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What is Layer 2 on Ethereum?

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  • Last Updated : 04 Jul, 2022

Ethereum is the first blockchain to provide token creation services and is considered the most popular blockchain network. It offers a high level of trust due to its maturity and strong position in the cryptocurrency market. ERC-20 is the standard used by all tokens built on Ethereum.

This article focuses on discussing the following topics:

  • What is Layer 2 On Ethereum?
  • Benefit Of Layer 2.
  • Risks of Layer 2.
  • Why Do We Need Layer 2?
  • How Does Layer 2 Work? 

Let’s discuss these topics in detail.

What is Layer 2 On Ethereum?

According to Ethereum, Layer 2 is the term used to describe a specific set of Ethereum scaling solutions. It is a different blockchain that provides security for Ethereum and can take Ethereum to the next level. Layer 2 handles Ethereum Layer 1 transactions while leveraging the strong decentralized security of Ethereum Layer 1. Here, Layer 1 is the underlying blockchain used by Ethereum and Bitcoin, as it is the foundation of the various Layer 2 networks built on top of it. The best example of a layer 2 project is “rollup” on Ethereum. Any transaction activity by a user on layer 2 can ultimately be traced back to the layer 1 blockchain.

Benefits of Layer 2

Below are some of the benefits of layer 2:

  • Lower Fees: There are lower fees Because all multiple off-chain transactions are combined together into single layer 1 transactions, Therefore transaction fees are greatly reduced and make Ethereum more accessible to everyone. 
  • Maintain security: All layer 2 transactions are conducted on the Ethereum mainnet, which allows users to take Security benefits on the Ethereum network.  

Risks Of Layer 2

Below are some of the risks of layer 2:

  • Transactions and holdings on the Ethereum mainnet are less risky compared to layer 2 projects. For example, when the sequencer fails, you have to wait to access funds.
  • Blockchain bridges that facilitate the transfer of Layer 2 assets are in the early stages of development and the optimal bridge design may not have been discovered yet. So there have been a lot of bridge hacks recently.

Why Do We Need Layer 2?

Ethereum has a big community and has around 1million+ transactions every second. Decentralization, Security, and Scalability are the three most important properties of any blockchain network. But according to the blockchain trilemma, it said that only two properties out of three are achieved by blockchain architecture. So if security and decentralization are chosen then we have to lose scalability.  But it seemed that the need for scalability has increased in demand as well. Therefore for solving this problem layer 2 networks come in.

What Is Scalability?

  • The purpose of scalability is to accelerate transactions per second without sacrificing decentralization and security, both of which are more important than scalability for any transaction on the network, and the Ethereum community has always firmly supported scalability without sacrificing decentralization or security to save scalability. 
  • Layer 1 is capable of processing 15 transactions per second. Therefore, to solve problems like high demand or network congestion using Ethereum, they need to increase transaction fees and price users who cannot afford these fees to remove transaction load from layer 1, making layer 1 less crowded and scalable. 
  • To prevent this move, Layer 2 was developed, which removes the transaction load from Layer 1, makes Layer 1 less congested, and more scalable, and prevents price increases to remove the transaction load from Layer 1.

How Does Layer 2 Work?

Communication between Layer 2 and Ethereum happens regularly and it ensures decentralization and provides security by sending transaction packets. So there is no need to change the Layer 1 protocol on Ethereum. 
Layer 1 is responsible for security, data availability, and decentralization, while layer 2 is responsible for scaling. Therefore, layer 2 removes the transaction load from layer 1 and publishes the proof of completion back to layer 1. By removing this transaction load from layer 1, the crowd on the base layer becomes smaller and everything becomes more scalable. 

Rollup

Rollup is currently the best example of the preferred layer 2 solutions for Ethereum scaling. 

  • Rollups operate by processing transactions at layer 2 and sending data to layer 1. 
  • Rollup combined hundreds of transactions together into a single Layer 1 transaction, making it much faster and cheaper without forgetting about benefiting from the security of the Ethereum mainnet.
  • Rollup transactions execute outside and published data on layer 1 by which it inherits the security of Ethereum by publishing transaction data at layer 1.

Ethereum has had a major impact on cryptocurrencies with its great ideas. Rollup is one example of his idea. With scalability in mind, Ethereum created an optimistic zero-knowledge rollup to improve scalability.

Below are the differences between Optimistic Rollup and Zero-Knowledge Rollup.

 

Optimistic Rollup

Zero-Knowledge Rollup

DefinitionIn optimistic rollup, a transaction is assumed to be valid if it is necessarily challenged when required. If a transaction is suspected to be invalid, error detection is performed to see if this transaction is invalid.Zero-knowledge rollups use Proof of Validity, in which every transaction is calculated off-chain, and then compressed data is sent to the Ethereum mainnet as proof of its validity.
ImplementationOptimistic Rollup is implemented on the Live public network. But there is a delay in moving data between layers 1 and 2.Zero-Knowledge Roll is not implemented on the Live Public network or we can say that there is no solution that implements zero-knowledge on the layer 2 projects. But it is able to have all the benefits of Optimistic rollup and there is no delay in moving data between layers 1 and 2.
Pros
  • Optimistic rollups are compatible with the EVM and Solidity. On other hand, some Zero-knowledge rollups don’t have EVM support. 
  • Because all transaction data is stored in Layer 1, it is safe and decentralized.
  • Zero-Knowledge rollup has an advantage over Optimistic rollup that it is not vulnerable to economic attacks. Where else Optimistic rollup is vulnerable.
  • Zero-knowledge is secure and decentralized because the data needed to restore the state is stored in layer 1.
Cons
  • Due to fraud issues, it takes a long time to wait for on-chain transactions.
  • The operator can influence the order of transactions.
  • Zero-knowledge is not worthwhile for many applications with little on-chain activity due to intense computational verification.
  • The operator can influence the order of transactions.
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