Ethereum Layer 2 Projects: Faster, Cheaper Blockchains for Everyone

Ethereum is one of the most popular blockchains. It popularized smart contracts and is the go-to blockchain for both DeFi and NFTs. But that popularity has its downsides:

When demand for the network is high, gas fees spike and transaction speeds slow down. 

During the 2021 NFT hype, it wasn’t uncommon to pay $100 in gas fees for a single transaction. 

While the high demand on ether drove up the price, it also made many Ethereum transactions pointless. Swapping $50 of stablecoins to ETH doesn’t make sense if the transaction itself costs $100.

That’s why almost everyone, including Ethereum inventor Vitalik Buterin, agrees that layer 2 networks are the future. They’re new networks designed to make blockchains faster and cheaper to use without sacrificing security. 

Let's dive in.

What are Layer 2 Solutions?

Layer 2 solutions are networks which aim to scale the Ethereum network by processing transactions off the main Ethereum chain (Layer 1). 

That might sound a bit technical, but you can imagine it like traffic: 

The highway doesn’t take you all the way home (or all the way to work). If there was a single 8-lane highway expected to reach every single address in your city, everyone would be stuck on that highway all day.

Instead, the highway is what gets you from one smaller, more specialized road network (your town) to another smaller, more specialized road network (the town you work in). Those roads are far less crowded because the only people who drive there are people who need to be in that specific town. That makes it possible to create smaller roads (no 8-lane highways) and keep the streets less crowded. 

Ethereum layer 1 is like the big highway, while layer 2 solutions are like infrastructure in individual towns. 

But for most of Ethereum’s history, it was almost the only road, built without knowing which towns it needed to connect. That’s changing now: More and more transactions are happening on layer 2 networks. 

From a (simplified) technical perspective, layer 2s basically complete transactions on a separate blockchain (sidechain) before being batched together and added to the underlying blockchain (Ethereum mainnet). 

This increases transaction speed and capacity while inheriting some of the security and trustworthiness of Ethereum mainnet (because transactions settle there).

Why Ethereum needs Layer 2s

Ethereum mainnet’s recent challenges are a result of its success. The “highway” would never have been too crowded if there weren’t a ton of people who want to drive on it. 

But more users mean more transactions, and Ethereum's current design can only process about 15-30 transactions per second (TPS) at slow speeds and high gas fees.

Layer 2 solutions address these challenges. Built on top of Ethereum, you can use the same wallet and approve transactions the same way, but at faster speeds and lower costs. Compare the gas fees for an NFT mint on Ethereum mainnet and on the Optimism L2 network: 

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This makes Ethereum more usable for everyone, from individual users to businesses and developers. Layer 2s are essential for Ethereum to reach its full potential and for the broader adoption of blockchain technology.

How to Use Layer 2 Networks

To start using a layer 2 network, you generally need to transfer your tokens from the Ethereum mainnet (Layer 1) to the layer 2 platform. This is often done via a process known as 'bridging.' 

This simply means you’re moving the funds from one network to another. It’s like arriving in a country and exchanging some of your money for their local currency. In practice, here’s what that looks like in a transaction simulation in our Chrome extension:

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You’re sending your ether to a smart contract, which then dispenses your ETH to you on the layer 2 network (this simulation was created using the zkSync bridge). 

It might be a bit confusing, but you have an ETH balance on each layer 2, meaning you can have ETH on mainnet, on Polygon, on Optimism and zkSync. 

Once your tokens are on the Layer 2 network, you can transact as normal on any dApp that supports that network—with significantly lower fees and faster transaction times. When you're done, you can 'bridge' your tokens back to the main Ethereum network (or keep them on layer 2 for later).

What could go wrong?

Almost everyone agrees that layer 2 networks are the future of Ethereum. But that doesn’t mean they’re perfect. Layer 2s can potentially have a few downsides: 

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• UX: Web3 is already known for clunky UX and being difficult to use. By adding additional steps like bridging, the UX aspect of crypto does not get better. Luckily, account abstraction offers to transform that UX aspect.
• Security: One of the main upsides of Ethereum mainnet is its high security. It’s unlikely to get hacked. A less proven layer 2 developed by a startup may not offer the same level of security.
• Centralization: Because layer 2s usually have fewer validators than Ethereum mainnet, it’s easier for fewer parties to control a majority of the network, which goes against the web3 ethos of decentralization.

Now that we’ve explored how L2s work and what they are, let’s explore a few:

Polygon: The Most Popular Layer 2?

Polygon (previously known as the Matic Network) is one of the most popular Layer 2 solutions. 

It's a multi-chain scaling solution for Ethereum that provides faster, low-cost transactions. Polygon is compatible with Ethereum's network and tools, which means that it's an easy transition for users and developers.

Polygon is not only one of the most well-known, but also one of the most well-funded Ethereum layer 2 solutions. Their capital has enabled the team to: 

• Launch Polygon Studios, an initiative that focuses on accelerating the growth of web3 gaming, metaverse and NFT projects. 
• Acquire scaling protocol Mir for $400 million and relaunch it as zkEVM.

Optimism: Ethereum at Warp Speed

Optimism is a Layer 2 scaling solution that uses a technology called Optimistic Rollups. It essentially provides instant transaction confirmations, gas fees of fractions of a penny and enables developers to deploy their DApps seamlessly. 

Many dApps use Optimism as their preferred L2, including the popular web3 publishing platform Mirror. The team behind Optimism also recently released a set of open-source components called Bedrock, which lowered fees, sped up transactions and made it easier for developers to build Ethereum-compatible dApps on Optimism.

Optimism is also highly modular, which has attracted various high-profile builders to build using its open source OP stack. Coinbase’s Base is built using Optimism, as is Worldcoin. 

While those were created by big players, web3 native organizations have also created their own chains using Optimism:

Zora Network

Zora is an NFT protocol founded by Jacob Horne which is immensely popular with independent artists and creative collectives like Friends With Benefits. 

Zora recently launched their own layer 2 solution to enable more artists and creatives to turn their artwork into NFTs at lower costs. 

Arbitrum One

Arbitrum One, developed by Offchain Labs, also uses Optimistic Rollups to scale Ethereum. It allows for the execution of smart contracts at a much lower cost and with faster transaction times, providing a smoother experience for users.

The technology behind Arbitrum is similar to that behind Optimism, but the ecosystem it has attracted differs. Arbitrum is perhaps most famous for its recent $ARB airdrop and for housing the web3 gaming ecosystem treasure. 

zkSync

zkSync is a Layer 2 scaling solution that uses a technology known as Zero-Knowledge Rollups. It involves complex 'zero-knowledge' cryptography which allows for all transaction validation to be done without the validator needing to know all the transaction details, providing both scalability and privacy.

The technology behind zkSync is different from that behind optimistic rollups like Arbitrum and Optimism. One person who’s especially excited about zero knowledge rollups is Vitalik Buterin, which bodes well for the budding technology.

Layer 2 NFTs: The Next Evolution?

During the 2021 PFP NFT craze, gas fees often skyrocketed, especially during high-profile launches. The incredible demand dove prices up and made traders happy, but also made NFTs inaccessible to many. 

Layer 2 NFTs only cost a few pennies to mint or trade, which makes them perfect for utility-based NFTs: ZED Run’s horse-racing game runs on Polygon, the gaming ecosystem Treasure is build on Arbitrum. 

To buy these NFTs, many marketplaces have integrated layer 2 solutions. But there are also layer 2 NFT marketplaces like qx.app, which serves the Optimism ecosystem.

Account Abstraction: Simplifying Layer 2

For all the speed, savings and scalability that layer 2s bring to web3, they are difficult to use: You have to bridge funds in a transaction that can take 20 minutes to settle—and then discover that the dApp you intend to use isn’t supported on the layer 2 you’re on. 

Account abstraction gives wallets the same powers as smart contracts, which could improve Ethereum layer 2 UX in a few ways:

• Simplify transactions: Because smart contract wallets can process transactions in the background, you could soon interact with smart contracts on layer 2 with a single click. While your wallet would still change networks, bridge the funds and then complete the transaction, it will happen in the background after you click “approve”. 
• Pay gas in any token: While gas fees are usually cheap on layer 2, they’re not zero. Transacting on L2 can require you to have two tokens, adding extra friction to the process. Account abstraction lets you pay gas in any token (your wallet converts them on the backend), eliminating the need to deposit even more onto layer 2 networks.

Bonus: How Ethereum Layer 2s Work

At this point, you know why we need layer 2s, how to use them and have explored a few. While we don’t want to get overly technical in this article, we know some readers are interested in the background of the technology of EVM layer 2s. 

We won’t get into the cryptography or mathematics behind them, but if you’re curious, we’ll explain different types of rollups using the highway metaphor we established at the beginning of this article:

Rollups: Imagine you're on a bus with a bunch of other people (your transactions) going down the Ethereum highway. Instead of each car (transaction) taking up space, you've efficiently bundled into one vehicle (a single transaction). Pretty smart, right? But there are two types of buses:

• Optimistic Rollups like Optimism are like an honor-system bus. Everyone pays their fare in a box (bundled transaction), and it's assumed everyone is honest. But if someone cheats and a passenger (validator) calls them out, the bus stops, and the cheater is kicked off. Optimistic rollups bundle transactions together and assume they're all valid unless proven otherwise.
• zkRollups (zero knowledge rollups) like zkSync are secretive. They rely on a method called zero-knowledge proofs. Imagine you could prove you paid your bus fare without showing your ticket or saying a word. That's what zkRollups do. They can confirm the validity of transactions without revealing any transaction data, which makes them ideal for privacy-driven applications.

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Sidechains or State Channels: These are like private roads or carpool lanes that run parallel to the Ethereum highway. They have their own rules and speed limits but link back to the main road. They process their own traffic (transactions) and only interact with the main Ethereum road when they need to, like merging or exiting.

• State Channels are the carpool lanes of Ethereum. You and another driver agree to use this fast lane, bypassing traffic. All the quick back-and-forth happens in the carpool lane (off-chain), and only when you're done do you merge back into the main lanes (on-chain) to finalize everything.
• Plasma chains are like private toll roads, which also run alongside the main Ethereum highway. They deal with their own traffic and only occasionally report back to the main Ethereum road.

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