What are Ethereum’s layer two solutions

Have you heard anything about blockchain’s scalability trilemma? This trilemma is a famous challenge in the world of blockchains, consisting of three sides of “scalability”, “decentralization”, and “security”. In the simplest terms, the scalability trilemma states that for achieving scalability, you have to victimize decentralization and security, and for maintaining decentralization and security, you are forced to ignore scalability. However, second-layer or layer two solutions have proven this wrong. They are solutions for preserving decentralization and security while achieving scalability. Stay with us up to the end of this article to figure out how they realize this goal.

What are Ethereum’s layer two solutions?

Ethereum-based products including smart contracts, decentralized applications, play-to-earn games, non-fungible tokens, decentralized autonomous organizations, decentralized exchanges, and all other Defi products grew too fast in terms of popularity and public acceptance. This growth was so fast that Ethereum couldn’t keep up, and faced network congestion. The results of network congestion are high fees and slow transactions. All these challenges come from Ethereum’s consensus algorithm. Ethereum uses a proof-of-work consensus algorithm, and it can only process 15 transactions per second. While this popular blockchain aims to move to a proof-of-stake network, this process may take several years. So, the need for an instant solution was felt. Layer 2 solutions are these solutions.

The term “layer two solution”, or “second-layer solution”, refers to any solution that is built upon the same blockchain with the aim of improving its scalability. The concept behind these solutions is that instead of moving to new blockchains, we can use the original blockchain (here Ethereum), and think of some innovations for increasing its scalability.

Ethereum’s different second-layer solutions

Ethereum has different second-layer solutions. The most famous ones are “Plasma”, “Sidechains”, “State Channels”, and “Optimistic Rollups”. We will go through each of these solutions in the next part since being familiar with them gives you a better vision of how a layer two solution works.

Plasma Chains

Plasma chains are separate chains that get connected to Ethereum. Since they are like tiny copies of Ethereum’s main network, they are also called child chains. Plasma chains use a combination of smart contracts and independent encryption methods, and reduce the load of the parent chain this way. Plasma chains periodically report to the main chain. In case they face security challenges, or problems with confirming the malicious transactions, they make use of Ethereum’s security.

Plasma chains have a high level of computational power, and they process the transactions with the least amount of fee. By the way, they only support main transactions like transferring Ether or other ERC-20 tokens. OMG Network and LeapDAO are two famous projects that use Plasma chains for running decentralized applications.

Sidechains

Sidechains are independent chains that are compatible with the Ethereum Virtual Machine (EVM), and run in parallel with Ethereum’s main network. Sidechains are connected to Ethereum through a two-way bridge. They don’t get their security from Ethereum. The sidechain itself is responsible for its security. Sidechains have an independent consensus algorithm, and usually a more scalable one, like proof of stake or delegated proof of stake. For this reason, they are less decentralized than Ethereum. POA Network and xDai chain are two popular examples of sidechain projects.

State Channels

State channels are among the first layer 2 solutions. They transfer the transactions to channels outside the main chain and reduce its load. Using state channels, you only have two transactions on the main chain: the first transaction that transfers the assets to the state channels, and the last transaction that terminates the channel and moves the assets back to the main network. Payment channels are limited forms of state channels. State channels support more complex interactions like games, while payment channels are only appropriate for payments between two or a few parties.

State channels are ideal for micropayments. By the way, pay attention that it is not worth using a state channel for one, or a small number of transactions. This layer two solution is appropriate for parties who have frequent transactions. Celer, Perun, and Raiden are famous projects that have used Ethereum’s state channels.

Optimistic Rollups

Optimistic rollups also run in parallel with Ethereum’s main network. In rollups, transactions are processed in groups, and outside the first layer. These transactions are then sent to the main network in the form of a single transaction. So, optimistic rollups benefit from Ethereum’s security.

Optimistic rollups’ main premise is that all transactions are valid, unless some signs of malicious activities are found. As their name suggests, they are optimistic. Suspicious transactions are checked and validated. If a transaction is really found malicious, anyone who is responsible for it gets punished, and the staked collateral is seized.

Since rollups are compatible with EVM and use the Solidity programming language, they can support all activities possible on the first layer. All the data belonging to them also gets stored on the main network. Arbitrum and Cartesi are among the projects that use optimistic rollups. The popular decentralized exchange Uniswap has also announced its will to run a version of its platform on Optimism.

Conclusion

None of layer two solutions are able to completely solve the scalability challenge, but they are very helpful in reducing the costs and providing some necessary requirements. As we mentioned throughout the article, Ethereum 2.0 is going to launch, but the exact time is not clear, and it may take several years. Second-layer solutions are helpful for preserving Ethereum’s popularity until its second version gets released.