Blockchain is in the moon race as it tries to develop scalability solutions that meet demand without sacrificing security and decentralization. This is the classic blockchain trilemma.
The rapid growth of decentralized finance, NFTs and gaming has led to adoption congestion in the Ethereum network. This is due to its limited processing speed, which can only process a handful of transactions per second. Many dApps are not usable at times.
Ethereum’s transition to a proof-of-stake sharded network may alleviate some of that pressure on layer 1, with sharding splitting the Ethereum network into new chains or shards to spread the load, reducing congestion, and increasing transactions per second.
However, full deployment is still many years away and participation isn’t slowing down anytime soon, so the urgent need for scalable solutions has accelerated adoption of layer 2, which runs on top Ethereum’s layer 1. This technology is not designed to improve performance at its base layer.
Layer 2 (and related technology) offer many different solutions to Ethereum scaling. Each solution has its own benefits and tradeoffs.
Plasma
Sidechains
State Channels, and Payment Channels
Optimistic Rollups
ZK-Rollups
Validium
Aggregators
Plasma
Plasma chain are independent blockchains that anchor Ethereum. They are sometimes called child chains because they function as smaller copies the Ethereum mainnet. These child chains combine smart contracts with cryptographic verification to offload transactions from their parent chain.
Each Plasma chain has its own block validation mechanism. The Ethereum mainchain periodically reports back to it, using its security to settle disputes that are raised via fraud proofs.
Plasma chain enables high throughput and low transaction costs. Only basic transactions such as token transfers and swaps will be supported. There is also a requirement for liveliness and chain withdrawals may prove difficult.
Several projects offer implementations of Plasma to dApp integration. These include OMG Network and LeapDAO.
Plasma. Image by Near.org
Sidechains
Layer2 sidechains are compatible Ethereum Virtual Machines (EVMs) that run parallel to the Ethereum mainchain. Sidechain nodes are responsible for verifying and processing transactions, adding block and maintaining the sidechain’s own consensus rules such as proof of authority or delegated proofof-stake to ensure more efficient transactions.
Compatibility can be achieved through a two-way bridge with Ethereum. However, its security is not directly inherited. It is the responsibility and responsibility of the sidechain.
Sidechains. Image by Near.org
Sidechains use established technology to support more complex transactions with EVM compatible. However, they are less decentralized and rely upon their own consensus mechanisms and security rather than layer 1. So technically they are not layer 2.
Projects that offer sidechain implementations include POA Network, xDai Chain and xDai.
State Channels and Payment Channels
One of the most widely discussed layer 2 scaling solutions is state channels. They use multi-signature agreements to allow participants to transact quickly off-chain and then return to layer 1 to finalize transactions as needed.
State channels can handle more complicated interactions, such as a game. Payment channels, on the other hand, are simpler state channels that deal only with payments between two parties. State channels are ideal for micropayments because they allow for high transaction throughput and low costs. The setup and settlement costs are prohibitive for micropayments. However, they can be used to make one-off payments. Liveliness is essential and funds must be kept in open channels.
The main projects leveraging state channels on Ethereum are Celer, Perun, and Raiden.
Optimistic Rollups
Optimistic rollsups are located in parallel to layer 2 of the Ethereum main chain. These rollups allow transactions to be executed quickly and cheaply in batches outside of layer 1. However, they still maintain the security of Ethereum base layer for submissions as one transaction.
As computation is the slow and expensive element of the Ethereum network, optimistic rollups offer up to 100 times scalability improvements as they don’t run any computation by default, a number that will increase further with the future introduction of Ethereum sharding.
Optimistic rollups assume that transactions are valid and can only run computation if challenged by fraud-proof. Optimistic rollups use an optimistic bonding system. Anyone found guilty of a fraudulent transaction will lose their bond and be incentivized to do so.
Optimistic rollsups are compatible with EVM and Solidity, so they can handle any Ethereum layer 1 transaction. Optimistic rollups are secure and decentralized because all transaction data is stored on layer 1. They also provide execution scaleability. Due to potential fraud issues, it is possible for transactions on-chain to take a long time.
Optimistic rollups. Image by Near.org
As optimistic rollups support both simple payments and complex smart contracts, they are seen as more immediately suitable for DeFi applications, with Optimism, Arbitrum, and Cartesi among the multiple projects offering implementations.
In a sign of the future direction of the space, the leading DEX platform Uniswap recently also announced it would be taking the next step in adopting layer 2 tech by launching on Optimism to sharply reduce transaction costs for its users.
ZK-Rollups
Zero-knowledge rollups, or ZK-rollups, bundle transactions off-chain and generate a cryptographic proof, known as a SNARK. ZK-rollups, in contrast to optimistic rollups perform computation off-chain and submit these valid proofs to layer 1.
ZKrollup smart contracts keep the state of all transactions at layer 2. This can only be changed with validation proof. Validating blocks is faster and cheaper because ZK-rollups do not need all transaction data but only the validity proof.
Additionally the ZK-rollup contract already verified the transactions so there is no delay in moving from layer 2 into layer 1.
ZK-proofs have faster finality times and are secure and decentralized. The data required to recover the state is stored at Ethereum layer 1. Some ZK-rollups don’t have EVM support and validity proofs can be very time-consuming to compute. This makes them ineligible for dApps that do not have a lot of on-chain activity.
Multiple ZK-rollup implementations are also available, including ZKSwap and zkSync. ZK-rollup technology is used to make scalable, low-cost Ethereum payments. ZkSync provides a trustless protocol that allows for secure, scalable and reliable transactions on Ethereum. This protocol can be used by crypto wallets as well as defi platforms to access PayPal-like scale. ZKSwap is a ZKrollups-based layer-2 DEX that offers zero gas fees and high transaction throughput. This transforms the future of AMM.
Harmony offers something unique. It combines the best of both ZK-rollup and optimistic worlds. Harmony offers full EVM compatibility unlike ZK-rollups. It also provides faster settlement and shorter withdrawal times than Optimistic rollsups. It also has gas-efficient interoperability thanks to its sharded Proof-of-Stake Blockchain that bridges to Ethereum through smart contracts.
By building on the benefits of both Optimistic rollups and ZK-rollups, generally seen to be the most promising of layer 2 scaling technologies, while addressing their shortcomings, Harmony can provide a more wholescale solution for projects to deploy. Harmony’s interoperability extends beyond Ethereum, with its Horizen bridge connecting to Binance Smart Chain. This opens up access to the wider defi ecosystem.
Validium
Validium uses validity proofs like ZK-rollups, but instead, data is not stored on Ethereum layer 1, allowing for scalability of up to 10,000 transactions per second per Validium chain, of which multiple can run in parallel.
Validium has no withdrawal delays, which improves capital efficiency and makes it less vulnerable to economic attacks by high-value, fraud-proof-based dApps. Validium chains offer limited smart contract support.
Projects providing implementations of Validium include Loopring and StarkWare. Immutable X, the first layer 2 scaling solution for NFTs on Ethereum, utilizes StarkWare’s Validium and ZK-rollup technology to enable transaction speeds of over 9,000 per second with zero gas fees while retaining Ethereum’s security for its ecosystem of marketplaces, apps, and games.
Aggregators
Polygon is something of an aggregator of these layer 2 solutions, offering multiple implementations of several layer 2 technologies. Polygon is the fastest growing layer 2 network. It offers multiple implementations of several layer 2 technologies and makes it accessible to everyone.
Polygon has been adopted by Defi blue chip companies. Platforms like Aave and SushiSwap already integrate with it.
CVI, the decentralized volatility index for the crypto space powered by the COTI network, has also followed that lead in integrating with Polygon. CVI users are able to open positions, provide liquidity, and stake while simultaneously processing transactions on the main ETH blockchain.
Summary
No single scaling solution is enough to realize the secure, decentralized and scalable vision for Ethereum 2.0. This avoids the problems of high fees or bottlenecks.
Sharding is sure to help on-chain scaling at layer 1. But off-chain layer 2, flexible solutions that can be tailored to the specific requirements and acceptable tradeoffs of the plethora dApp projects are crucial to the future development of blockchain.
The ecosystem as a whole can be greater than the sum its parts. Different layer 2 solutions are possible and can work in harmony to meet the growing demands of mainstream adoption. This will continue to reduce congestion and prevent single points or failures as we move to Web 3.0.
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Ethereum Price Analysis: ETH Challenges Key Resistance, Is $3.5K Next?
Ethereum is approaching a decisive resistance at the 200-day moving average of $2.7K, signalling a potential bullish shift in market sentiment. A successful breakout above this level could ignite a strong rally, with the price likely targeting the $3.5K threshold in the mid-term.
Technical Analysis
The Daily Chart
ETH is on the verge of a decisive breakout above the critical 200-day moving average at $2.7K, a key level that has historically served as both support and resistance. After a brief consolidation beneath this threshold, the market has regained strength, with renewed buying pressure pushing the price toward a potential breakout.
A confirmed break above the $2.7K resistance would mark a significant shift in market sentiment, signaling the beginning of a broader bullish reversal. In this scenario, Ethereum is likely to target the $3K mark in the near term, with a possible extension toward the $3.5K resistance in the mid-term.
However, if the breakout attempt is rejected, selling pressure may take control, leading to a deeper retracement toward the $2K support region, aligned with the 100-day moving average. This level would then serve as a critical zone for the bulls to regroup.
The 4-Hour Chart
On the lower timeframe, ETH recently consolidated within a bullish continuation wedge pattern. After testing and holding support at the wedge’s lower boundary near $2.3K, the asset went on an impulsive rally, breaking out of the structure.
This breakout reflects a continuation of the bullish trend. Nevertheless, Ethereum now faces a key short-term resistance around the $2.7K swing high. A brief rejection and pullback toward the breakout level could occur, which would serve to validate the breakout before a potential continuation rally toward the $3K and possibly $3.5K levels.
Onchain Analysis
The Binance liquidation heatmap continues to offer key insights into Ethereum’s evolving market dynamics and potential price trajectory. Following a strong upward movement, ETH recently reached the critical $2.7K level, where a dense cluster of liquidation levels was triggered, flushing out leveraged short positions and offloading significant market liquidity.
Historically, in phases of recovery or strong bullish sentiment, markets tend to hunt these liquidity pockets, as smart money and institutional participants trigger forced liquidations to fuel upward momentum.
Currently, Ethereum has reclaimed the $2.5K resistance and is holding above $2.7K, signaling renewed bullish strength. Notably, the heatmap reveals a noticeable void of substantial liquidation levels between the current price and the $3.5K range. This lack of sell-side liquidity indicates reduced resistance ahead, supporting the potential for a continued rally toward the $3.5K threshold in the mid-term.
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Last week the crypto market didn’t just ride on bitcoin’s coattails—it ran with it. As bitcoin smashed through the $100,000 mark (again), ethereum, solana, and a host of altcoins followed suit. This editorial is from last week’s edition of the Week in Review newsletter. Subscribe to the weekly newsletter to get the editorial the second […… Read More
Ethereum Price Analysis: What Lies Ahead for ETH on its Way to $3K?
Ethereum is showing signs of short-term exhaustion after a strong impulsive rally. Although the buyers have managed to break through major resistance levels, the price is currently stalling around a key structure and could be at risk of a local top if momentum fades.
Technical Analysis
The Daily Chart
ETH has decisively broken above the 100-day moving average, located around the $2,100 area, and is also trying to reclaim the 200-day moving average near the $2,600 mark. Moreover, the RSI is hovering in the overbought territory, signalling that the rally might be overextended in the short term.
Currently, the asset is consolidating just below the lower boundary of the previously broken long-term ascending channel. A daily close above this level would invalidate the idea of a pullback and open the door toward the $3,000 zone, which coincides with a prior supply area. On the downside, the $2,150 zone now acts as solid support and could serve as a potential re-entry point for buyers if the market pulls back.
The 4-Hour Chart
The 4-hour timeframe shows ETH consolidating within a narrow range around the $2,600 level. The price is maintaining its gains following the breakout from a descending channel and a series of bullish imbalances filled along the way.
The RSI has also cooled off, showing a decline in bullish momentum but no immediate signs of bearish divergence. If ETH can break and hold above the $2,600 zone, it may gather enough strength to run toward the key $3,000 resistance level soon.
Onchain Analysis
Exchange netflows remain negative on aggregate, with a recent reading showing a net outflow of over 170K ETH. This indicates a broader trend of accumulation and long-term holding, as coins continue to leave centralized exchanges and move into self-custody. Persistent outflows during a price rally typically support the case for bullish continuation as they reflect a lack of intent to sell.
However, it’s worth noting that this behavior also raises caution, as extreme bullish positioning can lead to sharp corrections if the sentiment becomes too one-sided. Traders should monitor changes in netflows closely, especially if inflows begin to spike around major resistance levels, as that could mark local tops and signal profit-taking.
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Disclaimer: Information found on CryptoPotato is those of writers quoted. It does not represent the opinions of CryptoPotato on whether to buy, sell, or hold any investments. You are advised to conduct your own research before making any investment decisions. Use provided information at your own risk. See Disclaimer for more information.