Layer 2 has revolutionized Ethereum with lightning-fast transactions and low costs. Ethereum pioneered smart contracts and dApps — today, L2 blockchains inherit its security while making these contracts highly efficient. Here’s how they supercharge decentralized interactions.
Ethereum’s scalability woes
Inherent shortcomings hinder Ethereum’s ability to support the demand for smart contracts. The veteran chain has long struggled with reconciling security, scalability, and decentralization.
According to this well-known trilemma, it is only possible to enhance two of the properties with a compromise on the third. For Ethereum, these two priorities are security and decentralization.
Layer-2 (L2) solutions address the remaining piece of the puzzle — scalability — by resolving transaction bottlenecks. Smart contracts on these networks are faster, more cost-effective, and more efficient overall.
These enhanced self-executing agreements support a myriad use cases, from payments to supply chain management to property ownership.
How Layer-2 solutions work
L2 blockchains are based on secondary protocols running atop Ethereum’s primary chain (Layer 1). They process transactions independently before combining them into batches — single transactions recorded on the main chain.
Validators or relayers ensure the accuracy of the off-chain data. By offloading some processing tasks from the Ethereum mainnet, L2 blockchains advance the development and deployment of smart contracts.
Layer 2 vs. Layer 1: Overview of advantages
Layer-2 smart contracts are superior to Ethereum’s primary layer. Their agile infrastructure and scalability focus are well-positioned to address emerging challenges and integrate tech advancements.
1. Supercharged throughput
L2 solutions offload transactions from the main chain, reducing congestion and speeding up contract execution. Furthermore, Layer 1 maintains network integrity, which they inherit. As a result, dApps can handle more transactions without sacrificing efficiency or security.
2. Lower fees
Following the Dencun upgrade in March 2024, L2 transaction costs dropped by 50–99%. As of June 20, the average Optimism, Polygon, and Arbitrum One fees are below $0.01, compared to around $0.74 for Ethereum gas fees.
Thus, transactions on L2 are not just cheaper, but dramatically so — a crucial benefit for users and businesses. Enhanced efficiency and convenience are key aspects that make L2 solutions so intriguing.
3. Interoperability
As L2 solutions are inherently interoperable with Layer 1, developers can utilize Ethereum’s infrastructure and reach a wider user base. Smart contracts may be programmed to interact with multiple blockchains, leveraging their unique features for a more versatile and seamless ecosystem.
4. Higher speeds
With fewer on-chain interactions needed, L2 smart contracts have shorter transaction confirmation times, enhancing the usability and responsiveness of dApps.
Transactions occur almost instantaneously in comparison with Layer 1. This is particularly important for gaming dApps and those facilitating real-time payments.
5. Security and privacy
L2 blockchains inherit Ethereum’s robust security, backed by approximately 1 million validators and over $100 billion in stakes. This provides a secure environment for dApps with enhanced privacy features, reassuring users about the safety of sensitive data.
6. Improved user experience
Designed with users in mind, L2 smart contracts eliminate delays and reduce gas fees, improving interactions with dApps.
The combination of scalability, lower costs, and increased speed changes how we interact with blockchain technology. It translates into better wallet integrations, simpler onboarding, and more intuitive interfaces, which are crucial for mainstream adoption.
Layer-2 solutions for smart contract development
L2 solutions address smart contract scalability in various ways. Ethereum developers should consult Ethereum Improvement Proposals (EIPs) — standardized frameworks ensuring compatibility across platforms and projects. Bitcoin has its own range of L2 options.
State channels
These solutions enable direct communication between participants off-chain — without needing a third party, like a miner, to confirm their transactions. Opening a channel is an on-chain transaction. Then, any number of transactions between the parties happen through the channel off-chain.
State channels accelerate processing, lower costs, and boost scalability by unburdening the main chain. Multi-signature technology temporarily locks a portion of the blockchain, adding the channel’s final state once the transaction is approved. Hence, the main chain only records the resulting state of interactions.
Zero-Knowledge Rollups (ZK-Rollups)
ZK-Rollups offload transactions from the main blockchain but relay only a small amount of data with a cryptographic proof — validity proof. This technology ensures the validity of transactions and data privacy, as it does not require revealing specific information.
ZK-proofs also reduce gas fees, making settlements prompt. They save significant amounts of processing energy, eliminating the need for essential data about the digital agreements. The proof, known as a Succinct Non-Interactive Argument of Knowledge, ensures transaction integrity.
Optimistic Rollups
Unlike ZK-Rollups, Optimistic Rollups are assumption-based and use fraud proofs. Aggregators publish minimal data on Layer 1, assuming it is correct unless proven otherwise — hence the name.
Verification is not immediate. Instead, if a transaction is disputed, the L2 blockchain validates it through a fraud-proof process, penalizing the sender if they are dishonest. Both processing times and gas fees decrease, while compatibility with existing contracts streamlines migration.
Plasma
This framework creates child blockchains anchored to the “parent” mainnet. Each has its specific consensus mechanism and periodically commits a summary of the processed transactions to the main chain, removing congestion risk.
Plasma allows withdrawals from the child chains to the main one. It supports massive scalability and customization for various use cases, including decentralized exchanges (DEXs), gaming, and dApps with unique consensus needs.
Sidechains: Why they are different
Unlike L2 blockchains, sidechains rely on their own security. These are autonomous networks running parallel to the main chain. A two-peg system enables asset exchange between the two. Some sidechains are dependent, which means they derive all assets from transfers from the primary chain.
Sidechains provide development flexibility and reduce congestion on the primary chain. They support unique governance mechanisms or consensus algorithms, serving diverse needs, from private enterprise applications to cross-chain asset transfers.
Smart contract development process on Layer-2
The development process for L2 solutions involves several technologies, such as Optimistic Rollups or ZK-Rollups. Solidity remains the preferred programming language.
1. Explore: Developers should assess each solution’s use cases and strengths, such as throughput, implementation difficulty, and available development libraries.
2. Code: Development should align with the standards of the chosen solution, ensuring contract compatibility with the Ethereum Virtual Machine (EVM). Simplifying contract logic can make auditing, maintaining, and upgrading easier.
3. Test: Dedicated testnet environments help identify and fix vulnerabilities, ensuring the contract meets all functional and behavioral requirements.
4. Deploy: Depending on the project stage, smart contracts may be deployed on the mainnet or testnet of the L2 solution. Role-based access controls are recommended to prevent single points of failure.
5. Integrate: Integrating smart contracts into applications ensures a seamless and cost-effective user experience. Reputable oracles should be used for fetching on-chain prices to provide accurate, tamper-resistant data.
Layer-2 smart contracts on Bitcoin
While Ethereum is the leading platform for smart contracts, Bitcoin also supports its own Layer-2 solutions. Lightning Network leverages its smart contract scripting language to enable low-cost P2P transactions with acceleration to millions to billions of TPS.
Via Lightning payment channels, transactions between parties are made without broadcasting to the main blockchain. These channels may exist for prolonged periods, and only the final balance — once all transactions are finalized — is posted to Bitcoin.
The Stacks blockchain enhances Bitcoin’s utility without altering its core protocol. Using Proof-of-Transfer (PoX) consensus, Stacks leverages Bitcoin’s Proof of Work to secure its network and enable smart contracts that interact directly with Bitcoin’s state and transactions.
Wrapping up
Layer-2 smart contracts enhance dApp performance and make blockchain interactions more efficient. The underlying solutions, from State Channels to ZK-Rollups, improve Ethereum’s scalability, cost, speed, security, and user experience, paving the way for a new era of smart contract development.
