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.

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 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.

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.