Peeling Off The L1 & L2 Layers: Blockchain Trends 2023
By Anju B Nair, Sr. Technical Content Writer, Kerala Blockchain Academy
The internet was created as an instrument for radical self-expression. The web’s inception was all about experimentation and creativity in a truly decentralized peer-to-peer setting. Yet, developed over time, it grew from a network of enthusiasts to a multi-billion dollar enterprise. Gradually corporations, governments and large ISPs began to upsurge their dominance.
Any blockchain technology aims to bring freedom and true decentralization back to the people. Bitcoin does it for money and digital payments, Ethereum and the Web 3.0 paradigm for the Internet of Value and decentralized applications, etc. However, you will discover that everything comes with a price once you delve further into the technology. Decentralization and Censorship-resistance are possible with blockchain, but always at the cost of scalability and speed. This article digs into the Blockchain L1 and L2 Landscapes that tell the story of blockchain’s improved scalability. We’ll also foresee what holds in future for these blockchain layers. Let’s get started,
Impressive Growth in Layer 2 Activity Indicates Future Trends.
Spending on Ether is constantly increasing on Layer 2 activities.
Layer 2 solutions are critical to Ethereum scaling, but alternative Layer 1s provide competition.
Arguably, Ethereum is today’s most trusted blockchain innovation, the second largest blockchain to Bitcoin, serving different intended purposes. The ubiquitous Layer 1 blockchain underwent a seismic transformation in blockchain use cases from simply hosting cryptocurrencies to operating as an architecture on which decentralized applications (dApps) can be built. Yet despite its success, the scalability of the blockchain is a suffice. In 2022, more than 7.75 million smart contracts were deployed on the Ethereum blockchain, including 4.6 million contracts in the fourth quarter alone. Comparatively, there were 1,148 unique Solana transactions in the same annual timeframe — making it all the more pertinent to address the issue once and for all.
L2: The Scaling Layer
Layer 2 (L2) scaling solutions that continue to iterate and improve on its underlying technology have captured the community’s attention even as the core Ethereum network infrastructure continues to upgrade itself. L2 improvements have changed from a desired feature to an imperative requirement for dApp developers to function sustainably in terms of performance and cost.
Arbitrum, Optimism, zkSync and StarkNet are the popular Layer 2 blockchains often compared to. Looking at the total value bridged by each of these protocols, we find that Arbitrum is building a clear dominance, with more than four times the amount of the closest competitor, Optimism (over 2 million ETH bridged, compared to less than 500,000 ETH). Likewise, Polygon has recently become the Layer 2 choice for well-known, recognized traditional brands and platforms expanding into web3 and NFTs (including companies such as Starbucks, Meta and Reddit). Layer 2 Immutable X specifically focuses on gaming and NFTs and may be able to fill a unique market niche.
In addition to scaling, Metis, hopes to enhance the DAO idea by transforming it into something more substantial through what it calls a DAC (Decentralized Autonomous Corporation that runs business automatically without human intervention based on the logic programmed into them).
Ethereum Is Scaling
There was hardly any reduction in its transaction fees when Ethereum switched successfully to proof-of-stake; Vitalik Buterin has said that Layer 2 solutions will be essential for scaling (and avoiding those fees). These solutions are now finally succeeding, which is good cheers for Ethereum. At this juncture, it seems acceptable to comment that Ethereum has acquired network effects and first mover advantage regarding smart contract technology. It should be looking now to build a stage which Layer 2s can enable.
Currently, the rollup-centric vision set forth by Ethereum Blockchain acts as the primary catalyst of L2 solutions. L2 rollups rely on Ethereum’s decentralized security; however, they outsource transaction processing to separate third-party networks after ‘rolling up’ the data and committing it to the Ethereum mainnet. There are two popular approaches — optimistic and ZK (zero-knowledge) proofs.
Optimistic rollups: Assumes transactions are valid by default and only run computation via a fraud proof in case of a challenge.
ZK rollups: Runs computation off-chain and submits a validity proof to the chain.
By splitting out transaction costs across a batch of transactions, rollups efficiently mitigate network congestion and improve throughput speed, enabling a 10x–100x reduction in Ethereum transaction fees. Also, the benefits of larger transactions per second and cheaper fees add to the capability of L2 projects’ resources for improving user experience and extending the reach of decentralized application development.
What’s more, compatibility with the Ethereum Virtual Machine (EVM) is a key factor for developers when creating dApps and is necessary for rollups to function. The cross-chain interoperability necessary for dApps to operate seamlessly across several blockchains is guaranteed by the run-time environment for smart contract execution and Ethereum’s application code. This has resulted in a clear change among developers, who now choose to construct on L2s rather than on the Ethereum mainnet, given the L2 benefits of offering comparably low transaction fees. In fact, since December 2022, the aggregate volume of transactions on the well-known L2 chains Optimism and Arbitrum has exceeded that of Ethereum’s on-chain transactions.
That said, we can’t ignore that the L2 landscape is young at the moment. ZK rollup development is still in its infancy, and optimistic rollups are burdened by low throughput, expensive data publication fees, and a protracted challenge period before transaction finality is realized.
Modular Blockchain: The latest innovation
Modular blockchains adopt a fundamentally different approach. Instead of having all nodes responsible for the function, modular blockchains carry a system whereby an independent network of nodes performs every function. Allowing each network to focus on its task, the blockchain enables efficiency gains via lower fees to users and better performance for dApps. The example is the latest buzzword- Mantle.
Mantle — a BitDAO product, is a high-performance Ethereum Layer-2 network that leverages an additional decentralized data availability layer with Ethereum rollups to expand the use cases for developers. Mantle offers Ethereum-level security by separating execution, data availability, and transaction finality into separate layers while increasing transaction speeds through reduced inefficiencies. In addition, to shorten the challenge period and give users speedier finality, transaction-related data is stored on Mantle’s L2 before being broadcast onto Ethereum. In this way, Mantle is able to effectively utilize Ethereum’s vast trust network while eliminating any possible block space congestion through its modular design. These upgrades are now anticipated to allow dApp developers to construct more components on-chain without having to worry about exorbitant transaction fees or battle a subpar user experience. Even complex DeFi protocols that enable margin trading and other intricate DeFi strategies are expected to help themselves with minimal cost operation, opening the door for much broader user adoption.
Alternative Layer 1s
Throughout 2022, Ethereum maintained its leadership position in terms of Total Value Locked.
Parallelly some younger blockchains made their way. A new generation of layer-1 blockchains and protocols formed its crude shape, providing a more nuanced approach to developing systems with improved scalability. Blockchains like Avalanche, Cronos, Aptos, and Sui are a few incorporating new technologies towards scaling solutions.
Cronos: Its innovations include EVM compatibility, Cosmos integration, interoperability, and proof-of-authority (PoA).
Avalanche: It implements the novel leaderless consensus protocols, introduces the Subnets, and uses DAG to organise transactions.
Aptos: The main novel parts of Aptos include its consensus algorithm (AptosBFT), parallel execution framework (Block-STM), and the Move programming language.
Sui: There are some similarities between Aptos and Sui, but Sui adopts additional creative ideas, such as a split of simple and complex transactions, a dual consensus mechanism, and Sui Move.
As blockchain technology continues to witness rising real-world adoption, the focus on scalability, fast transaction speeds and low transaction fees will drive developments across both L1 and L2 scaling solutions. L2 landscapes linked to L1, like Ethereum, will be significantly impacted by their promise to introduce significant updates like improvements to the consensus mechanism and the techniques like sharding.
Secondly, with rising adoptions of blockchain-based solutions, scalability, quick transaction times, and low transaction prices will be the driving forces behind advancements on both L1 and L2. L2 solutions may offer even faster transaction times and bring down costs to a level hitherto seen before. Besides the abundance of L2, these benefits will fuel the development of new applications, particularly in the DeFi sector. Furthermore, users will enjoy higher blockchain interoperability and newer possibilities in areas like the trade of digital assets. All thanks to bridges being established across various L2 platforms. Also, L2 scaling solutions will play a key role in promoting a multichain world. This will put the onus on developers to ensure that growth is sustained without compromising the security, decentralization and scalability tenets blockchains are known for.