Performing a transaction on Ethereum can sometimes cost some bucks and time. The blockchain is used frequently which can cause the network to become congested. This is also known as network congestion and is a common problem with Ethereum. Even after the upgrade to Ethereum 2.0, this problem is likely to continue to occur, although it will be less severe.

Fortunately, there are plenty of other solutions to take care of this problem. These solutions are called layer 2 scaling solutions and help Ethereum scale up. There are many different scaling solutions, so below I discuss the best layer 2 scaling solutions for Ethereum.

What is the problem with Ethereum?

The largest network at the time of writing is undoubtedly Ethereum. Various protocols and decentralized applications (dApps) are being built on Ethereum. But this is not happening without a hitch. More and more people are using the network, making transactions not only take longer, but also significantly more expensive. Remember Ethereum’s sky-high gasfees? Just make a transaction and pay several hundred dollars in fees, while sometimes you had to wait an hour for the verification of your transaction.

That’s why more and more layer 2 solutions are emerging to solve these problems. With this they want to make the network scalable above all: fast transactions and low transaction costs.

What is a layer 2 scaling solution?

Blockchains can have different functions and applications. Looking at Ethereum itself, it is a layer 1 network that focuses on decentralized applications (dApps). Bitcoin, on the other hand, wants to be a new payment system.

Layer 2 is the data link layer and provides communication and data transfer within the same network. Layer 2 protocols are created on existing blockchains mainly to make the blockchain more scalable. This means that a layer 2 scaling solution thus runs on top of another blockchain, and is not itself a solution. Transactions are processed on the scaling solution, after which the outcome is stored on the mainchain.

How do layer 2 protocols work?

The problem is often in the foundation of the blockchain itself. Because of this, some blockchains by nature cannot scale and quickly run into problems. Layer 2 protocols are ways to improve scalability and typically process transactions outside of their mainchain. Is that completed? Then they send a compressed version back to the mainchain. So layer 2 does the executive work, while layer 1 focuses on security and storing data. More and more layer 2 solutions are emerging for Ethereum, each seeking in its own way to improve Ethereum’s network. Improved scalability, without compromising security or decentralization.

Different types of layer 2 solutions

Sidechains

A sidechain is an additional blockchain that runs parallel to the mainchain. Transactions are no longer processed on the mainchain, but are bundled on this sidechain. This sidechain is therefore not dependent on the resources of the mainchain. This frees up more space on the mainchain. Example: Bitcoin can only handle 7 transactions per second. In a global network, this is very little, far too little. By processing transactions on a sidechain, there is more space on the mainchain. Some sidechains are designed for micropayments or other applications. After processing on the sidechain, transactions are sent to the mainchain where they are stored.

Optimistic Rollups

In an optimistic rollup, transaction data is split into pieces, then rolled together to form a cryptographic hash. The data is first broken up so that it can then be stored more efficiently. This ensures that more data fits into a cryptographic hash. Transactions are not checked, but approved immediately. Tricky? At first glance, yes, but nodes have the ability to flag fraudulent transactions afterwards. If it turns out that a transaction was actually fraudulent, the node receives a reward. If the accusation is false, the node is penalized. This prevents nodes from randomly rejecting transactions.

ZK Rollups

ZK Rollups bundle transactions together into one transaction. After this, the transactions are validated all at once, using Zero-Knowledge Proof, abbreviated as ZK. This technology uses far fewer resources than a blockchain normally would. As a result, many more transactions can be processed in a shorter amount of time. After the transaction is processed, a ZK Proof is created. This is a cryptographic hash, the contents of which cannot be seen or traced. This ensures the privacy of the users who performed a transaction.

An overview of the 6 best scaling solutions on Ethereum

Arbitrum

Arbitrum is a scaling solution for smart contracts and decentralized applications. Developers can use Arbitrum to use smart contracts at low cost and fast processing times. The smart contracts are no longer developed on Ethereum, but within Arbitrum. This allows Arbitrum to set its own costs.

We call Arbitrum an “optimistic rollup. So it is not a separate chain, but runs on top of Ethereum. Transaction data from smart contracts is first distributed and rolled up. Result? A cryptographic hash. Transactions are instantly approved, hence the name ‘optimistic.’ Because transactions are immediately seen as valid, Arbitrum has a high processing time. Does a transaction turn out to have been wrongly approved? Then nodes can report this afterwards. This can only be done within a certain time, because after that the transaction is stored on the blockchain forever. For declaring this transaction, they receive a reward.

Loopring

Loopring is a solution that combines the best of central and decentralized exchanges to get transactions processed faster and cheaper. It is therefore also seen as a hybrid solution for mainly decentralized exchanges (DEX). Central exchanges, for example, can process transactions at lightning speed, but lack transparency. Also, power here lies centrally with a large party. Decentralized exchanges have distributed power and are transparent, but process transactions a lot slower. Loopring wants to manage transactions centrally and handle them decentrally.

Loopring has its own token, called LRC. The token is used within Loopring’s protocol, but was available much earlier than the protocol. It was released via an ICO in 2017, while Loopring had not launched its protocol on Ethereum until December 2019. Loopring also has their own wallet, which you should definitely check out.

The Loopring wallet is not only a smart contract wallet with superb security but also a DEX that supports Order Book mode; moreover a pathway to integrate DeFi and traditional CeFi products in a trustless mode. Be your own bank and stay in control with a Loopring wallet!

Polygon

Polygon is a layer 2 scaling solution with its own network called Matic Network. The network runs on top of Ethereum, but is a standalone network. This means that the network has its own token, called MATIC. The Polygon Network uses Proof of Stake (PoS) as its consensus mechanism, well before Ethereum did. Partly because of this algorithm, Polygon can process transactions much faster and cheaper. So within Polygon’s network, you can strike crypto.

The team behind Polygon has developed several solutions. For example, some solutions focus on the optimization of NFT transactions, while others focus purely on business users. The solutions have one thing in common: They process transactions a lot faster and cheaper than on Ethereum. Several developers have developed projects on Polygon.

Do you believe in Polygon? If so, you can also buy Polygon’s MATIC token. Many other layer 2 scaling solutions do not have their own token, but use Ether as currency.

Optimism

Optimism, like Arbitrum, is an optimistic rollup. Transactions are processed on Optimism’s protocol. To do so, they are broken into small pieces and rolled up, resulting in a cryptographic hash. This cryptographic hash is sent to Ethereum’s blockchain and stored on the mainchain. It is important to remember that transactions are not stored on Optimism. They are only verified and processed on Optimism, but then stored on Ethereum.

In many ways, Optimism is similar to Arbitrum. Both solutions are an optimistic rollup and allow nodes to declare fraudulent transactions after the fact. The difference between Arbitrum and Optimism is that Optimism returns fraudulent transactions entirely, while Arbitrum returns only the fraudulent portion. As a result, Arbitrum is faster than Optimism.

Immutable X

Immutable X focuses on improving the transaction speed of NFTs. In 2020, NFTs have become incredibly popular and increasingly traded. Unfortunately, it can sometimes take a very long time to send an NFT over Ethereum, even though it is the most popular blockchain for NFTs. Immutable X is a ZK Rollup and can process 9,000 transactions per second. There is even a dedicated NFT marketplace running on Immutable X where one can trade NFTs. All NFTs traded on this marketplace are processed over Immutable X.

With a ZK Rollup, transactions are bundled into a ZK-proof. This is a cryptographic solution that ensures the privacy of transactions. The technology, called Zero-Knowledge, is also used within Zcash. After the transactions are bundled, a hash called the ZK-STARK proof is created. The advantage of this hash is that it allows you to prove the processing of transactions without having to see the transactions. Thus, the privacy of users performing transactions over Immutable X remains protected.

Aztec

Blockchain is a transparent technology. We can easily track transactions. This tracking is seen by some as an invasion of privacy. Aztec is a layer 2 scaling solution that has found a solution to the privacy issue. Any user who wants to make a transaction on Ethereum can use zkDai to make the transaction confidential. xDai is a protocol that uses Zero-Knowledge proof technology to provide these privacy guarantees.

Developers can integrate zkDai within their dApp. In fact, an SDK (software development kit) is available. All transactions then performed through the dApp will be secured using Aztec’s Zero-Knowledge Proof.

With a ZK Rollup, transactions are bundled into a ZK-proof. This is a cryptographic solution that ensures the privacy of transactions. The technology, called Zero-Knowledge, is also used within Zcash. After the transactions are bundled, a hash called the ZK-STARK proof is created. The advantage of this hash is that it allows you to prove the processing of transactions without having to see the transactions. Thus, the privacy of users performing transactions over Immutable X remains protected.

Conclusion

Layer 2 scaling solutions allow us to perform transactions over Ethereum quickly and cheaply. Ethereum’s network can no longer handle the number of transactions itself, leaving us with high fees and long waits. Fortunately, there is multiple solutions to this problem, because in this article you have been able to read more about the following layer 2 scaling solutions: Arbitrum, Loopring, Polygon, Optimism, Immutable X and Aztec.