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Peeling Away the Layers: Introducing the New Layer-1 and Layer-2 Blockchain Landscape

The new layer-1 and layer-2 landscape has evolved to tackle scalability. We introduce new layer-1 technologies, optimistic and zero-knowledge (ZK) rollups, the Blockchain Trilemma, and more.

Aug 31, 2022
Crypto.com Feature Report New Layer 1 and Layer 2 Blockchain Landscape

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Key Takeaways

  • Cryptocurrency is growing at an exponential rate, and so are the number of users and transactions. This presents a scalability challenge as the network capacity on blockchains struggle to keep up. 
  • A new generation of layer-1s is emerging, built with innovations that address the Blockchain Trilemma. These new layer-1s like Cronos, Avalanche, Aptos, and Sui integrate multiple solutions to improve scalability while maintaining a high level of security and decentralisation:
    • Cronos: Its innovations include EVM compatibility, Cosmos integration, interoperability, and proof-of-authority (PoA).
    • Avalanche: It implements the novel leaderless consensus protocols, introduces the Subnets, and uses DAG to organise transactions.
    • Aptos: The main novel parts of Aptos include its consensus algorithm (AptosBFT), parallel execution framework (Block-STM), and the Move programming language.
    • Sui: There are some similarities between Aptos and Sui, but Sui adopts additional creative ideas, such as a split of simple and complex transactions, a dual consensus mechanism, and Sui Move.
  • Metrics in scalability, decentralisation, and security are compared among these new blockchains in our private report, and the conclusions are:
    • Cronos is promising in this multi-chain party because of its ecosystem support, interoperability, and great payment use case. From a technical perspective, Sui and Aptos are worth looking forward to.
    • The future development of a decentralised network infrastructure should have these features: modularisation, parallel execution, and a secure programming language.
    • With the emergence of new technologies, blockchains will continue to evolve and find the best way to develop.
  • Layer-2 blockchains exist to relieve congestion on layer-1 blockchains (e.g. Ethereum and Bitcoin) by helping to process some of the transactions faster. Currently, most layer-2 solutions aim to reduce the transaction load on the Ethereum blockchain.
  • Gas fees (i.e. transaction fees) are usually much lower, while transaction speeds are higher, on layer-2 solutions as compared to layer-1 blockchains. The two most popular technologies currently used by layer-2 blockchains to process transactions are optimistic rollups and zero-knowledge rollups. 
  • We also compare other metrics such as total value locked (TVL), security, and smart contract functionality in our private report. Some of our key findings are that:
    • One notable outperformer is Optimism, which more than tripled its TVL from US$0.3B on 1 March 2022 to $1.1B on 14 August 2022.
    • In general, optimistic rollups and ZK-rollups are considered to have high security, as they inherit the security from the Ethereum Mainnet.
    • The EVM-compatibility of optimistic rollups makes it convenient for developers to migrate existing smart contracts from Ethereum to the optimistic rollup chains.
    • On 20 July 2022, the Polygon team officially introduced Polygon zkEVM (mainnet launch in 2023), which offers both the scalability benefits of ZK proofs and EVM-compatibility.

Scaling Solutions in Layer-1

  • ‘Blockchain Trilemma’ is the theory that says a blockchain can only provide two out of the following three benefits – security, decentralisation, and scalability – but not all three. Layer-1  focuses on solving this problem at the blockchain or infrastructure level. Currently, layer-1 solutions include:
L1 Cat 1
As of 24 Aug 2022 Sources: Qiheng Zhou et al., Crypto.com Research

Sharding

  • One solution is dividing the network nodes into smaller groups. These groups can then split all of the data stored between them. This allows the data to be processed simultaneously and in parallel with the network. This mechanism is called sharding. 
  • Instead of maintaining an entire blockchain record, each network node is assigned to a particular shard. These individual shards share specific data between each other – such as balances, addresses, and general state – and provide proofs to the mainchain. 

Consensus

  • As a primer: consensus mechanism is a set of rules used to verify, validate, and record transactions on the blockchain. For a transaction to be fully registered on a block, consensus needs to be achieved among all nodes that the transaction is legitimate. 
  • Most modern protocols use Byzantine Fault Tolerance mechanism (like PBFT) to ensure that validators agree on the order for appending new transactions on the ledger. Another popular consensus mechanism is proof-of-stake (PoS), which can leverage a network’s security without consuming a large amount of energy like Bitcoin’s proof-of-work (PoW) consensus mechanism.

Blockchain Reparameterisation

  • Another solution, albeit less popular, is optimising the block’s data structure, with the aim of increasing throughput by adding more transactions per block.

New Layer-1 Blockchains

  • A new generation of layer-1 blockchains and protocols are emerging, providing a more nuanced approach to developing systems with greater scalability.
  • Blockchains like Cronos, Avalanche, Aptos, and Sui are incorporating new technologies and combining them with their own scaling solutions.
L1 Metrics

Layer-2 Blockchains

  • Layer-2 blockchains, which are built on top of layer-1s, aim to improve scalability by helping to process some of the transactions on layer-1s.

What Are Optimistic Rollups and Zero-Knowledge Rollups

  • Currently, the two most popular technologies that layer-2 solutions use to process transactions are optimistic rollups and zero-knowledge rollups (ZK-rollups). Other technologies include side-chains, state/payment channels, plasma chains, and validiums.

Optimistic Rollups

  • An optimistic rollup achieves higher transaction speeds by batch processing a large number of transactions off-chain before sending them to the layer-1 network (e.g. Ethereum Mainnet).
  • Optimistic rollups also save time by assuming off-chain transactions are valid (i.e. correctly calculated), so there’s no need to provide proof of validity before sending the transaction batches to the layer-1 network. Instead, optimistic rollups use a fraud-proving scheme, in which a time window is provided for anyone to submit proof of invalid transactions.
  • Notable layer-2 blockchains using optimistic rollups include Optimism, Arbitrum, and Boba Network.

Zero-Knowledge Rollups

  • Similar to optimistic rollups, ZK-rollups also batch process transactions off-chain before sending them to the layer-1 network.
  • ZK-rollups also save time by posting minimal summary data, instead of all transaction-related data, to the layer-1 network. The summary data defines the changes that need to be made to the layer-1 state to reflect the transactions.
  • Layer-2 blockchains using zero-knowledge rollups include Polygon Hermez, StarkNet, zkSync, and Loopring.

Popularity of Layer-2 Solutions Reflected in TVL Growth

  • Layer-2 solutions have gained popularity and adoption, with the TVL in leading layer-2s crossing over the billion dollar mark. Check out our weekly DeFi and L1&L2 newsletter, and subscribe to it for all the latest TVL trends and more detailed insights and news on layer-2s.

Detailed Comparisons of Layer-2 Blockchains

  • Layer-2 blockchains vary across key factors such as technologies used, transaction speeds, transaction fees, security, and smart contract functionality.
  • Our in-depth exclusive report provides a detailed comparison. Become a Crypto.com Private member here to gain access to it and much more.

Authors

Crypto.com Research and Insights team


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