Ethereum continues to be, in soaring, the largest platform for DApps in the cryptoactive industry. The total number of decentralized apps exceeds 3,000 and it continues to grow, with many more apps in development.
This is more than the total number of DApps deployed across all other blockchains combined.
However, this growth has taken its toll. The continually increasing number of users on the Ethereum network has resulted in certain network limitations such as slowness and high transaction rates for users.
This is where the solutions known as Layer 2 come in, which have been growing in adoption and technological development. That's what we're going to talk about today.
THE NEED FOR A SCALABILITY SOLUTION FOR THE ETHEREUM NETWORK
Mass adoption of Ethereum is a win for the blockchain industry, but problematic for the user experience. At the
At the time of this writing, over 164,000 transactions were pending to be added to the Ethereum network.
If you've used Ethereum at some point in 2021, you know what I'm talking about, as you've probably dealt with slow and high
fees.
The growing number of applications and users on Ethereum, in addition to the appreciation of Ether, is responsible for increasing the load on the network, whose capacity is limited.
Therefore, the cost of using the network increases significantly, with more and more users competing with each other to add transactions
to the Ethereum network.
Second-tier solutions attempt to overcome these scalability issues and can be vital to improving network performance.
Even though Ethereum is working on introducing sharding as a scaling solution with Ethereum 2.0, it is far from being implemented. So the obvious choice in this case automatically points to second-tier solutions.
Layer 2 is a network running on top of the Ethereum network's core network and interacts with it without the need for core network modifications. Layer 2 scaling solutions are decentralized protocols that increase the processing power of a blockchain and, as a result, alleviate network congestion.
They work by delegating off-chain processing to a chain of their own, processing transactions there but recording the final balances in the main network.
Thus, second-tier solutions increase efficiency and reduce the gas rates of a network, in this case Ethereum.
Recently, TVL on Layer 2 solutions at Ethereum reached a new record. The value reached US$ 6.16 billion, increasing 13.26%. This represents a significant increase in investment in second-tier solutions, which are becoming increasingly popular. Let's get to know the main ones.
One of the first and most popular second-tier solutions on Ethereum, Polygon, formerly known as Matic, is a solution that drives Ethereum's infrastructure scaling and development.
Polygon is used by many projects, such as Sushiswap, Aave, Chain Games, Quickswap, among others. In addition, it also offers flexible tools and components for developers, taking advantage of the security of Ethereum.
Transaction fees on Polygon are symbolic.
Polygon's $MATIC token can be traded on major exchanges.
Currently, TVL at Polygon is $4.88 billion, but it has already surpassed $10 billion in June.
Arbitrum is another second-tier solution that is gaining in popularity.
It's designed to increase the speed and scalability of Ethereum's smart contracts, while adding extra privacy features. The platform allows developers to execute EVM contracts and transactions at layer 2 without compromising layer 1 security.
It closely interoperates with Ethereum to allow Solidity developers to easily compile their smart contracts. The platform consists of three main components - Compiler, EthBridge and Validators.
Some of the important partners adopting Arbitrum are: Chainlink, Graph Protocol, OKEx, among others. Arbitrum positions itself as the ideal scaling solution for DeFi applications, with the ability to use Arbitrum Rollup to scale any Ethereum contract.
Offchain Labs, the company behind Arbitrum, launched the beta on August 31, 2021 and announced $120 million in funding, valuing the company at $1.2 billion
Currently, TVL at Arbitrum is US$1.92 billion.
Optimism is another example among Ethereum's leading scaling solutions that can provide improvements in transaction accessibility.
Developers can easily create smart Solidity contracts capable of running on Optimism, albeit with certain exceptions.
Users can move assets in and out of the network using the Optimistic Ethereum Gateway. Among the protocols participating in Optimism are Uniswap V3 and Synthetix. The project has an investment by VC a16z - Andreessen Horowitz.
Currently, TVL at Optimism is $307 million.
It is also based on ZK Rollups and combines Ethereum security with low rates and high network speed.
In addition to the protocol, the project also has a decentralized exchange and payment mechanisms - the Loopring Pay, in which users can send and receive Ethereum-based assets, instantly and for free.
ZK Rollup increases transaction capacity by 1000x, offloading most of the off-chain processing.
In addition to its ICO, in 2017, Loopring had no other round of financing.
Currently, TVL at Loopring is $307 million.
xDAI is a sidechain that supports users in processing transactions at faster speeds and reduced costs.
xDAI uses a Proof-of-Stake (PoS) consensus mechanism to help users stake native xDAI tokens on the network to become validators. xDAI is also a stablecoin.
The growth of the xDAI ecosystem has been driven by its integrations and partnerships with different projects and platforms, such as Unifty, Chainlink, Ramp Network, CardStack, HOPR, SushiSwap, Ankr and others.
For blockchains and digital assets to deliver on their promises of being the world's computers and internet money, they must be able to scale sustainably. For this, a combination of tier 1 and tier 2 solutions will be required.
On the other hand, it is also important to note that many tier 2 solutions are in the development stage, so it may take some time before we see full tier 2 solutions being widely used. Therefore, it is necessary to be careful when using them.
