Overview of Layer 2 Technology

  • Inheriting the security properties of Layer 1.
  • Providing greater throughput.
  • Lower opereating cost.
  • Faster transaction confirmations.

Why do we need Layer 2?

  • Currently transactions are expensive and severely impacting the retail adoption of Ethereum and dApps running on the network. Many investors feel priced out from the network.
Gas fees and confirmation times ballooned at the height of the yield farming craze. Credit: https://ycharts.com/indicators/ethereum_average_transaction_fee
  • Some use-cases where speed of transaction affects the ability of the DApp to operate at an optimal level (blockchain games). Assuming in cases where users transactions are added instantly to a block, it still takes an average 15 seconds for blocks to be processed.
Credit: https://etherscan.io/chart/blocktime
  • Still utilising the security that Ethereum provides but with scalability instead of using other blockchain networks entirely.
  • If the mainet blockchain grows too large, hardware requirements to run an Ethereum full node increases significantly over time, reducing decentralisation.
  • Simply increasing block size is not feasible since it places incredible strain on each validator.

Plasma

How Plasma works

  1. A transaction where an asset is moved from the mainchain to the Plasma network is sent to the smart contract managing Plasma and given a unique ID.
  2. The protocol operator will generate a batch of Plasma transactions based on the ones received from the smart contract.
  3. Like how the EVM batches transactions on Ethereum, the side chain operator generates a transaction trie from the batch in the side chain block.
  4. The root hash of the trie is added to the Ethereum blockchain to record the state.
  5. Users are given the index of the branch in the trie corresponding to their assets on the chain (they are now owners of those assets).
  6. Users interact throughout the chain and their states are constantly updated by the Plasma operator.
  7. To withdraw an asset a user can publish their branch and the asset will be sent to them on their ETH address on the mainnet.
  • Users on the chain have had to continuously verify the sidechain and update the ownership state of the assets on the chain against the Ethereum mainnet protocol. This requires a constant state of data availability from the Plasma chain.
  • The requirement to always assign assets to owners and update that on record off the chain brings about problems where owners are not required for an asset. An example of this is the Uniswap liquidity pools which have no “owner” and thus interactions on Plasma with Uniswap are not possible unless a version of Uniswap exists purely on the sidechain.
  • In order for users to withdraw from the side chain, they are required to retain a large amount of the transacted data in case of challenge and validate themselves. There is also an extensive mandatory challenge period (up to a week in most cases) before the side chain transactions can be solidified as accurate.
  • In a scenario where the all users on a sidechain entire need to be offboaorded due to a compromise in security, the entire history of the chain would need to be verified by main Ethereum blockchain, overloading the network entirely.

Rollups

How Rollups work:

Zero Knowledge Rollups

Optimistic Rollups

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