Ethereum gas fees cause for a mixed user experience on the Ethereum network. During DeFi Summer of 2020, gas fees reached an astonishing $500 per transaction. So, what are some ways around this? Fortunately, Ethereum 2.0 upgrades will make Ethereum transactions as cheap as Binance. However, until then, scaling solutions are the most effective solution to gas fee prices.
What does layer 2 scaling on Ethereum mean?
Layer 2 solutions are other blockchains built on top of Ethereum. Ethereum is the layer one protocol. As said above, they are much needed resolution to slow and expensive transactions on the Ethereum mainnet (layer one). An article published at nasdaq.com says:
“Currently, it’s fair to say that layer 2 platforms are the most significant growth area in DeFi, perhaps in the broader blockchain space.”
There are four different kinds of layer 2 solutions and they all have their advantages and weaknesses:
- Plasma: Makes fast transactions at a cheap price, but is not ideal for more intricate DeFi procedures such as borrowing and lending. An example of a plasma layer 2 solution is Polygon (MATIC) and OMG.
- Sidechains: Sidechains are separate blockchains. This means they are not built on top of the Ethereum mainnet like other layer 2 solutions. However, they can interoperate with Ethereum layer one and receive contracts.
- Rollups: Rollups scale Ethereum transaction capabilities by rolling up a number of transactions together into one – hence the name “rollups”.
- Channels: Finally, there are channel layer 2 solutions. With channels, parties can perform numerous transactions off chain and only send 2 transactions to Ethereum.
A layer 2 solution is a protocol that operates separate from the mainnet. A quote from Ethereum.org says:
“Most layer 2 solutions are centered around a server or cluster of servers, each of which may be referred to as a node, validator, operator, sequencer, block producer, or similar term.”
At this moment, Ethereum is able to conduct 15 transactions per second. Layer 2 solutions can improve transactions to as high as thousands of transactions per second.
Is Layer 2 still needed after Ethereum 2.0?
Will sharding make layer 2 solutions not needed? Definitely not.
Ethereum 2.0 will release a sharding updated which the Ethereum developers promote will handles thousands of transaction per second. However, the Ethereum developers are preparing to continue scaling the Ethereum network after 2.0. So, it won’t end with ETH 2.0 updates. And layer 2 scaling solutions will be needed to help facilitate this. This means we will see more of these projects like Polygon (Matic) being built in the future.
Layer 2 solutions are critical to decentralized finance. Layer 1 solutions are necessary, but focusing solely on layer one builds a blockchain which centralizes power into a few nodes.
If you enjoyed this article, you might also want to read What Is Karura? The DeFi Hub of Kusama.
Aaron is passionate about blockchain and has been an investor in cryptocurrencies for the past years. He enjoys engaging with other people in the cryptocurrency community online, particularly on Telegram, and learning from experts.