Three minutes to understand what is Layer2, side chain, Rollups

Ethereum 1.0 has found a killer app in the DeFi ecosystem. However, as adoption increases, the scalability, robustness, and economic viability of the infrastructure layer becomes critical to the long-term success of both Ethereum and the dApps based on it.

There's no point in pressing the "withdraw" button if the user can withdraw the $60 reward for only $80 in gas fees. While it's true that this will only happen if the Ethereum network becomes clogged due to the network's current limitations and temporarily increased usage, that doesn't affect the fact that it will still happen.

Therefore, it is clear that both Ethereum and the projects built on top of it need scalability solutions to meet the needs of the growing DeFi community.

In general, there are two main approaches to scalability: (i) scaling the base layer itself - L1, or (ii) scaling the network by offloading some work to another layer - L2.

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The first option is to extend the basic Ethereum layer in the form of an Ethereum 2.0 upgrade, which will greatly help applications currently built on Ethereum (such as PlotX) expand their services to meet the needs of the growing DeFi community.

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While this update is a great solution for projects looking to stay on top of the base Ethereum layer, a phased rollout over the next two years may be too long to keep up with growing application demand. So the most straightforward solution would be Layer2.

What the hell is L2?

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Layer 2 scalability is an umbrella term for solutions that help increase the functionality of the base Ethereum blockchain by processing transactions on both the main Ethereum blockchain and secondary chains. The two main features that are improved using L2 scaling are (i) transaction speed and (ii) transaction throughput. It does not require any changes to the Ethereum base layer and can be built on top of it using existing components such as smart contracts.

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Ethereum can currently process about 15 transactions per second (TPS) on its base layer. With the help of layer2, it can increase that number considerably; from 15 TPS to several thousand TPS.

Not only does this help with the processing time of transactions, but it also reduces the gas fee required for each transaction made on layer 2, thereby greatly improving the economic viability of the network as well.

Furthermore, the concept of layers is not even an Ethereum-specific concept, other blockchains already use it extensively, for example, Bitcoin!

How does it do it?

When discussing scaling solutions, there are several options. Some are proposing to increase the throughput of the Ethereum network in the near to medium term, while others are targeting medium to long-term solutions. And some are application-specific, while others are generic.

So, to better understand the differences between all these solutions, let's explore some of the most popular types of layer2 scaling solutions:

In terms of scaling solutions, Channel was one of the first widely discussed solutions. They make participants exchange x number of transactions offline, submitting only two transactions for the base layer. The most popular channel types are national channels and their subtype - payment channels.

While Channels have the potential to easily handle tens of thousands of TPS, some of their disadvantages are that when using Channels, participants must lock their funds in a multisig contract, which effectively means that public participation is not supported. Moreover, this scaling solution is application-specific and cannot be used to scale general-purpose smart contracts.

Plasma is a Layer2 scaling solution proposed by Joseph Poon and Vitalik Buterin. This is a framework for building scalable applications on Ethereum that utilizes smart contracts and the use of Merkle trees to create an unlimited number of child chains that are copies of the parent Ethereum chain.

Transfer transactions from the main chain to the child chain to achieve fast and cheap transactions. The downside is that users have to wait several days to withdraw funds from the child chain. Also, like channels, Plasma does not support general smart contract execution.

Sidechains are independent Ethereum-compatible blockchains with their own block parameters and consensus model. These sidechains are connected to the Ethereum mainchain via a two-way bridge. Therefore, contracts deployed to the Ethereum base layer can also be deployed directly to sidechains.

Rollups provide scaling by bundling (i.e. rolling), where sidechain transactions are bundled into a single transaction and generate cryptographic proofs (also known as SNARKs (Succinct Non-Interactive Arguments of Knowledge)) that are submitted to the base layer. With Rollups, all transaction status and execution are carried out on the sidechain, while the Ethereum mainchain only stores transaction data.

There are two types of Rollups: (i) ZK Rollups and (ii) Optimistic Rollups. Although ZK Rollups are faster and more efficient than Optimistic Rollups, they cannot provide an easy way for existing smart contracts to migrate to Layer2. Optimistic Rollups run an EVM-compatible virtual machine called the Optimistic Virtual Machine (OVM) which allows the execution of the same smart contracts that can be executed on Ethereum.

These are the most popular methods for L2 scaling, and users will find most DeFi projects adopt them when migrating to L2.

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Ethereum 2.0 will introduce proof of rights and sharding, which will greatly improve the transaction speed and transaction throughput of the base layer. But does this mean we won't need L2 scaling once Ethereum 2.0 is launched? not really. This is because, even with such a large-scale update, Ethereum will still not be able to meet the tens of thousands or even millions of TPS demand that it will eventually face due to the increase in adoption.

At this point, one could argue that we should skip L2 scaling and just focus on scaling the base layer. However, this will require highly specialized nodes to handle the increased workload, which will eventually lead to higher centralization and thus less security and censorship resistance of the network.

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