Ethereum Layer 2: Explained

Source: https://boxmining.com/ethereum-2/

If you are an active member of the Ethereum community, then you will likely have heard catchphrases like ‘going bankless’, ‘banking the unbanked’, and ‘permissionless finance’. This is the bright future that is promised by blockchain, but the current state of the ecosystem is the complete opposite of that dream.

You may remember the 2017 bull market frenzy when Ethereum became overwhelmingly congested for the first time, spiking gas fees to unprecedented highs. In 2020, we saw gas fees skyrocket even higher, thanks to DeFi. It somehow became ‘normal’ to pay $50 for a single transaction, which made it start to feel like DeFi on Ethereum was a playground for the rich. Eventually, the community saw the need to scale the network, or the dreams of equity and access that blockchain promised would never see the light of the day.

There are two ways in which the Ethereum community is endeavoring to scale the blockchain:

1. Scale the Ethereum base layer i.e. scaling L1; and
2. Scale the network (L2 solutions)

At the moment, most transactions are settled on L1, which currently operates at a throughput of 15 tx/sec. L2 solutions will amp that up to about 3k-4k tx/sec, reduce gas fees and increase transaction throughput, and thereby generate avenues for more use-cases, ultimately enhancing the end user experience.

The current architecture of Ethereum is such that all transactions are settled on L1. Generally speaking, transactions are submitted to L1 nodes (mainnet). With L2 solutions coming into the picture, transactions will be submitted to L2 nodes. These L2 nodes would then group these transactions together before pushing them to L1. The way L2 nodes ‘group’ these transactions depends on the technology being used (i.e. a rollup, plasma, or something else).

L2 solutions may be application-specific or general purpose. For example, payment channels are application-specific and are only used to settle simple payments. On the other hand, rollups can handle more arbitrary smart contract calls and are general purpose.

Many bright minds have up with an increasing number of ways of scaling the network. In this blog we will go through the following:

1. Rollups