Blockchain infrastructure has evolved to encompass an ecosystem of Tier 1 and Tier 2 networks.

In this article we will explore the difference between the two and how layer 2 networks and other scaling methods such as sidechains attempt to address the scalability challenges of layer 1 blockchains.

What are Layer 2 networks?

Simply put, Layer 2 networks are blockchain networks that live above a layer 1 network such as Ethereumwith the layer 1 network providing the base layer of infrastructure and security for the networks that rely on it, validating transactions and achieving consensus.

Layer 2 networks use a variety of technologies to address the scalability bottlenecks of the Layer 1 blockchain, which are caused by transfer and transaction costs.

Ethereum, for example, currently handles about 14 transactions per second (TPS), per blockchain explorer Etherscan. Visa, by comparison, processes around 65,000 transactions per second.

Scalability issues are most pronounced during periods of high network activity, when blockchain networks experience increased transaction fees (also known as gas fees), along with network congestion and reduced transaction times.

In 2017, Ethereum creator Vitalik Buterin identified “scalability trilemma” for blockchains, claiming that they are up to the challenge of processing thousands of transactions per second while remaining secure and adhering to the ethos of being decentralizedthat is, it runs without the need for centralized control.

theory, imported from computer scienceis that a network can only focus on two of these principles at the expense of the third.

Ethereum’s solution to the scalability problem is to focus on making its own layer 1 blockchain network as secure and decentralized as possible, while outsourcing scaling to the layer 2 networks built on its infrastructure.

How do scaling networks work?

Scale-out networks implement a variety of different solutions to help address layer 1 network scalability challenges.

These networks include transaction pooling or off-chain transaction processing using sidechains or layer-2 packets.

Side chains

Sidechains are blockchains that run independently of the layer-1 chain, with their own token and consensus mechanism.

It connects to the layer-1 blockchain via a bridge, which uses a smart contract to “lock” assets on the layer-1 chain and creates a mirror image of those tokens on the sidechain, with the value of those tokens tied to the locked asset.

These mirrored tokens are then used to perform transactions, after which they can be destroyed, releasing the tokens locked on the layer-1 chain.

rollup sites

rollup sites takes a different approach by aggregating (hence the name) multiple transactions, presenting them to the layer-1 blockchain as a single transaction that can be processed much faster than individual transactions.

There are two main types of rollups: optimistic rollups and zero-knowledge (zk) rollups.

Optimistic rollups assume all accumulated data is valid, allowing people to challenge transactions after the fact to determine whether they are legitimate or not. The disputed transaction is sent directly to the Tier 1 network to resolve the dispute, with both parties potentially losing the staked tokens if they are proven to be wrong.

Zero Knowledge Packs it uses zero-knowledge proofs, a cryptographic technique that can be used to prove that something is known without revealing the known information directly. Transactions are accumulated in batches that are executed off-chain, with the completed batch being transmitted to the level 1 chain using a zk-proof that proves the proposed state changes are correct.

Ethereum scaler you need to know

There are a number of different layer 2 networks and sidechains that are being built on top of or alongside Ethereum, each with their own preferred technology solution to scale layer 1. On CoinGecko data, the following are the largest Ethereum chains by total value locked (TVL), as of November 2024.

The base

Incubated by crypto exchange Coinbase, The base is built on the Ethereum Optimism scaling solution. It has quickly established itself as a leading player in the layer 2 space that follows it launch in August 2023, increasing to over a million addresses in just 11 days. According to Coinbase CEO Brian Armstrong, the exchange has without plans to launch a token for Base and is trying to make Base “something that’s much broader” than a Coinbase-led project.

Arbitrum

Created by Offchain Labs, Arbitrum it uses bullish accumulation to scale Ethereum, with a claimed 40,000 tps versus Ethereum’s more imposing 14 tps. In March 2023, Arbitrum launch its native ARB token for governance, handing over control of the project to a Decentralized Autonomous Organization (DAO) made up of community members.

Polygon

Formerly known as Matic Network, Polygon takes a multi-pronged approach to scaling, implementing multiple solutions including its main POS chain (sidechain), Plasma chains, zk-rollups, and optimistic packages. It aspires to be more than just a scaling solution, presenting itself as a platform for launching interoperable blockchains. In September 2024, this one has completed its migration from its original native token MATIC to a new token, POL.

Optimism

Launching on the main network in January 2021, Optimism— as the name suggests — uses optimistic packets, which assume that all transactions in the packet are valid. Optimism further compresses the data in its packets using a sequencer, before sending the transaction data to the Ethereum main chain. Validators for each rollup have one week to query the packet if they believe it contains fraudulent data.

Scroll down

A relatively new entrant in the layer-2 space, Scroll launched on the mainnet in October 2023. The platform uses zkEVM technology in batch trials, leveraging “bytecode-level compatibility” with Ethereum Virtual Machine support to ensure EVM applications and tools are compatible “out of the box.” Scroll launched its SCR token in October 2024 airdrop.

Explosion

Launched by a team led by Tieshun “Pacman” Roquerre – founder of NFT marketplace Blur – in February 2024, Explosion differentiates itself from other tier 2 networks with features including native yield for ETH and stablecoins. Layer-2 led a airdrop of its native BLAST token in June 2024

The Future of Layer 2 Networks

Layer 2 networks form a key part of Ethereum’s “rollup-centric roadmap”. conformable Ethereum co-founder Vitalik Buterin, who hopes to use layer 2 solutions to increase the blockchain’s ability to handle over 100,000 transactions per second.

Buterin has outlined plans to converge Ethereum’s two scaling strategies, sharding and layer-2 protocols, in what he described as “The Surge”. This roadmap would see Level 2 blockchains implement cryptographic solutions such as SNARKs (Succinct Non-interactive Argument of Knowledge) to ensure transaction integrity. Buterin is also trying to ensure that Layer 2 networks inherit Ethereum’s core principles of trustlessness, openness, and resistance to censorship.

Layer 2 networks are not just limited to Ethereum. In June 2024, coders from BitcoinOS alleged to have checked a zk-proof on Bitcoin mainnet for the first time, opening up the possibility of using rollups to scale Bitcoin. Solana also shows an increase in layer 2 activity, such as via Game-centric Sonic SVM network.

Meanwhile, new Tier 2 networks continue to appear on Ethereum. In October 2024, decentralized exchange Uniswap announced development plans its own layer 2 networkUnichain, using Optimism technology, plus centralized exchange Kraken will launch its own Layer 2 based on optimism called Ink.

Edited by Andrew Hayward