Cryptocurrency was created to revolutionize our financial and payment systems as a significant blockchain application. The blockchain, a later innovation to other centralized digital payment systems in an ideal world, should provide comparative advantages.
Yes, the blockchain is more decentralized and secure than any financial system globally; however, Bitcoin, the first blockchain, can only process a few transactions per second (TPS). In contrast, other traditional digital systems can scale up to several thousands of TPS. Hence, several debates have sprung, looking to solve the blockchain trilemma (achieving peak scalability without compromising decentralization and security.
As you would expect, blockchain technologists have developed a few on-chain solutions to facilitate scalability; however, despite these innovations, traditional Proof-of-Work blockchains still fall short of mass-usage scalability requirements. As a result, off-chain scalability alternatives have been considered.
What are Layer-2 Solutions?
Layer-2 solutions are created to help scale a blockchain by processing transactions of the mainnet blockchain. Unlike Layer-1 solutions, they do not require any changes or forks to the blockchain’s protocol; they work with the mainnet to achieve scalability.
There are several layer-2 blockchains with various solutions that help scale the Ethereum network. Some of these include Polygon, Arbitrum, Loopring, etc.
The most common Layer-2 solutions are Rollups, State Channels, Plasma chains, side chains, and Validium Chains.
Rollups: Rollups achieve scalability by carrying out a transaction on a separate chain before sending back a complete transaction to the mainnet for confirmation. As a result, the bulk of data needed to be processed has been “rolled up” into a miniaturized version for the mainnet to finalize.
Since transactions are finalized on the mainnet, Rollups derive their security from the Layer-1 Blockchain.
Rollups are subdivided into Optimistic rollups and Zero-knowledge (zk) rollups; learn more about rollups.
State Channels: A state channel is a smart contract that allows off-chain transactions by enforcing strict rules that either party must agree to by signing off on it; this signature can be cryptographically proven on the blockchain.
State channels facilitate scalability by computing blockchain transactions without committing all data to the blockchain. In a state channel, only two transactions are added to the blockchain (the first and the last), and all other transactions can be made between both participants (based on the smart contract’s arrangement). As a result, heavy data load is moved away from the blockchain, making it faster.
Learn more about State Channels.
Plasma Chains: Like most Layer-2 solutions, plasma chains work by reducing the load on the major blockchain. A plasma network can have an unlimited number of plasma chains, each of which is an independent Blockchain bonded to the main chain via a smart contract. The plasma chains transmit the block headers of each block to be recorded on the mainnet chain, while other transactions stay in the plasma chains.
These plasma chains (sometimes called child chains) are basically copies of the mainnet blockchain. Each child chain can also birth more child chains in a tree-like structure. Since each chain is independent, they can serve different needs and operate with varying consensus mechanisms – be it Proof-of-Work, Proof-of-Stake, or any other.
Although Plasma chains use “fraud proofs” to settle disputes and flag malicious transactions, they are different from optimistic rollups.
Sidechains: A sidechain offers one of the easiest layer-2 solutions; it involves an independent Blockchain that runs parallel with the mainnet blockchain, operating independently with any consensus mechanism of choice. A sidechain is connected with the Mainnet chain via a two-way bridge that allows back and forth communication.
Sidechains often work similarly to the mainnet blockchain, making it easy for developers to move their mainnet dApps to the sidechains. However, to utilize a sidechain connected with the main chain, a user must lock up some funds by sending them to the sidechain; these funds are locked and unspendable anywhere else but the sidechain. For each transaction, a confirmation is shared between both chains. If a user wishes to return to the main chain, he can simply unlock his tokens and reverse the process.
Some common examples of sidechains are Rootstock and Liquid network (on the Bitcoin Blockchain) and the Gnosis chain and skale network (Ethereum Blockchain).
The major drawback of sidechains is that they don’t derive their security from the mainnet blockchain; hence, they are less secure.
Validium Chains: Validium chains work similarly to zk-rollups by taking massive data off the main chain. However, unlike zk-rollups that transfer batched data back to the main chain, validiums maintain the data off-chain. In addition, like zk-rollups, validiums use validity proofs to validate data and avoid fraudulent transactions.
Validium chains are very scalable, achieving about 20,000 TPS. However, the system is relatively centralized and less secure. Hence, it is an excellent alternative to existing centralized systems but not an optimal focus for decentralization.
Validium chains are not to be confused with zk-rollups; they are different.
Layer-2 solutions help scale the blockchain massively, a lot better than layer-1 blockchains. In addition, some of them can be combined with other layer-1 solutions like sharding to further increase transaction throughput. As a result, they help the blockchain achieve high levels of scalability.
Regardless of these existing solutions, developers and technologists are working to develop many more scalability solutions to ensure cheap and fast transactions without compromising decentralization and security. This is mainly because Blockchain participants are in millions, whereas the world’s population is in Billions. Hence, for the blockchain to power and redefine our lives, it must operate seamlessly.
We hope that we have provided vital insights into Layer-1 scalability solutions. Check out our article that broadly explains why scalability is essential for the blockchain.