Looking at all the cryptocurrencies on tracking sites like Coinmarketcap.com can leave most beginners confused by the number of tokens offered to the public. Layer 1, Layer 2, metaverse, DeFi, gaming, liquid staking, real-world assets, memes and the like are like toys in a big toy store. Each has its own separate world.
One of the most recent types of tokens to hit the market are called Layer 2 Scaling Solutions. Examples of these tokens are Optimism, Arbitrum, zkSync, Polygon zkEVM, Consensys Linea, Coinbase Base, Starkware and some that are not very popular yet. acquaintances.
Ethereum founder Vitalik Buterin stated something called the Blockchain Trilemma. A blockchain attempts to be secure, fast and decentralized. But according to Buterin, it is very difficult to achieve all three. Ethereum, for example, is secure and decentralized, but quite slow. Sometimes transactions can take about an hour to finish if the network is congested. It is secure and decentralized because more than 500,000 independent validator nodes now secure the network and approve transactions by consensus. That’s why it’s also slow compared to a blockchain that only has a handful of nodes that validate transactions by consensus.
Early blockchains like Ethereum, Solana, Cardano, Binance Smart Chain and others basically tried to do all the work of a blockchain themselves. This is similar to a restaurant manager who is also the one who takes orders, cooks food, cuts vegetables, runs the cash register, serves drinks, and cleans tables and floors. The next customer would have to wait until the one-man team is ready to take their order. Hence, a long queue forms outside the restaurant.
The new layer 2 scaling solutions basically take some of the functions of blockchain and only perform the final settlement on the Ethereum chain. For the user, they may not realize and be surprised that Ethereum is still behind the scenes as the one recording the final transaction. But the initial part of the transactions is handled by layer 2 chains.
Some time ago, Ethereum underwent an upgrade called Shapella. This update allowed people who staked their ETH to validator nodes to withdraw them. Another upgrade that was made earlier was moving from Proof of Work (like Bitcoin) to Proof of Stake.
The problem is that Ethereum transactions are still slow and gas (transaction) fees are still expensive. This is actually what layer 2 scaling solutions want to address. For example, someone who wants to buy an NFT might not want to pay $50 in transaction fees for a $200 NFT. On the other hand, the buyer might be more receptive if the transaction fee was only $5, but the transaction is done on a layer 2 scaling solution which in turn ends up on Ethereum.
On the other hand, if you’re making a transaction worth a million dollars, having the security of Ethereum could be worth a $20 gas fee just for your own peace of mind.
The way layer 2 solutions work is like dealing with the waiter and waiter at a restaurant, when ordering, serving and paying. But you don’t actually see the chef who prepared your food. This is how a layer 2 scaling solution works. It still works on top of Ethereum, but you only see the fee and speed of the scaling solution.
One problem that arises when you have a lot of Ethereum layer 2 tokens is that when you use a distributed application (dApp), you need a type of layer 2; then for another dApp you need another layer 2. This is somewhat similar to having non-tradable poker chips from one casino to another. Although right now you can bridge these different assets, every time you do so, you pay gas fees.
Whether this strategy of doing most functions at layer 2 on top of Ethereum will dominate other monolithic layer 1, “do everything” blockchains is still an open question. But it looks like the next wave of layer 2 tokens will try to do just that.
Zain Jaffer is the CEO of Zain Ventures focused on investments in Web3 and real estate.
This article was published through the Cointelegraph Innovation Circle, a vetted organization of top executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. The opinions expressed do not necessarily reflect those of Cointelegraph.