What are the top 3 Ethereum Layer 2 solutions you should know?

Legacy blockchains like Bitcoin and Ethereum have begun seeing a lot of layer two solutions, which are intended to improve the performance of the blockchain being that their current layer 1 throughput has significant limitations. Layer 2 solutions handle transactions off the Ethereum Mainnet to achieve scalability. Here, we’ll look at the best L2 projects.

For example, the Bitcoin blockchain is only able to process 7 transactions per second (TPS) but with its layer, two solutions, the lightning network, Bitcoin is touted to have the capacity to process about 25 million TPS.

Like with traditional computer networks, every blockchain protocol has a different capacity tolerance. There is only so much traffic they can take before they become congested. In turn, this traffic overload results in high transaction fees, especially when it comes to the largest smart contract platform—Ethereum.

The solution to this network congestion problem is simple—layer 2 networks attaching to Ethereum’s core, layer 1 chain. These L2 scalability solutions act like roads connecting to Ethereum’s highway, offloading traffic so that it runs smoothly and affordably. Here, we’ll look at the top 3 Ethereum L2 scaling solutions, commonly called sidechains.

Polygon (MATIC)

By far, Polygon is the most widely adopted layer 2 solution for Ethereum. Unlike Ethereum, which is limited to 13–17 transactions per second (TPS), Polygon can execute up to 7,000 TPS, making it comparable to Visa.

As a proof-of-stake (PoS) network—to which Ethereum is transitioning soon—Polygon relies on MATIC tokens to verify transactions. Therefore, those who hold MATIC tokens can become the network’s validators, earning a cut whenever a transaction occurs. This process is called staking.

Likewise, MATIC holders can delegate their MATIC stash to trusted validators, serving the same purpose but indirectly. That’s why they are called delegators. Either way, staking MATIC yields up to a 9.5% annual percentage rate (APR). This is far beyond the national average offered by banking savings accounts at 0.06%. Polygon’s calculator shows exactly how much one can earn with MATIC staking.

Presently, Polygon offers nearly 900 decentralized applications (DApps), ranging from lending, borrowing, and blockchain gaming to NFT marketplaces and gambling. The more we use these DApps, the more valuable MATIC token becomes as Polygon’s native cryptocurrency.

However, Polygon’s TVL (total value locked) is far beneath Ethereum itself, at $4 billion. Nonetheless, those who wish to avoid Ethereum’s expensive transaction fees can look forward to drastically lower gas fees.

Because of this, hardly a week goes by without Polygon partnering up with another web3 company. Two of the most popular NFT marketplaces, OpenSea and Rarible, have already extended their blockchain support to Polygon, which is great news for NFT traders.

Arbitrum

Arbitrum has gained much popularity in a very short time since its launch in May 2021. At this pace, it may even outcompete Polygon with the current TVL at $3.3 billion. Interestingly, the company’s founder that developed Arbitrum, Offchain Labs, is none other than former White House Deputy Chief Technology Officer, Ed Felton.

Unlike Polygon, Arbitrum doesn’t have its own token. Therefore, it doesn’t have a staking mechanic. Instead, Arbitrum uses Ethereum’s main chain to verify transactions. For this reason, Arbitrum’s gas fees are somewhat higher than on Polygon but still significantly lower than on Ethereum.

On the other hand, the fact that Arbitrum is secured by Ethereum means that it mirrors Ethereum’s decentralization with a much larger TVL pool. With that said, Arbitrum is not yet suitable for investors who prefer to withdraw their crypto assets. Due to its confirmation protocol, it takes two weeks to withdraw funds, while it takes only three hours to do the same with Polygon.

Yet, much is expected of Arbitrum because it has its own Arbitrum Virtual Machine. This is the framework powering its smart contracts, just like EVM (Ethereum Virtual Machine). At first glance, this may seem like a problem, but it is a benefit because it doesn’t rely on Ethereum if it significantly changes its consensus protocol.

As such, Arbitrum beats Optimism in the L2 race. Furthermore, importing DApps from AVM to EVM is an easy and automatic process. This is why Arbitrum has no trouble attracting DApps every month. Presently, Arbitrum offers all the major DApps one would need.

Loopring (LRC)

Loopring uses zero-knowledge (ZK) rollups to stand out from the L2 herd. Rollups mean that L2 networks scoop up Ethereum’s main chain (L1) data and feed it back in a compacted format. Both Arbitrum and Optimism rely on optimistic rollups to accomplish this. However, as their name implies, optimistic rollups count on all network participants to act in good faith.

Loopring takes a different approach with ZK rollups. Without going into cryptography minutia, this means that transactions are verified without other parties revealing their identity. The ZK approach also results in greater data throughput because its type of rollup significantly reduces transaction volume.

Another ZK benefit is that there is no lengthy challenge period because transaction validity is inherent. Therefore, withdrawal time is faster than both Polygon and Arbitrum. With these upsides, Loopring also has its own stakeable token called LRC.

However, unlike a more universalist platform like Hermez, Loopring focuses on providing a cheap and super fast ramp for payment DApps, in addition to being a decentralized exchange (DEX). Yet, because Loopring offers up to 2,025 TPS, fast withdrawals, and 100x lower gas fees than Ethereum, it has become more popular.

Lastly, Loopring got its name because of its unique circular trading system for its DEX—order rings. Each order ring consists of up to 16 individual orders. This way, orders don’t need to directly match up between buyers and sellers to be executed. The end result of this system is better to market liquidity and price discovery.

What are layer 2 solutions? – Ethereum Layer 2 solutions Explained

Layer 2 is a term used for solutions created to help scale an application by processing transactions off of the Ethereum Mainnet (layer 1) while still maintaining the same security measures and decentralization as the mainnet. Layer 2 solutions increase throughput (transaction speed) and reduce gas fees. Popular examples of Ethereum layer 2 solutions include Immutable X, Polygon, and Polkadot.

Why are layer 2 solutions important?

Layer 2 solutions are important because they allow for scalability and increased throughput while still holding the integrity of the Ethereum blockchain, allowing for complete decentralization, transparency, and security while also reducing the carbon footprint (less gas, means less energy used, which equates to less carbon.)

Although the Ethereum blockchain is the most widely used blockchain and arguably the most secure, that doesn’t mean it doesn’t come with some shortcomings. The Ethereum Mainnet is known to have slow transaction times (13 transactions per second) and expensive gas fees. Layer 2s are built on top of the Ethereum blockchain, keeping transactions secure, speedy, and scalable.

Each individual solution has its own pros and cons to consider such as throughput, gas fees, security, scalability, and of course functionality. No single layer 2 solution currently fulfills all these needs. However, there are layer 2 scaling solutions that aim to improve all these aspects; these solutions are called rollups.

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