Ethereum, the world’s second-largest cryptocurrency with a market capitalization of over $220 billion, has undergone one of the most ambitious transformations so far: the Merge. This is a merger between the Beacon Chain and Ethereum’s initial Proof-of-Work mechanism system. Gone are the days when creating new tokens would consume alarmingly high amounts of electricity and cause a disturbance. The update made possible the switch to a Proof-of-Stake consensus mechanism – better regarded by environmentalists and eco-friendly investors and institutions.
Besides allowing stalkers to withdraw staked tokens, the upgrade has positively impacted Ethereum and the related Layer-2 projects. Pundits believe further network improvements may fuel investors’ interest in similar Layer-2 projects, thus shaping a more secure and better ecosystem and probably contributing to their price increases.
Here’s a rundown on the basics of Ethereum’s Layer 2 protocols and the most noteworthy projects to check out post-merge.
Ethereum Layer 2 Protocols Explained
To understand layer 2 protocols, we must grasp the difference between layer 1s and layer 2s. The former is a base network in charge of data availability, security, and decentralization. On the other hand, the latter is an umbrella term that is accountable for scaling applications by handling transactions outside of Layer 1. These run on top of layer 1 to enhance scalability and minimize transaction costs while securing the layer. Nested blockchains, state channels, zero-knowledge rollups, and side chains are types of layer2s.
To better understand these solutions, you can envision them as streets connected with the main road – Ethereum. When too much traffic leads to congestion, layer 2 aids by offloading some of it and minimizing the blockage.
Ethereum has achieved its 1 million transaction/day limit, meaning that congestion on the network could be probable. But different layer 2 protocols help the blockchain improve transaction speed without impacting security or decentralization. Additionally, they result in lower gas fees and permit devs to build new apps with a better user experience.
Types of Layer 2 Protocols
As the team of developers behind Ethereum has persisted in creating ways to improve the network’s efficiency, scalability, and transaction speed, different Layer2 solutions have emerged. Some of the best-researched techniques are roll-ups, plasma, and state channels, each providing its series of ups and downs:
- State Channels. State Channels facilitate user transactions off the blockchain, enabling peer-to-peer transactions. State Channels bring cheaper costs, instant withdrawal, and high transaction throughput, but they also come with cross-chain interoperability.
- Plasma uses Merkle trees and smart contracts to build almost unlimited sidechains, enabling Ethereum to process greater data sets.
- Roll Ups. You can think of blockchain roll-ups as you would of plasma. They store some of the data on the blockchain with a unique technique that decreases decentralization by improving security. There are two types: zero-knowledge rollups and optimistic rollups, the former of which may prove more practical in the long term owing to their decreased withdrawal time.
Ethereum Layer 2 Projects After the Most Recent Major Update to Check Out
Among all the cryptocurrencies available, Ethereum is the one that has always come closest to Bitcoin. Investors and experts believe it’s the only one that threatens Bitcoin and can achieve the Flippening, overtaking the reigning coin’s position in the charts. As stated above, Layer 2s can fix scalability issues posed by Ethereum that may speed up the Flippening.
If you’re an Ethereum enthusiast and want to invest in some projects, check out the following well-established and arising Layer2 projects.
Arbitrum was created to reduce congestion on Ethereum by employing high transaction speeds of no less than 40.000 TPS, bringing the upfront cost of around two cents in fees. Optimistic roll-ups validate smart contracts on Arbitrum. This project makes waves among developers unwilling to learn a new coding language to develop applications, as this project permits exactly this. For example, you don’t need extra skills to build apps, assuming you already know how to create smart contracts on Ethereum.
Because Arbitrum lacks a native token at the moment, you can back this technology up by investing in rollup-related projects. Until the native token is issued, you have GMX to invest in – the largest DeFi project deployed on Arbitrum and its utility and governance token.
Mantle, with the utility token BIT, is the first modular Layer 2 solution deployed on Ethereum that is made possible by using DAO (Decentralised Autonomous Organisation). The Mantle extends BIT’s utility. Given its modular structure, various actions and transactions are processed in specific layers carried out by users through a decentralized data availability layer and Ethereum rollups. This way, high throughput costs less with Ethereum-grade security, derived from a staking mechanism, for any Mantle-based application.
Another purpose behind Mantle is to make the sequencer a decentralized place, therefore enabling multiple notes to operate and generate profits in BIT. This decreases the already-existing typical operational and security risks brought by roll-up models.
The options to trade BIT include spot pairs, inverse perpetual, and perpetual contracts.
Polygon is among the most prominent Layer 2 scaling solutions for Ethereum in the crypto world. This project is a sidechain that runs alongside the main chain to permit transactions, and some of its primary functions include lower transaction costs and faster transactions. You can use different decentralized apps that are limited to Ethereum by “bridging” some of your digital coins to this token.
PoS sidechain, the main chain of this network, is used to verify transactions and decide on future network undertakings. Devs can use the underlying software and effortlessly create other sidechains.
So far, Polygon has facilitated other side chains’ development, all using ZK-rollups solutions, optimistic rollups, and plasma.
There are several ways to invest in this project, including purchasing it as a spot pair or trading as a leveraged token or perpetual contract.
Optimism lives up to its name, using the optimistic rollups, as the name suggests. It’s a fierce competitor to the first project mentioned – Arbitrum. These features employed swear by every transaction’s validity, and every miscellaneous transaction is returned after participants prove fraud.
Arbitrum and Optimism resemble each other as both deploy when something’s wrong.
You can invest in four noteworthy Ethereum-related projects this year. Has any of these caught your attention so far?
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