Layer 2 solutions explained (Arbitrum, Boba, Optimism, Ethereum 2.0)
Description
Ethereum is expensive and slow. But the good thing is, we don’t have to wait for ETH 2.0 to roll out just to have cheap and fast transactions, we can make things a lot better right now with layer 2 so...
AI Analysis
Ethereum is currently facing significant challenges: it's notoriously expensive and slow due to high gas fees, which essentially act as a "bribe" to prioritize transactions on the congested network. Thankfully, we don't have to wait for the full rollout of ETH 2.0 to get faster and cheaper transactions. Layer 2 solutions and sidechains are already making a huge difference by offloading transactions from the main Ethereum blockchain, addressing current congestion while also preparing the network for future demands.
Here's a breakdown of how these solutions work and what the future might look like for Ethereum:
* The Problem: Ethereum's Congestion: Ethereum's network is the most utilized blockchain globally, leading to incredibly high gas fees. These fees are effectively a "bribe" – the more you pay, the faster your transaction gets processed. This creates a vicious circle where popularity leads to congestion, making day-to-day use unbearable for many users. Layer 2 solutions emerged as a critical immediate fix to this problem.
* Why Layer 2 Solutions are Game-Changers: Layer 2 projects are designed to solve Ethereum's scalability issues by processing transactions off the main blockchain, reducing congestion and keeping the core network free of unnecessary transaction history. This approach is providing much-needed relief in the short term and sets the stage for long-term growth. The field is seeing a lot of competition as different projects vie for adoption.
* How Layer 2 Solutions Work: Sidechains vs. Optimistic Rollups
* Sidechains: A popular example is Polygon (which uses its native Matic token). Sidechains are essentially independent blockchains that run parallel to Ethereum. They only interact with the main Ethereum chain when it's time to update the overall state of the ledger. Because they're independent, they have their own consensus mechanisms and validators to secure their networks.
Optimistic Rollups: These are quite different from sidechains because they operate within* Ethereum as smart contracts. The huge benefit here is that they leverage the robust security of the main Ethereum chain, so they don't need their own separate consensus method.
* The "Rollup" part refers to how they bundle or "roll up" many transactions off-chain and then commit them as a single transaction to the main Ethereum chain.
* The "Optimistic" part means that they assume transactions are valid by default, allowing for incredible speed. However, there's a fraud-proving window where any user can flag a fraudulent update. If a fraud is proven, the transgressor is punished by the protocol, ensuring security.
* Leading Optimistic Rollup Projects: Arbitrum, Boba, and Optimism are the major players in this space, all aiming to scale Ethereum and reduce gas fees.
* Arbitrum: Currently the leader among Layer 2 networks, boasting over $2 billion in total value locked (TVL), which is five times more than Boba or Optimism. It's designed to significantly improve Ethereum smart contract capabilities, boosting speed, scalability, and even adding privacy features. A big win for Arbitrum is its exceptional Ethereum Virtual Machine (EVM) compatibility, making it super easy for developers to migrate existing Ethereum applications without rewriting their code.
* Optimism: This project focuses on upholding Ethereum's core values by building infrastructure that supports public goods. It works by converting Ethereum smart contracts into an Optimistic Virtual Machine (OVM) format and deploying them onto the mainnet. The OVM is highly compatible with Ethereum, meaning popular applications like Synthetix don't have to tweak their code to deploy on it.
* Boba Network: Boba shares the same scaling goals as others, but it stands out with a remarkable innovation: it has drastically reduced the optimistic rollup exit period from several days to just a few minutes. This is a huge deal! Typically, withdrawing funds from other Layer 2 projects can take up to seven days due to potential fraud disputes, interoperability challenges, and fragmented liquidity. Boba's solution to this "withdrawal waiting game" is a significant advantage. It also offers incentivized yield farming opportunities for liquidity providers (LPs).
* Ethereum 2.0 (ETH 2.0) Explained: ETH 2.0 is an upcoming upgrade to the Ethereum protocol. A major change involves transitioning from the energy-intensive Proof of Work (PoW) consensus mechanism to a more sustainable Proof of Stake (PoS) model. This means mining will be replaced by "validators" who secure the network by "staking" their ETH. ETH 2.0 is being rolled out in phases and is expected to significantly reduce transaction fees and speed up transactions.
* Will ETH 2.0 Make Layer 2 Solutions Obsolete? This is the ultimate question, and the strong belief is no, they will coexist and even need each other.
* The argument is that even with a successful and complete transition to ETH 2.0, the sheer growth of the Ethereum ecosystem and increasing global demand for decentralized applications will mean that the main chain alone won't be able to handle all the transactions.
* Sandeep Nailwal, co-founder of Polygon, has highlighted this point: ETH 1.0 handles about 13 transactions per second (TPS). Even after the move to Proof of Stake, it might only reach 20 TPS. Looking further ahead, even with the proposed 64 "shards" in ETH 2.0 (each potentially handling 20 TPS), the total capacity would still only be around 1280 TPS. While this is a massive improvement, it's still far from enough to support the entire world's transaction needs.
* Essentially, ETH 2.0 won't provide infinite scalability, and there's no "permanent" solution to blockchain traffic problems. Layer 2 solutions will continue to be crucial for providing additional speed and scalability. Think of it like adding a turbocharger to an already powerful car – it just makes it even better.
* In short, Ethereum needs these Layer 2 solutions as much as Layer 2 projects need Ethereum. They are all contributing to the overall success and future of the Ethereum ecosystem.
Transcript
So Ethereum is expensive, it's slow, there's no argument there for sure, but of course we don't have to wait for ETH 2.0 to roll out just to have cheap and fast transactions. We can actually make things a lot better right now with Layer 2 solutions or sidechain. So in this video, I'm going to go over some of the major players in the Layer 2 solutions field, identifying different solutions and also answer the ultimate question at the end, whether I think ETH 2.0 is going to kill all the Slingert...