Part 6: The Layers of Blockchain — L2

Layer two (L2) is where most of the fun is happening at the moment. It’s also the most complex concept in this entire series but can be made a lot simpler than most people make it.

If you remember our car analogy, an L2 network is like a GPS being added to our car. It’s not made by our car manufacturer, but it was designed to dramatically improve the experience of driving the car. People can now get to destinations faster by saving time navigating. In fact, it’s such a bonus that people may even choose to use that model of car with the special GPS over another model of car where that accessory is not sold. An L2 network is very similar.

Technically speaking, it refers to a secondary protocol or framework that is built on top of an existing blockchain. The main goal of these secondary networks is to improve the L1 blockchains, usually by making them faster.

The major problem with using decentralised networks is that they are slow, far slower than a centralised server. Visa processes around 1,700 transactions per second, which is impressive compared to Bitcoin’s 7 transactions per second. Right now, the scalability and speed of public blockchains is the largest obstacle to mass adoption.

Enter L2 networks. Many companies have been created to explore solutions in scaling these more secure and decentralised blockchains (Ethereum and Bitcoin). While there are plenty of blockchains which offer incredibly fast throughput (Solana, Avalanche etc), they make trade-offs with security and decentralisation. This is why most L2 companies focus on improving Ethereum and Bitcoin because they are the most secure and decentralised networks that exist.

It’s like GPS companies making custom products for the largest car manufacturers because they should be around for the longest.

So what are the different types of L2 networks that exist?

• Zero-Knowledge Roll ups (ZK)
• Optimistic Roll ups
• Plasma

Currently, it looks like ZK roll ups will be the future of Layer 2 and will scale Ethereum up to 2,000 transactions per second. We will focus on ZK rollups because they appear to be the most promising solution on the market. It is possible that each will be implemented for different use cases, although this is less likely as most other scaling solutions make trade-offs that are sub-optimal for any use case such as lock up periods where you can’t use the asset for several days

They work by reducing what is uploaded to the L1 blockchain. Similar to going to the movies to buy a ticket. Each time you buy a ticket you wait in line and then purchase one. If the movie is popular, the line will be long. Currently, Ethereum functions slowly because the line is so long and people have to queue up every time they want to perform a task, to buy an ice cream, popcorn or another ticket. What if, there was someone who could take your order and then queue up for you? Not only that, but they could take many people’s orders and then queue up and remember everyone’s orders. This way the line is never congested because everyone in the line is ordering for lots of other people.

This is kind of how ZK rollups work. They process things off chain (not in the line) and we can trust them because of maths (they are cryptographically secure).

For a technical explanation, please read more here.

So why is all this important? It’s important because if L2 solutions can fix Ethereum, then it may win as the dominant blockchain of the future. If it does not, then it may be dethroned by new L1 blockchains like Solana. There could also be a world where the two co-exist and some providers use L2 on Ethereum and some use Solana.

The major companies in the space are Starkware, Optimism, Arbitrum and Aussie company, Immutable X. Each are offering a different type of L2 scaling solution.

• Starkware = ZK Roll Up
• Immutable X = ZK Roll Ups
• Optimism = Optimistic Roll Ups
• Arbitrum = Optimistic Roll Ups + Plasma

Whoever wins will change the future of how people interact with public blockchains. Will Ethereum win? If so, which L2 will win?

It is important investors have a view on these questions. We are not so optimistic about optimistic roll ups and have faith in ZK Roll ups on Ethereum but believe other L1s like Solana will continue to thrive in a multichain universe. It’s not a winner takes all, and different chains will excel at different use cases.