What are Layer 2 networks and sidechains? Ethereum Scaling Explained

Blockchain infrastructure has evolved to span an ecosystem of Layer 1 and Layer 2 networks.

In this article, we’ll look at the difference between the two and how Layer 2 networks and other scaling methods such as sidechains attempt to solve the scalability issues of Layer 1 blockchains.

What are Layer 2 networks?

Simply put, Layer 2 networks blockchain networks that live on top of a layer 1 network, such as Ethereumwhile the layer 1 network provides a basic level of infrastructure and security for the networks built on it, validating transactions and reaching consensus.

Layer 2 networks use various technologies to address the scalability bottlenecks in Layer 1 blockchain that are caused by throughput and transaction costs.

For example, Ethereum currently processes about 14 transactions per second (TPS) per Etherscan blockchain explorer. Visa, by comparison, processes about 65,000 transactions per second.

Scalability issues are most pronounced during periods of high network activity, when blockchain networks face increased transaction fees (also known as gas fees), as well as network congestion and reduced transaction times.

In 2017, Ethereum creator Vitalik Buterin defined the “scalability trilemma” for blockchains, arguing that they face the challenge of processing thousands of transactions per second while remaining secure and adhering to the ideal of decentralization, that is, operating without the need for centralized control. control.

The theory, borrowed from computer science, is that a network can focus on just two of these principles, making concessions at the expense of the third.

Ethereum’s solution to the scalability problem is to focus on making its own Layer 1 blockchain network as secure and decentralized as possible, while outsourcing scaling to Layer 2 networks built on top of its infrastructure.

How do scalable networks work?

Scalable networks use many different solutions to help solve Layer 1 network scalability problems.

These networks include transaction aggregation or off-chain transaction processing using sidechains or Layer 2 aggregations.

Sidechains

Sidechains are blockchains that operate independently of the layer 1 chain, with their own consensus mechanism and token.

They connect to the layer 1 blockchain via a bridge, which uses a smart contract to “lock” assets from the layer 1 chain and create a mirror image of those tokens on a side chain, with the value of those tokens tied to the locked asset.

These mirror tokens are then used to perform transactions, after which they can be destroyed, releasing the locked tokens on the layer 1 chain.

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Accumulation transactions take a different approach: they combine (hence the name) multiple transactions, presenting them on the layer 1 blockchain as a single transaction, which can be processed much faster than individual transactions.

There are two main types of convolutions: optimistic convolutions and zero-knowledge (zk) convolutions.

Optimistic reports Assuming all combined data is valid allows people to challenge transactions after the fact to determine whether they are legitimate or not. A disputed transaction is sent directly to the Layer 1 network to resolve the dispute, with both parties potentially losing their staked tokens if they are found to be in the wrong.

Zero Knowledge Joins use zero-knowledge proofs is a cryptographic technique that can be used to prove that something is known without directly revealing the known information. Transactions are bundled into batches that are executed off-chain, with the completed batch being passed onto the layer 1 chain using a zk-proof that demonstrates the correctness of the proposed state changes.

Ethereum Scalers You Need to Know

There are a number of different layer 2 networks and sidechains built on or near Ethereum, each with their own preferred technology solution for layer 1 scaling. According to CoinGecko, below are the largest Ethereum networks by total value locked (TVL) as of for November 2024.

Base

Based on the crypto exchange Coinbase, Base is built on top of the Ethereum scaling solution Optimism. After launching in August 2023, it quickly established itself as a leading player in Tier 2, growing its address count to over one million in just 11 days. According to Coinbase CEO Brian Armstrong, the exchange has no plans to issue a token for Base and is trying to make Base “something much broader” than a Coinbase-led project.

Arbitrum

Created by Offchain Labs, Arbitrum uses optimistic joins to scale Ethereum at a claimed rate of 40,000 operations per second versus Ethereum’s more impressive 14 operations per second. In March 2023, Arbitrum launched its own governance token, ARB, transferring control of the project to a decentralized autonomous organization (DAO) made up of community members.

Polygon

Polygon, formerly known as Matic Network, takes a multi-pronged approach to scaling, deploying multiple solutions including core POS chain (sidechain), Plasma chains, zk-rollup and optimistic drives. It aims to be more than just a scaling solution, positioning itself as a platform for launching interoperable blockchains. In September 2024, it completed the transition from its original MATIC token to the new POL token.

Optimism

Launched on the mainnet in January 2021, Optimism, as the name suggests, uses optimistic aggregate data that assumes all transactions in the combined batch are valid. Optimism further compresses the data in its summary data using a sequencer before sending transaction data to the Ethereum main chain. Validators of each rollup have a week to challenge the rollup if they believe it contains fraudulent data.

Scroll

A relatively new entrant into the second-tier space, Scroll launched on the mainnet in October 2023. The platform uses zkEVM technology for batch verification, using “bytecode-level compatibility” with Ethereum Virtual Machine support to ensure compatibility between EVM applications and tools. non-standard.” Scroll launched its SCR token in an airdrop in October 2024.

Explosion

Launched in February 2024 by a team led by Tyshun “Pacman” Rockerra, founder of NFT marketplace Blur, Blast differentiates itself from other layer 2 networks with features such as native yields for ETH and stablecoins. Level-2 conducted the distribution of its own BLAST token in June 2024.

The Future of Layer 2 Networks

Layer 2 networks form a key part of Ethereum’s “convergence-focused roadmap,” according to Ethereum co-founder Vitalik Buterin, who hopes to use Layer 2 solutions to increase the blockchain’s ability to process more than 100,000 transactions per second.

Buterin laid out plans to combine Ethereum’s two scaling strategies—sharding and Layer 2 protocols—in what he called “Surge.” As part of this roadmap, layer 2 blockchains will implement cryptographic solutions such as SNARK (Short Non-Interactive Argument of Knowledge) to ensure transaction integrity. Buterin also aims to ensure that layer-2 networks inherit Ethereum’s core principles of trust, openness, and censorship resistance.

Layer 2 networks are not limited to just Ethereum. In June 2024, BitcoinOS programmers announced that they had verified the zk-proof for Bitcoin mainnet for the first time, opening up the possibility of using rollups to scale Bitcoin. Solana is also seeing an increase in second-layer activity, such as through the gaming-focused Sonic SVM network.

Meanwhile, new second-layer networks continue to emerge on Ethereum. In October 2024, decentralized exchange Uniswap announced plans to develop its own Layer 2 network, Unichain, using Optimism technology, and centralized exchange Kraken will launch its own Layer 2 based on Optimism, called Ink.

Edited by Andrew Hayward