What are the best Layer 2 scaling solutions to look out for in the upcoming crypto bull run?
When Bitcoin first launched in 2009, the primary concept of the technology was to offer a decentralized and secure database that is visible and public to everyone. Blockchain technology, the novel database aimed to cater to transparent and secure transactions, allowing users to send transactions across the world, seamlessly and cheaply without depending on any third party.
Fast forward to 2024 and blockchains offer way more utility to users than a native token for facilitating payments. From decentralized finance (DeFi) to non-fungible tokens (NFTs), the blockchain ecosystem has witnessed exponential growth – with millions of retail and accredited investors joining the space. However, this exponential growth exposed the difficulty in scaling layer 1 blockchains, such as Bitcoin and Ethereum and the low transaction speeds on several blockchains.
For blockchains to be perfect, three critical conditions must be met, namely decentralization, security and scalability. However, Layer 1 blockchains are designed only to satisfy two of the three conditions, leading to a problem known as ‘the blockchain trilemma’.
Blockchain Trilemma: Problem with Layer 1 Blockchains
As alluded to, the current design of Layer 1 blockchains does not fit the explosive growth the ecosystem is witnessing. If a blockchain, such as Bitcoin, focuses on decentralization and security, it compromises on scalability, making mass adoption of the blockchain impossible. If a blockchain is built to be widely scalable and secure, it compromises on decentralization. And a decentralized and scalable platform may well compromise a bit on security.
Over the years, Bitcoin and Ethereum have struggled with the blockchain trilemma, but new technologies are coming up to solve this issue. One of the most effective solutions out of the trilemma is the development of Layer 2 networks, which scale transactions and data computations without compromising on security or decentralization aspects of blockchain technology.
Today, the market value of Layer 2 chains stands at $19.5 billion, according to Coingecko, with over half of this value in Ethereum-based projects. With the growth for Layer 2s in full swing, this article looks at the five top L2 blockchains shaping the blockchain ecosystem, and why they are the most effective solution to the blockchain trilemma.
Our selections focus on Ethereum-based Layer 2 solutions, the most popular L2s in the blockchain ecosystem. The most popular types of Ethereum L2 scaling solutions are rollups, which “roll-up” or packet several transactions into a single mainnet transaction while maintaining the high-level security provided by the Ethereum blockchain. In this piece, we will focus on three main types of rollups including optimistic rollups, zero-knowledge proof rollups and a new unique rollup, the fully homomorphic encryption (FHE) solution, made popular by Fhenix blockchain.
Top Ethereum Layer 2 Scaling Solutions in 2024
As alluded to, rollups can majorly be divided into three main categories: optimistic, zero-knowledge proof and fully homomorphic encryption, which combines the advantages of the first two rollups.
Optimistic rollups are blockchains that are built parallel to the main blockchain (in this case, Ethereum), avoiding the computations that make the Layer 1 chain expensive and less scalable. Simply, optimistic roll-ups operate on the premise that all transactions once bundled back on the main chain are valid unless proven otherwise. These blockchains ensure a higher degree of decentralization and security as all transaction data is stored on the main Layer 1 blockchain.
Since its launch last year, Arbitrum has grown into the second-largest optimistic rollup within the Ethereum ecosystem in market cap. The ETH Layer 2 scaling solution supports smart contracts, offering users reduced fees and high scalability without limitations of network congestion. Moreover, Arbitrum offers users the high-grade security of Ethereum while allowing DApps to enhance their scalability and privacy.
OP Mainnet, formerly Optimism, is an Ethereum L2 scaling solution designed to reduce the cost of transactions and improve scaling on Ethereum. The blockchain allows developers and users to send transactions at a fraction of Ethereum’s cost while maintaining the security offered on Ethereum.
Unlike Arbitrum, OP Mainnet offers users a multichain feature, known as the Superchain, whereby multiple Layer 2 networks connect via a shared code. This allows the chains to interact and exchange transactions, creating a multichain network on top of OP Mainnet.
Fully Homomorphic Encryption (FHE)
As stated before, optimistic and zk-rollups solve the issue of scalability and high transaction costs, but data encryption remains a headache for Ethereum users. Fully Homomorphic Encryption (FHE) could be the solution to this. This technology is a math-based encryption scheme that facilitates computations on encrypted data without the need for decryption.
According to Fhenix, the developer of FHE, the technology allows users to deploy confidential smart contracts, whereby all transactional information will remain encrypted during the validation process. This is similar to the end-to-end encryption available in Web 2 apps such as WhatsApp.
Fhenix is the pioneer of the FHE L2 scaling method. The platform leverages the FHE model, allowing developers to build encrypted smart contracts on a scalable and cost-efficient platform while leveraging the security of Ethereum. Fhenix developers can use Solidity and other EVM-compatible tools to build out their DApps.
By utilizing FHE technology to build encrypted smart contracts, the platform offers developers a next-gen level of data security and paves the way for unprecedented use cases in blockchain and other futuristic technologies such as AI.
The biggest difference between optimistic rollups and zero knowledge rollups (zk-rollups) is how transactions are validated. While optimistic rollups do not validate transactions, zk-rollups employ validity proofs to compute transactions off-chain and then compress the transactions into a smaller package, which is then posted on Ethereum.
While optimistic transactions are posted without finality, whereby all transactions will be valid unless proven otherwise, zk-rollups transactions are final as they are validated before being posted on Ethereum. These rollups are best for financial transactions, which require finality and speed.
The largest L2 scaling solution, Polygon zkEVM makes it to our list. Polygon is a zk-rollup that allows developers and users to create DApps atop it, using zk proofs (validation proofs) to lower the cost of transactions and scale the platform. Similar to optimistic rollups, Polygon zkEVM leverages the security of Ethereum and allows users to build apps using Solidity (the main language used on Ethereum).
Immutable zkEVM is a layer 2 scaling solution on Ethereum built specifically for gaming. Its predecessor, Immutable X, is a first-of-its-kind Layer 2 scaling solution developed for non-fungible tokens (NFTs). The early access of its mainnet was announced in late January 2024, aiming to enhance gaming development on Polygon, its base layer.
The platform provides developers with EVM compatibility, to ensure the seamless building of Web 3 games while leveraging the security of the Ethereum blockchain. Additionally, gaming developers can access a suite of ready-to-build tools to ease Web 3 game development and advance the development of futuristic blockchain games.
In conclusion, the rapid evolution of Layer 2 scaling solutions underscores the blockchain ecosystem’s ongoing quest for innovation and scalability. As evidenced by the emergence of optimistic rollups, zero-knowledge proof rollups, and fully homomorphic encryption (FHE), developers and users alike are presented with a diverse array of tools and techniques to address the inherent challenges of decentralization, security, and scalability in blockchain networks.