rollup in terms of TVL, and EMV-compatible.
3. Base: The third largest optimistic rollup in terms of TVL, and EMV-compatible.

Many of these projects are still in their early stages, often involving a period of centralized control known as the “training wheels” phase, which allows for controlled system updates and bug fixes. Although necessary initially, these training wheels should eventually be removed to operate with the intended decentralization and trustlessness.

The adoption of L2 solutions has been growing steadily across various sectors, including decentralized finance (DeFi), non-fungible tokens (NFTs), and onchain gaming. The most commonly used L2 types tend to be optimistic and validity rollups. However, the integration of L2 solutions is not without challenges.

Challenges and solutions

Despite the promise of L2 solutions, several challenges must be overcome to realize their full potential. From a user perspective, interacting with L2 networks can be slightly more complex, requiring additional steps, such as bridging assets and managing multiple wallets. Improving user experience through better wallet integrations, simplified onboarding processes, and more intuitive interfaces will be crucial for driving mainstream adoption.

This is why Starknet offers built-in account abstraction, enabling a much smoother user experience with features like transaction signing with face and fingerprint ID (Braavos Wallet, for example, offers both). On Starknet, scaling Ethereum means a Web2-style UX is just as important as cheaper and faster transactions.

The road ahead for L2s

As the L2 ecosystem matures, we can expect to see a wave of innovation, such as native account abstraction on Starknet. Hybrid solutions that combine the best features of different L2 technologies are already starting to emerge, offering the benefits of both optimistic and validity rollups. Advances in validity proofs, such as STARKs, further enhance the scalability and privacy of L2 networks.

Looking ahead, the future of L2 solutions is closely tied to the overall development of blockchain technology. As L1 networks continue to evolve and new consensus mechanisms like proof-of-stake gain traction, L2 solutions will need to adapt and seamlessly integrate with these changes.

Over the coming years we will see a proliferation of L2 solutions tailored to specific use cases and application domains. Some predict that L2 networks will eventually become the primary layer for user interaction, with L1 serving as a secure settlement layer. Others envision a multi-layered blockchain architecture, with L2 solutions building alongside each other—at times with Layer 3 (L3) chains on top of them—to create a scalable and interoperable ecosystem.

Conclusion

As the L2 ecosystem continues to evolve, it is crucial for developers, researchers, and users to collaborate and contribute to the development of robust and user-friendly L2 solutions.

By embracing the potential of L2 technologies, the blockchain community can overcome the limitations of L1 networks and unlock new possibilities for decentralized applications. The road ahead is filled with challenges and opportunities, but with the right approach and a shared vision, we can build a scalable and inclusive blockchain ecosystem that empowers individuals and transforms industries.

To learn more about the Starknet ecosystem, check out the range of dApps available.

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