Scalability (Un)Limited
In 2017 Cartoon kittens had a big impact on the Ethereum network, slowing down the transactions and also caused a major spike in the gas fee. Further in 2020 DeFi and Yield Farming caused more network congestion. The average fee per transaction on the Ethereum network rallied to an all-time high of $6.04. Would these result people moving away from Ethereum?
But wait…Ethereum is moving forward very fast with a massive community of developers.
Due to growth and increase in demand, Scalability has become a much-needed requirement for Ethereum. Scalability can be achieved in a couple of ways, scaling the base layer itself i.e, layer one, or scaling the network by offloading some of the work to another layer, i.e, layer two. Layer one is the standard base consensus layer where pretty much all transactions are currently settled. Ethereum can currently process around 15 transactions per second on the base layer, layer two scaling can dramatically increase the number of transactions, processing thousands of transactions per second by offloading some of the work to another layer, i.e, layer two.
Ethereum 2.0 vs Layer two scaling
Ethereum 2.0 introduces Proof of Stake and Sharding that will improve the transaction throughput dramatically and reduces energy usage. So do we still need Layer two solutions in the future?
Let’s first understand Layer 2 solutions, either Ethereum or Bitcoin, which are termed as layer 1 base protocols (Mainet), operate on proof-of-work rules. Security and decentralization are core principles of layer 1. All settlements happen on layer 1. Due to the lengthy process involved with proof-of-work, confirmation times become quite slow when traffic is high on these networks. Layer 2 is a collective term for solutions designed to help scale your application by handling transactions off-chain (layer 1) while taking advantage of the robust decentralized security model of Mainnet. The two main capabilities that can be improved are transaction speed and throughput. The other benefit is a reduction in the gas fee.
Also many layer 2 solutions are EVM compatible, which will allow DApps to interoperate with one another.
e.g. Polygon, a Layer 2 solution is a composition of layer 2 and side-chain solution successfully improved network scalability and transaction speed (so far at the time of writing this post, Polygon processed 687M transactions). Popular defi and NFT applications including Sushi Swap, OpenSea, Curve Finance, and Decentraland have integrated with the layer 2 solution, taking advantage of Polygon’s fast, low-fee infrastructure.
Are layer 2 solutions tactical and would become obsolete once Ethererum 2.0 is launched?
Not really, “Layer ones are settlement platforms, they are not meant to have the ‘business activity” as suggested by Sandeep Nailwal one of the cofounders at Polygon.
“Eth2.0 doesn’t provide Ethereum infinite scalability. The best-case scenario is 64 shards with shards which can be similar to today’s Ethereum chain. Assume a single chain improves with PoS and has 50 TPS. Even then 64 shards can offer 3200 TPS. The moment the supply of this TPS hits, the Dapps will start utilizing on-chain aspects even faster and the demand will rise faster. We will again end up in the same situation.” — Sandeep Nailwal
Disclaimer: You should not make any decision, financial, investment, trading, or otherwise, based on any of the information presented on this blog. This blog is my personal; opinions are my own.
References:
“An Incomplete Guide to Rollups.” Vitalik Buterin’s website. Accessed August 30, 2021. https://vitalik.ca/general/2021/01/05/rollup.html.
“Polygon,” n.d. https://polygon.technology/
