By Mariquita de Boissière

Layer 2s (L2s) are blockchains that extend the DeFi stack by adding scaling capacity to the underlying Layer 1 (L1) blockchain. Recent breakthroughs in L2 technology promise to shake DeFi up by combining smart contract capability with increased speeds and lower costs - all without compromising the security and decentralization principles of the underlying blockchain. 

Ethereum network founder Vitalik Buterin has heralded L2s as a strategic priority for the Ethereum ecosystem over “the near and mid-term future.”

Keep reading to find out why L2s matter, how they work, and what L2s are the most popular choices for the Ethereum ecosystem.

Why Do Blockchains Need L2s?

The blockchain trilemma describes the choices and trade-offs networks make between decentralization, security, and scalability. It’s nearly impossible to have all three features on the same L1 blockchain. For example, the Ethereum network prioritizes decentralization and security over scalability.

Why is scalability so important? As demand on Ethereum has risen over recent years, the network has become increasingly congested and gas fees have rocketed. Simply put, with over one million transactions a day and throughput of around fifteen transactions per second, the Ethereum 1.0 network hit capacity.

L2s address scalability issues by relieving the underlying blockchain of its computational burden. L2s do this by processing multiple transactions off-chain before validating them, in batches, on-chain. In this way, L2s inherit Ethereum's decentralization and security while providing additional capacity.

These scaling solutions promise to bring Ethereum closer to its founding vision. Increased capacity opens the door to millions of users around the world being able to access the network at higher speeds and lower costs.

L2s also pave the way for a whole host of new use cases. Gaming and the sharing of heavy multimedia files are some examples of the kinds of computationally demanding applications that L2s make possible for the blockchain.

Putting the layers in the context

Before jumping into how you can start exploring L2s for yourself, a quick and easy overview of the different layers, from zero through two:

Layer 0

Sits beneath L1 blockchains, serving primarily as a “connector” between different ecosystems. Their approach to solving the limitations built into L1s is to facilitate greater interoperability between multiple blockchains. Examples include Cosmos, Polkadot, and Horizen.

Layer 1

The settlement layer, it determines the consensus mechanism for validating blocks. L1 blockchains are typically considered to be the core technology that the rest of the stack is built around. L1s include Ethereum, Hedera, and Avalanche.

Layer 2

Stacks on top of L1. These blockchains default to the consensus mechanism of the underlying settlement layer. As such, they inherit the same decentralization and security profile. By processing transactions off-chain, they are able to increase the computational capacity of its corresponding L1. L2s main objective is to scale L1 blockchains.

Keep reading for examples of some of the most important L2s helping to bring Ethereum to scale.

What Are Some of the Most Popular L2s on Ethereum?

There are two branches of L2 technology: Optimistic (ORU) and zero-knowledge (ZK). Although they both process batches of transactions off-chain, it is the way that each of these branches validate those transactions that differ.

Optimistic rollups are so-called because they assume an “innocent until proven guilty”, or fraud-proof, approach to processing transactions.

Network actors are given a grace period in which to flag suspicious or fraudulent transactions. In practice, this means that it can take up to seven days for assets – especially non-fungible tokens (NFTs) – to be transferred back to the mainnet.

Zero-knowledge proofs rely on a validity-proof security mechanism. This approach assumes parties to be “guilty until proven innocent”. As such, it does away with the long transaction times associated with returning assets to the L1 from ORUs.

Below we take a look at some of the specific L2s that are leading the charge for L2 technology on Ethereum. 

Optimism

As the name would suggest, Optimism sits firmly within the ORU camp.

Launched in 2021, ORUs, like Optimism, are generally considered to be the best bet for Ethereum scaling solutions in the short term. 

Despite a few minor teething issues, Optimism is building a thriving community and user base. Unlike many L2s, it boasts its own native token (OP) which was airdropped to users and can be used for governance of its Optimism Collective DAO.

Arbitrum

Another ORU, Arbitrum was originally forked from the open-source code that underpins Optimism. As such, it shares Optimism’s fraud-proof methodology and dispute resolution system.

Unlike Optimism, Arbitrum decided against issuing a native token. Instead, it has opted for launching a new chain. Called Nova, this secondary chain is better able to support more bandwidth-intensive applications. The launch of the Nova chain makes Arbitrum of particular interest to game developers and creators of social apps.

Polygon

A different scaling solution, the Polygon proof of stake chain is not recognized as an L2 by the Ethereum community. Running on a separate consensus mechanism with its own validators, the Polygon chain is a sidechain. As such, it doesn’t build upon Ethereum’s security or decentralization.

That said, Polygon is due to launch its own Ethereum-compatible L2 rollup. The proposed zkEVM is a zero-knowledge rollup that runs upon the Ethereum Virtual Machine (EVM). Labeled by some analysts as “the holy grail of scaling”, zkEVMs combine a zero-knowledge proof mechanism with full smart contract functionality.

Through breakthroughs like these, the broader ecosystem for L2s is growing and evolving rapidly. Other protocols committed to bringing an additional level of scalability to Ethereum include Loopring, Rhino.Fi, Starknet, and zkSync. 

Final Thoughts on the L2 Scaling Revolution

L2 technology is still very much in its infancy. It has a while to go before stepping into its true potential as a robust set of blockchain scaling solutions. Using these platforms comes with certain risks and, as ever, research and caution are recommended when entering the space.

That said, users of the ORU rollups are already enjoying savings on gas fees and the faster transaction speeds that these platforms have to offer. Furthermore, there is consensus within the Ethereum community that L2s represent the number one means of bringing blockchain technology to the mainstream. This sentiment is reflected in the network’s roadmap.

Should you decide to make the switch to L2, be sure to drop into the Surge Discord and share your experiences. See you there.