Ethereum Layer Two Solutions: Temporary Salvation?
With the ongoing launch of Ethereum 2.0, you may be wondering why you should be concerned with layer two solutions. Although Ethereum 2.0 will be much improved compared to the original product, there is still much to be desired, and this is where layer two solutions come into play.
Ethereum Layer Two Solutions Vs. Ethereum 2.0
Some of you may be confused and wondering just what the difference is between Ethereum 2.0 and a layer two solution for the platform. Basically, Ethereum 2.0 is an updated version of the software which is used for the current Ethereum blockchain. This software is very advanced and difficult to change, which is why the 2.0 upgrade is happening now, five years after the invention of the original product.
On the flipside, a layer two solution is a software solution which operates on top of the software which runs the full blockchain. Layer two solutions often solve problems which exist in the software of the blockchain. For example, the lightning network is a layer two solution which was created to solve the problem of the slow speeds of transactions on the Bitcoin blockchain.
Why Does Ethereum 2.0 Need Layer Two Solutions?
Well, first of all, the process of getting Ethereum 2.0 up and running is long and slow. And although it’s creator, Vitalik Buterin, has indicated they are working as quickly as possible, this doesn’t mean everything will necessarily go as scheduled. Layer two solutions help bridge the gap while users wait for the new platform.
And once Ethereum 2.0 is up and running, it likely will still not be the perfect software and will still be subject to a number of vulnerabilities, especially as the DEFI world takes off. This is why layer two solutions will always have a place on the Ethereum blockchain. But the layer two solutions which are applicable may change as the platform changes.
The main reasons layer two solutions are employed on the Ethereum blockchain is due to the high gas prices and slow transaction speeds which can make transacting on the blockchain only feasible for some individuals.
Rollups are the Ethereum equivalent of the Lightning Network for blockchain as what rollups do is, they allow two or more parties to have micro transactions off the blockchain, then these are rolled up and settled with the Ethereum blockchain later. There are two main types of rollups, zero knowledge, and optimistic.
Zero knowledge rollups can also be called ZK-rollups, and these can be used to bundle up hundreds of transactions into one single transaction for the blockchain using a smart contract. And instead of an address being posted to the ledger, an index is posted instead. These transactions are also posted on Ethereum as calldata, which reduces the amount of gas required to post them.
An Optimistic rollups is a sidechain which operates alongside the Ethereum blockchain and works to speed up transaction processes. It does this by pre notarizing transactions and thus speeding up the time it takes for them to be posted to the blockchain. This makes Ethereum transactions 10-100x faster. Not only that, but these are written as calldata as well, making them cheaper than transacting on the actual Ethereum blockchain. Optimistic rollups are expected to increase in necessity as the Ethereum blockchain grows, meaning they will definitely still be necessary with the implementation of Ethereum 2.0.
Rollups could be used to help with blockchain implementation when it comes to retail. This is because a store could have an optimistic rollup which pre-notarizes transactions as customers check out, then the transactions would be settled at the end of the day—similar to the way in which visa currently operates.
Like rollups, channels also allow parties to transact off the blockchain. And they work much in the same way, by settling the transactions all at once rather than one by one. So, when would you use a channel instead of a rollup? Well channels only work when you know the number of participants in advance, lessening their use in retail but rather as something for employers to use with certain employees, or two friends who do business with each other frequently.
Channels are extremely useful for micropayments as they use a small amount of gas. However, they are also difficult because they require semi constant monitoring, meaning you and your friend can’t just open a channel and then leave it there for when you need to use it later. You would only open a channel if you were actively going to use it right now. Channels will likely still have a place in the Ethereum 2.0 update just because they are so efficient at processing small payments which could be too expensive to send on the Ethereum blockchain.
Plasma is a layer two solution which operates on fraud proofs like optimistic rollups, which is anchored to the main Ethereum blockchain and is used to settle disputes. Like channels, plasma cannot be left unattended for long, making them a difficult long-term solution. What makes plasma unique is that funds settled using plasma do not release for a few days, this is what allows for fraud to be checked before anyone loses any ETH. Unfortunately, plasma only supports general token swaps, and no other complicated blockchain functions as of now.
Validium employs the use of ZK-proofs and can be used to process up to 10,000 transactions per second off chain. And multiple Validium chains can be run in parallel, greatly increasing the transaction power of the Ethereum blockchain. This will only prove to be more important as the user base of Ethereum grows with the implication of the 2.0 version of the blockchain. Validium is also great because it allows users to receive their coins instantly, and it has a number of fraud proof systems making it immune to a number of the fraud issues faced by the Ethereum blockchain. Unfortunately, the downside of Validium is the speed is expensive, and you won’t save any gas by using this specific layer two solution.
This is only the tip of the iceberg when it comes to layer two solutions which are on the market for Ethereum. These are just the most popular solutions which experts believe won’t be going away with the update to Ethereum 2.0. And it’s likely that more layer two solutions will be created to function with the new blockchain, innovating Ethereum to new heights where it can be enjoyed quickly and cheaply by everyone.