As more people sign up for cryptocurrency, the network becomes increasingly strained. Ethereum, as the market leader, is currently in a scalability crisis. But, it appears that we may not have to wait much longer for lower transaction fees with Layer 2 solutions. In this article, we'll discuss what Layer 2 projects are and how they work.

Why Do We Need Layer 2 Solutions?

Ethereum users must pay high gas fees to make transactions on the network. With the overwhelming transaction volume, it's becoming a "who can afford to pay" system for your transactions to go through faster than other users on the network. Currently, Ethereum's capacity cannot allow it to perform large numbers of transactions per second. Most importantly, Ethereum needs to maintain the network security and high level of decentralization.

Enter Layer 2 Solutions Layer 2 solutions are a way for Ethereum to scale blockchains. Before Layer 2 solutions, Ethereum ran the blockchain in a monolithic manner. This means that everything was done on the blockchain itself from transaction processing to security protocols to data integrity. However, Ethereum is currently adopting a modular approach that makes use of a multi-layer system. So, rather than handling everything on its own, the blockchain delegates some of the work to other layers of the network.

How Do Layer 2s Work?

Layer 2 solutions usually execute transactions outside of their underlying network. Once done, they send back compressed forms of the transactions back to the network. In this way, Layer 2 performs the execution part while Layer 1 performs the security and final data storage. Many Layer 2s can run simultaneously on top of Ethereum. This means that you can have a much higher number of transactions running per second. Layer 2 scaling solutions send compressed forms of the transactions back to Ethereum on a regular basis. In turn, Ethereum assures the transaction's security and decentralization because no modifications are required on Layer 1.

The Most Exciting Layer 2 Solutions Since many Layer 2s can run simultaneously on top of Ethereum, many projects have emerged over the last few months. Each new Layer 2 solution will often tweak the code of its predecessor to boost efficiency. The most exciting of which are arbitrary optimism, zk sync, StarkNet, and Metis. These projects generally fall under two categories: optimistic roll-ups and zk roll-ups.

Optimistic Roll-ups There are three major types of optimistic roll-ups: optimism, arbitrary, and metis. The optimism project is the preceding Layer 2 solution which uses single round fraud proofs and relies on Layer 1 to execute Layer 2 transactions. As a result, the fraud proof verification process is instant but it incurs extra gas fees due to its reliance on on-chain Layer 1 execution processes. Arbitrum, on the other hand, saw this problem and tweaked optimism source code to implement multi-round fraud proofs. This way, transactions are not entirely executed on Layer 1. Lastly, there's Metis, a hard fork project of optimism that offers a higher level of decentralization. It does this using multiple sequencers as opposed to one as optimism does. It also uses its own virtual machine called the Metis Virtual Machine (MVM).

Why Are They Called Optimistic Roll-ups?

These three roll-ups are known as optimistic roll-ups because they employ an honor system in which the smart contract on Layer 1 does not validate that Layer 2's state changes were done correctly. Furthermore, optimism and arbitrum do not have their own tokens. They instead use Raff ETH, which has a 1:1 ratio with the ETH token. As a result, they both have cross-chain ERC-20 token compatibility.

Zero knowledge roll-ups

Zero knowledge roll-ups, also known as zk roll-ups, take a different approach to layer 2 scaling. They use a cryptographic technique called zero-knowledge proofs to validate the state changes in layer 2 transactions. This method allows for a higher level of privacy and security because the proof can be verified without revealing the actual information.

zkSync is one of the most promising zero knowledge roll-up projects. It was developed by Matter Labs and it uses zk-rollups to achieve up to 2000 transactions per second with very low fees. Another notable project is StarkNet, developed by StarkWare. It uses a technology called STARKs to achieve the same level of scalability as zkSync.

Conclusion

Layer 2 solutions are a promising development for Ethereum and the wider blockchain ecosystem. They provide a way to scale the network while maintaining security and decentralization. With layer 2 solutions, Ethereum can accommodate millions of users and run more transactions per second, without sacrificing its core principles. While there are still some challenges to overcome, such as interoperability and user adoption, the future looks bright for layer 2 solutions on Ethereum.