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The importance of Ethereum layer 2 scalability solutions

Posted by
Ilya Abugov

With DeFi projects more active around the subject, it looks like layer 2 solutions are going to get their moment in the spotlight.

Business is about costs and benefits. DeFi and NFTs on Ethereum have offered the market a multitude of revenue opportunities, but the fees have become so exorbitant that the industry has started to price out retail users.

While Ethereum 2.0 is slowly making its way towards launch the community has been playing with layer 2 scalability solutions to alleviate the pain of slow expensive transactions. 

The main goal of these is to reduce activity on the Ethereum blockchain, by moving transactional activity elsewhere, while still maintaining the main chain as the guarantor of security.

With DeFi projects starting to be more active around the subject, it looks like layer 2 products are going to get their moment in the spotlight. As such, It is vital to understand those solutions making an impact and take a look at the key projects operating on those side chains. 

Plasma

This approach is based on utilizing Plasma chains to do most of the heavy lifting and then sending proofs up to the Ethereum main chain, to maintain validity and security.

This provides tremendous efficiency improvements within the Plasma network but has significant limitations when it comes to withdrawing assets from it.

Key Plasma Projects

OMG Network – the project utilizes the MoreViable Plasma implementation and has already integrated with Tether.

Source: omg.network

Matic Network

Matic is a hybrid implementation of Plasma that utilizes PoS validation. The project has been active in the DeFi space, setting up an incubator program and bringing Chainlink onto the platform.

Source: matic.network/matic-litepaper.pdf

DappRadar will begin tracking the Matic dapp ecosystem from the middle of October.

Rollups

The key competitor to the Plasma solution is Rollups. Similar to Plasma, Rollups take advantage of off-chain computation and sends transaction packages to the mainchain.

The high-level approach may seem very similar, but the method of aggregating off-chain transactions and posting data to the mainchain varies, creating separate benefits and drawbacks.

Source: defirate.com

Key Rollups Projects

Optimism PBC – this project uses the optimistic rollup approach, which is less strict in terms of checking state transitions. The project has released a testnet and has started trialing its solution with Synthetix, with other DeFi projects looking to join as well.

StarkWare – this project utilizes ZK-rollups which mandate that every state transition comes with a Zero-Knowledge Proof. The project has partnered with dYdX to build a Perpetual Contracts product.

Loopring – the exchange is also experimenting with ZK-rollups as part of Loopring Pay.

Others of note

While Plasma and Rollups have taken up most of the media real estate they are not the only options being considered for improving scalability on the network.

Raiden Network  – this project, represents the state channel approach, which approximates to having the Lighting Network on Ethereum.

Skale Network – a project that utilizes a hybrid solution with elastic sidechains.

Implementation and drawbacks

With fees skyrocketing over the summer, scalability has become a pressing issue in the industry. As such, projects working on these solutions have received more attention. However, integrations have been limited in numbers.

Teams may be waiting to get more clarity on Ethereum 2.0 hoping to avoid doing multiple integrations. Also, as composability within the DeFi space has become a key feature, shifting projects to different scalability solutions may require adjustments in how different dapps communicate.

Still, given the detrimental impact of high fees on the Ethereum ecosystem, it is encouraging to see that progress is being made to alleviate the issue.

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