Introduction to Ethereum Layer-2s

Learn all about Ethereum Layer-2 scaling technologies and how they work.

Key Takeaways:

• The most popular types of Layer-2s on Ethereum are optimistic rollups and Zero-Knowledge rollups (ZK rollups). However, there are also other Layer-2 technologies like sidechains, plasma chains, and validiums.
• In general, optimistic rollups and ZK rollups are considered highly secure, as they inherit the Ethereum mainnet’s security.
• The Ethereum Virtual Machine (EVM) compatibility of optimistic rollups makes it convenient for developers to migrate existing smart contracts from Ethereum to optimistic rollup blockchains. Zero-knowledge Ethereum Virtual Machines (zkEVMs) can offer the scalability benefits of both zero-knowledge proofs and EVM compatibility.

What Is Ethereum?

Ethereum is an open-source blockchain platform that enables developers to build and deploy decentralised applications (dapps) and smart contracts. Proposed by Vitalik Buterin in late 2013, it officially launched in 2015.

At its core, Ethereum is a decentralised network of nodes that collectively maintains a shared database called the Ethereum Virtual Machine (EVM), which is capable of executing smart contracts. These self-executing agreements include the terms of the contract directly written into code. Smart contracts allow for the automation of various processes without the need for intermediaries.

Ethereum and Its Scalability Challenges

In recent years, the popularity of cryptocurrency has significantly risen, along with the usage of blockchains. Popular blockchains, most notably Ethereum, have not been able to keep up with the high demand, causing gas prices to skyrocket. Currently, Ethereum has reached the network’s capacity of over one million transactions per day.

In the cryptocurrency world, there is a concept known as the blockchain trilemma, which states that a typical blockchain can only focus on two out of three of the following elements: security, decentralisation, and scalability. Ethereum has taken a strong stance of focusing on security and decentralisation, which means — according to the trilemma — it has to sacrifice a level of scalability.

Layer-2s as a Scalability Solution

Layer-2 blockchains, built on top of Layer-1 blockchains like Ethereum and Bitcoin, assist with scaling by handling some of the transaction load from the base-layer blockchains. This helps Layer-1 become less congested and significantly lowers gas fees for users since Layer-2s typically combine multiple transactions into a single one.

Layer-2 solutions use various types of technologies. The most popular are optimistic rollups and Zero-Knowledge rollups (ZK rollups), although other Layer-2 technologies exist, as well. These include sidechains, state/payment channels, plasma chains, and validiums. Many current Layer-2 solutions are aimed at scaling Ethereum since it is currently the blockchain with the greatest demand for its block space.

Types of Ethereum Layer-2s

Optimistic Rollups

An optimistic rollup helps with scaling by moving computation and state storage off the Layer-1 network. Optimistic rollups group a large number of off-chain transactions together before submitting them to the Ethereum mainnet. They also use compression techniques to lower the amount of data posted on Ethereum. As a result, users enjoy lower transaction fees.

The defining feature of optimistic rollups involves their assumption that off-chain transactions are valid by default, and they do not publish proofs of validity for transaction batches posted on-chain. Instead, optimistic rollups use a scheme called ‘fraud-proving’ to detect incorrect transaction calculations. After a rollup batch is posted on Ethereum, there is a time window (also known as the ‘challenge period’) where anyone can submit a fraud proof to challenge the results of the rollup transaction.

Notable examples of optimistic rollups include Arbitrum, Optimism, and Boba Network.

Zero-Knowledge Rollups

Zero-Knowledge rollups (ZK rollups) also bundle transactions together to be executed off-chain, which greatly reduces the amount of data to be posted on-chain.

Validity proofs are a key feature that ZK rollups produce to prove that their proposed changes to Ethereum’s state are correct. Unlike optimistic rollups, which have to post all transaction data on-chain, ZK rollups only need to provide validity proofs to finalise transactions on Ethereum. This leads to several benefits, such as having no delays when transferring funds from a ZK rollup to Ethereum, since exit transactions are executed once the validity proof is verified.

There are two main types of validity proofs: ZK-SNARK (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge) and ZK-STARK (Zero-Knowledge Scalable Transparent Argument of Knowledge).

Other Layer-2 Solutions

According to Ethereum’s official website, rollups are currently the preferred Layer-2 solution for scaling its network. Nevertheless, there are also other Layer-2 technologies, which we briefly introduce here.

Plasma is a Layer-2 scaling solution first proposed by Joseph Poon and Buterin in August 2017. Using a combination of smart contracts and cryptographic verification, transactions from the Ethereum mainnet are offloaded to plasma chains, which periodically report back to the main Ethereum blockchain and use it to settle any disputes. It is noted, however, that the Ethereum community has generally moved on from Plasma in favour of rollups.   

Validium is a scaling solution that focuses on maintaining the integrity of transactions by using validity proofs, such as ZK rollups. Unlike other solutions, Validium does not store transaction data on the Ethereum mainnet. Although this approach introduces trade-offs, it also offers significant scalability improvements. Validium can process a high number of transactions, potentially reaching around 9,000 transactions per second (tps) or more.

Sidechains, also considered by some to be Layer-2 solutions, are Ethereum-compatible independent blockchains that use their own consensus models and block parameters to process transactions. Notable examples include Polygon (formerly Matic Network) and Gnosis (previously xDAI).

Benefits of Layer-2 Solutions

One key benefit of Layer-2 solutions is lower transaction fees, which attract more users and make the blockchain more feasible for dapps that require frequent transactions. These include games and decentralised social networks.

According to Buterin’s vision, “the internet of money should not cost more than 5 cents per transaction.“ While the Ethereum mainnet itself is far from reaching this goal, we observe that some Layer-2s are able to achieve this target. For example, a transaction on Loopring and zkSync only cost US$0.03 and US$0.04, respectively, at the time of writing.

Another benefit of Layer-2 solutions is their security. In general, optimistic rollups and ZK rollups are considered highly secure, as they inherit the Ethereum mainnet’s security. Optimistic rollups derive security from the Ethereum mainnet by publishing transaction results on-chain. Hence, they can improve scalability without sacrificing security or trustlessness. ZK rollups also derive security from Ethereum by storing data needed to recover the off-chain state on L1, which promotes security, censorship resistance, and decentralisation.

Certain Layer-2 solutions have additional smart contract functionality benefits. For optimistic rollups, a major advantage is their compatibility with the Ethereum Virtual Machine (EVM). This makes it convenient for developers to migrate existing smart contracts from Ethereum to the optimistic rollup chains. Additionally, developers can make use of Ethereum’s existing infrastructure, such as programming languages, code libraries, testing tools, client software, and deployment framework.

There have been recent advances in zero-knowledge technology that make zero-knowledge Ethereum Virtual Machine (zkEVM) implementation possible. A zkEVM can recreate existing EVM opcodes for proving/verification in circuits, enabling the execution of smart contracts. This helps to overcome the limitations of typical ZK rollups, which are not readily EVM-compatible and usually only support simple token transfers.

Read more about Layer-1 and Layer-2 projects in Peeling Away the Layers: Introducing the New Layer-1 and Layer-2 Blockchain Landscape.

Conclusion

Layer-2 solutions play an important role in improving the scalability of blockchains. Vitalik Buterin once stated that “[L]ayer-2 is the future of scaling the network and the only way to preserve its decentralisation.” This is especially true in the near to mid term since sharding could still be a long way off.

There are numerous Layer-2 scaling solutions, each with its own pros and cons. In general, rollups (both optimistic and ZK) are widely regarded as Ethereum’s key scalability solutions for the foreseeable future.

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