Startups are building for web3.
But Ethereum is really slow and expensive.
Gas fees can be $500+ at times!
Here is how “Layer 2” might be able to solve this.
First, the Blockchain Trilemma.
Vitalik Buterin (Ethereum’s co-founder) says that creators have to sacrifice one of these 3 elements: Security, Decentralization, Scalability.
For example, Ethereum’s strength is in security and decentralization. As a result, it’s not very scalable (slow and high fees).
Layer 2 is a secondary framework built on top of an existing blockchain system (AKA base layer, layer 1, or main chain).
These “layer 2 scaling solutions” can be built on Ethereum to make it faster and efficient. While also leveraging Ethereum’s security and decentralization capabilities.
You lock up your funds and use a virtual version to make transactions. But this method can only be used for transactions, not smart contracts or code.
Uses a number of “child chains” (copies of the main chain) to offload transactions. But they have long waiting periods to withdraw funds and also can’t be used for smart contracts.
Secondary blockchains attached to the main chain. They use their resources to help offload the work for the main chain. But as it is a separate blockchain, security can be a concern.
They basically roll up many transactions into a single transaction and then push that onto the main chain. There are 2 types of rollups.
ZKrollups are faster but they can’t use smart contracts.
Optimistic Rollups allow for work with smart contracts but are slower.
Bitcoin Lightning Network: Designed to make Bitcoin transactions fast and cheap.
Polygon: Sidechain aggregating scalable solutions on Ethereum.
Gnosis Chain (formerly xDai Chain): Sidechain scaling solution for Ethereum
Arbitrum: Optimistic rollup to scale Ethereum
Optimism: Optimistic rollup to scale Ethereum
Immutable X: First Layer 2 for NFTs on Ethereum
loopring: ZKrollup protocol to scale Ethereum
starkware: ZKrollup protocol to scale Ethereum
aurora: NEAR’s Layer 2 scaling solution
Layer 2 solutions are bringing the scalability we need for Ethereum.
If this is how the market shifts, it can greatly accelerate web3 startups.
https://www.youtube.com/watch?v=9pJjtEeq-N4&ab_channel=WhiteboardCrypto
https://www.youtube.com/watch?v=BgCgauWVTs0&ab_channel=Finematics
https://www.youtube.com/watch?v=IijtdpAtOt0&ab_channel=Finematics
https://www.finextra.com/blogposting/21237/top-ethereum-layer-2-networks
https://coinmarketcap.com/alexandria/article/what-are-cryptocurrency-layer-2-scaling-solutions
This is a special newsletter. Every week, we deconstruct the best crypto trends and share those insights with you.