Scaling Ethereum: A Technical Overview of Layer 2 Solutions

As the popularity of Ethereum grows, the need for an efficient and scalable network becomes increasingly crucial. The current limitations of Ethereum’s Layer 1, including slow transaction times and high gas fees, hinder its ability to handle the growing demand.

This is where Layer 2 scalability solution comes in.

By moving some of the computation off-chain, Layer 2 solutions such as State channels, Plasma, and Rollups aim to improve transaction throughput and reduce fees, providing a more efficient and scalable network for developers and users alike.

With the increasing adoption of decentralized applications and the potential for mass adoption, understanding and utilizing Layer 2 solutions is becoming increasingly important for developers and users to ensure the continued growth and success of the Ethereum ecosystem.

Understanding State Channels and How They Work

State channels, powered by Filecoin and Consensys, were the first scalability solution I ever came across, addressing issues related to the problems with Ethereum (scalability).

I took a curiosity dive at the time to learn more, and I found this amazing blog by the Graph, an indexing protocol for querying networks like Ethereum and IPFS.

Their platform enables developers to create open APIs called subgraphs, which provide easy access to data.

State Channels provide a very broad and straightforward approach to how blockchain interacts and are mostly conducted off-chain. This reduces the risk to participants without compromising security.

One of the most essential features is that it also helps to address the concerns of high gas fees and slow transaction processing times, both of which are well-known characteristics of the Ethereum network.

This was done by enabling two or more parties to conduct multiple off-chain transactions without having to broadcast every transaction to the Ethereum network.

Instead, only the channel’s start and final states are broadcasted to the network, decreasing the amount of computation required while improving scalability.

Finally, unlike chains, channels operate on a fixed set of live participants. Channel networks help to ease some of this, however, due to routing and liquidity concerns, they are currently unviable as solutions (along with a compounding of the copy problem mentioned above).

The always-on characteristic of channels is likewise unresolved.

Use Cases

State channels have a wide range of real-world use cases, from micropayments and gaming to decentralized finance (DeFi) and peer-to-peer marketplaces.

One example of a state channel in action is the Raiden Network, a decentralized off-chain payment network that uses state channels to enable fast and cheap payments on the Ethereum network.

Additionally, state channels can reduce fees for users by minimizing the number of transactions that need to be executed on the main chain.

This is because only the initial opening and final closing of the channel require a transaction on the main chain, while all subsequent transactions can take place off-chain.

Furthermore, state channels can offer increased privacy for users, as transactions that occur off-chain are not visible to the wider network. This can be particularly important for certain use cases, such as in financial transactions or other sensitive applications.

Below, is a Monorepo by State Channel of various applications using the state channel:

Exploring the Benefits and Mechanics of Plasma

Founded by the founder of Ethereum, Vitalik Buterin, alongside Joseph Poon, the duo published a paper back in 2017 where they introduced a new layer-2 scalability solution called Plasma.

Plasma is a scalability framework for public blockchains such as Ethereum. Plasma chains, as defined in the original Plasma whitepaper, are created on top of another blockchain (called a “root chain”).

Each “child chain” extends from the root chain and is generally maintained by a smart contract published on the parent chain.

This implies that Plasma may achieve far faster transaction throughput than the main Ethereum chain alone while maintaining the security and decentralization that make Ethereum so efficient.

The Plasma contract functions, among other things, as a bridge allowing users to move assets between Ethereum Mainnet and the plasma chain. Although this makes them similar to sidechains, plasma chains benefit — at least, to some extent — from Ethereum Mainnet’s security.

This is unlike sidechains that are solely responsible for their security.

It is also important to note that one of the key benefits of Plasma is increased scalability, and it achieves this by moving some of the computational work off-chain.

This implies that more transactions can be completed at a faster rate while maintaining network security and integrity.

Another significant benefit of Plasma is the significant reduction in transaction fees made possible by its unique feature of processing on-chain transactions off-chain, making it an appealing option for organizations and individuals looking to build on the Ethereum network in a more cost-effective and efficient manner.

Due to Plansma’s unique approach to handling large volumes of data and transactions without overburdening the main Ethereum network or sacrificing performance and security, dApps that intend to scale to millions of users and are built on the Ethereum network often find it to be a good layer 2 to build on.

Overall, Plasma represents a significant advancement in the Ethereum ecosystem, offering a range of benefits that make it an attractive solution for businesses, developers, and users alike.

Building on Plasma:

GenericTransaction is a Solidity library that defines a generic transaction format for Ethereum-based applications. It uses a list of five items, including txType, inputs, outputs, txData, and metaData.

The library provides functions for decoding a transaction from RLP-encoded bytes, getting an output at a specific index, and decoding an RLP item to an output. It also includes a struct for a transaction and an output to store the decoded data.

The library is designed for other Solidity contracts to process generic transactions in a standardized manner.

So, let’s say you deposit some funds into the Plasma contract. You can then use the startExit function to initiate an exit process for those funds, meaning you want to withdraw them from the Plasma contract.

This process can take a little bit of time to complete, but once it’s finished, you can use the finalizeExit function to complete the withdrawal process and receive your funds.

Of course, the actual implementation of a Plasma contract would be far more complicated, including elements like fraud proofs and block confirmation. But hopefully, this example gives you an idea of how Plasma can be used in practice.

Getting Started With Rollups

Rollups are a type of scaling solution designed to address the issues of high transaction fees and slow processing times experienced on the Ethereum network. Similar to other Layer 2 solutions like Plasma and state channels, Rollups move computational work off-chain.

However, instead of using a separate chain or sidechain, Rollups utilize a smart contract on the Ethereum mainnet to verify and batch transactions.

This approach enables Rollups to achieve high levels of scalability while still maintaining the security and decentralization of the Ethereum network.

Rollups are a promising solution for improving Ethereum’s scalability and reducing gas costs. They provide several benefits, such as increasing the number of transactions processed per second on the network and reducing transaction processing times and congestion.

By batching multiple transactions together, Rollups significantly lower the amount of gas required to execute transactions on the network, resulting in lower gas fees.

Despite these benefits, Rollups maintain the security and decentralization of the Ethereum network since they rely on a smart contract on the Ethereum mainnet for verification.

This ensures that Rollups remain secure and resistant to attacks, providing users with peace of mind when using the network.

If you’re a developer looking to get started with Rollups, here’s an example of a complete Ethereum DeFi swap and bridge application that makes use of Rollups for scaling:

First, let’s start with the smart contract for the Rollup:

pragma solidity ^0.8.0;

contract MyRollup {
    struct Transaction {
        address from;
        address to;
        uint amount;
    }

    Transaction[] public transactions;

    function batchTransfer(Transaction[] memory _txs) public {
        for (uint i = 0; i < _txs.length; i++) {
            transactions.push(_txs[i]);
        }
    }

    function processBatch() public {
        for (uint i = 0; i < transactions.length; i++) {
            Transaction memory tx = transactions[i];
            tx.to.transfer(tx.amount);
        }
        delete transactions;
    }
}

This Rollup contract allows for batch transactions to be submitted and processed off-chain, reducing the gas fees and congestion on the Ethereum mainnet.

Next, we have the DeFi swap smart contract:

pragma solidity ^0.8.0;

interface IERC20 {
    function transferFrom(address sender, address recipient, uint256 amount) external returns (bool);
    function approve(address spender, uint256 amount) external returns (bool);
    function balanceOf(address account) external view returns (uint256);
}

contract MyDeFiSwap {
    IERC20 public token;

    constructor(address _token) {
        token = IERC20(_token);
    }

    function swap(uint amount) public {
        // Transfer tokens from user to contract
        require(token.transferFrom(msg.sender, address(this), amount), "Transfer failed");

        // Perform swap logic here
        // ...

        // Transfer swapped tokens back to user
        require(token.transfer(msg.sender, swappedAmount), "Transfer failed");
    }
}

The swap function in this contract allows users to swap tokens by transferring them to the contract, performing the swap, and transferring the swapped tokens back to the user.

Finally, we have the bridge contract that interacts with the Rollup and DeFi swap contracts:

pragma solidity ^0.8.0;

interface IMyRollup {
    function batchTransfer(Transaction[] memory _txs) external;
    function processBatch() external;
}

interface IMyDeFiSwap {
    function swap(uint amount) external;
}

contract MyBridge {
    IMyRollup public rollup;
    IMyDeFiSwap public swap;

    constructor(address _rollup, address _swap) {
        rollup = IMyRollup(_rollup);
        swap = IMyDeFiSwap(_swap);
    }

    function swapAndBatchTransfer(Transaction[] memory _txs, uint swapAmount) public {
        swap.swap(swapAmount);
        rollup.batchTransfer(_txs);
        rollup.processBatch();
    }
}

The swapAndBatchTransferfunction in this contract performs a token swap on the DeFi swap contract, batches the transfer of tokens to multiple recipients using the Rollup contract, and then processes the batch off-chain to reduce gas fees.

It is important to note that in a real-world application, there would be additional code for user interfaces, testing, and deployment.

Overall, Rollups offer several benefits that can help make the Ethereum network more efficient, scalable, and cost-effective, making them a promising solution for addressing the challenges facing the network.

To make use of Rollups, leading organizations building with the technology also provide existing code examples, such as the Optimistic Rollup implementation from the Optimism team, the ZK-Rollups implementation from Matter Labs, and Taiko Labs’ implementation of their ZK-EVM.

Comparison and Applications of Layer 2 Solutions

Layer 2 scaling solutions such as state channels, Plasma, and Rollups are gaining traction amongst developers due to their ability to address the issues of high fees and slow transaction processing times on the Ethereum network.

However, each solution has its own advantages and disadvantages, and you should carefully consider which approach is best suited for you based on their specific use cases.

As a developer, it’s crucial to comprehend the technical distinctions between state channels, Plasma, and Rollups in order to determine the most appropriate Layer 2 solution for a specific use case.

These solutions offer varying approaches to enhance the efficiency and scalability of the Ethereum network.

State channels allow users to open a channel between two parties on the mainchain, conducting multiple transactions without committing them to the blockchain immediately.

This approach greatly reduces gas costs and increases transaction throughput, making it suitable for use cases like micropayments for online content or services, such as pay-per-view videos, pay-per-use services like ride-sharing or bike-sharing, and gaming.

However, the parties must be online and willing to sign transactions, and disputes can be expensive to resolve due to the need to go on-chain to do so.

Plasma uses a sidechain to process transactions off-chain, reducing gas costs and increasing transaction throughput. It can support more complex smart contract functionality than state channels and is suitable for use cases that involve frequent but small transactions.

Decentralized exchanges (DEXs) and gaming, where players can make in-game purchases or bet on game outcomes, are examples of use cases that can benefit from Plasma.

However, users need to exit the sidechain to settle their funds on the mainchain, which can be time-consuming and costly.

Additionally, the implementation of Plasma is still in active development, with multiple approaches being explored.

Rollups use a smart contract on the mainchain to batch and verify transactions off-chain, achieving high levels of scalability while benefiting from the security and decentralization of the Ethereum network.

They can support the same smart contract functionality as the mainchain, making them useful for use cases that require a high degree of security and decentralization. Prediction market platform Augur and decentralized exchange Uniswap are examples of real-world applications of Rollups.

Users do not need to exit the mainchain to settle their funds, making it a more user-friendly option.

However, implementing Rollups can be more complex than state channels or Plasma due to the need for additional infrastructure such as an aggregator, and the initial deposit required to use a Rollup can be high, making it less accessible to smaller users.

Overall, the best Layer 2 solution for a given use case will depend on factors such as the types of transactions being conducted, the desired level of decentralization, and the level of complexity that can be tolerated.

By carefully evaluating the strengths and weaknesses of each solution, you can choose the solution that best meets their needs.

Conclusion

To sum it up, Layer 2 solutions are crucial for the future of Ethereum. They offer a promising solution to enhance the scalability, efficiency, and usability of the network. This opens up new possibilities for various applications and use cases.

Therefore, it’s important for developers and stakeholders in the Ethereum community to keep exploring and creating innovative solutions to ensure the network’s sustained progress and prosperity.