This article is a beginner’s guide to Ethereum scaling solutions. The article focuses especially on Layer 2 solutions and also explains the differences between the terms Layer 1, Layer 2, Layer 0 and Layer 3. We’ll go through the most popular L2 solutions and dig deeper into Arbitrum.
Layer 1 and Layer 2 explained
Let’s start with the terms Layer 1 (L1) and Layer 2 (L2). In this context, Layer 1 means Ethereum’s main network (MainNet). Transactions carried out on the Ethereum MainNet always go through a certain consensus process, after which they are recorded on the Ethereum blockchain.
Transactions on the Ethereum network are paid with Ethereum’s native token ETH (Ether). The more congested the network is, the more Ether users have to pay for each transaction. Usually, Ethereum transaction fees are in the ballpark of a couple of dollars.
Layer 2 scalability solution refers to a network built on top of Ethereum (Layer 1). Layer 2 is designed to reduce congestion and increase the performance of Layer 1.
Many people understand L2 solutions best through Bitcoin’s lightning network. It is the most famous L2 solution on the market. Ethereum’s L2 networks started to gain wider awareness during the crypto boom of 2021.
Layer 2 solutions are compatible with the Ethereum MainNet. This means that dapps built on Ethereum can be easily cloned to run on L2 networks too. L2 solutions utilize the security of Ethereum’s MainNet in their own processes. Transactions on L2 are also paid with Ether.
This article does not go into more detail about Ethereum’s technology. If you want to understand Ethereum better, read our comprehensive Ethereum beginner’s guide.
Layer 0 and Layer 3 explained
Layer 1 and Layer 2 are familiar to most crypto investors. In addition to these, there are also Layer 0 (L0) and Layer 3 (L3), which are less known.
Layer 0 refers to infrastructure that interconnects Layer 1 blockchains. In other words, Layer 0 solutions aim to increase compatibility between blockchains. The term interoperability is often used in this context.
Layer 0 aims to get rid of bridges between blockchains that have proved to be vulnerable to hackers. In March 2022, hackers attacked the token bridge between the Ethereum and Ronin networks, causing losses of $620 million. This is just one example of many token bridge exploits in 2021 and 2022.
Huge crypto hack just revealed as @AxieInfinity's Ronin Network hit with an attack, some $622M drained in the process. The latest at @decryptmedia: https://t.co/VSrgNDXeyh
— Andrew Hayward (@ahaywa) March 29, 2022
Popular Layer 0 projects include Avalanche, Cosmos, and Polkadot. Cosmos is the most famous of these when you think about the Layer 1 blockchains built on top of its infrastructure. For example, BNB Chain is built on top of Cosmos Layer 0. The infamous Terra also uses Cosmos infrastructure.
Layer 3 differs from Layer 2 solutions by adding an extra layer on top of Layer 2, as the name suggests. Layer 3 is also known as the distributed application layer. Layer 3 enables even faster transaction times and fees than Layer 2.
When an extra layer is added on top of the L2, there a compromise has to be made on security. Transactions made on L3 applications are stored in an L2 network instead of an L1.
Layer 2 solutions are suitable for micropayments and, for example, games built on top of blockchains. L3 by no means that L2 solutions are unnecessary, as the applications built on top of it specifically utilize L2 networks in their processes.
Ethereum’s Layer 2 solutions
Optimism, Arbitrum, and ZK-Rollups are the most famous Ethereum Layer 2 solutions. Next, we briefly introduce all three.
Optimism
Optimism is the first Layer 2 solution built on top of Ethereum that utilizes Optimistic Rollups technology. Optimistic Rollups refers to a technology where transactions are processed in a network built on top of Ethereum’s MainNet and verifications are stored on Layer 1 in groups.
Storing transactions in groups takes significantly less capacity from Ethereum MainNet compared to storing transactions one at a time. This approach also allows costs to be spread over multiple transactions in each batch, reducing fees to end users.
Optimism is a fast, stable, and highly scalable L2 blockchain. The user can carry out transactions on the Optimism network much faster and at lower costs than on Ethereum (Layer 1). At the same time, Optimism takes advantage of the security provided by the Ethereum MainNet.
You can learn more about Optimism from optimism.io.
Optimism is EVM (Ethereum Virtual Machine) compatible, so applications built on top of Ethereum can be easily transferred (cloned) to Optimism.
Optimism has also its own token, OP. It was distributed as airdrops to people who had been actively using the Optimism platform. Thanks to this, Optimism has gained great popularity among crypto investors. Measured by liquidity, Optimism is one of the most popular smart contract blockchains in the market.
Arbitrum
Like Optimism, Arbitrum is a Layer 2 solution that uses Optimistic Rollups technology. Although Arbitrum and Optimism are similar in many respects from an end user’s point of view, there are also differences between them.
Arbitrum and Optimism verify transactions in a slightly different ways. The multi-layer transaction verification used by Arbitrum is more advanced and efficient than Optimism’s single-layer equivalent. This, in turn, is reflected in lower transaction fees.
Although Arbitrum and Optimism are both EVM compatible, Arbitrum has also developed its own Arbitrum Virtual Machine (AVM). Thanks to that, Arbitrum supports more programming languages than Optimism, so it is more approachable from the perspective of app developers.
ZK Rollups
ZK-Rollups is a rivaling Layer 2 technology to Optimistic Rollups. Transactions are processed on a blockchain built on top of the Ethereum before being stored in groups on the Ethereum blockchain. ZK-Rollups differ from Optimistic Rollups in the way transactions are processed.
In Optimistic Rollups technology, a number of validators process transactions before adding them to Ethereum. ZK-Rollups, on the other hand, is based on zero-knowledge proof. As the name suggests, this means that transactions are checked without revealing any information about what the transactions contain.
ZK-Rollups technology enables users to have better privacy. As a result, the transaction verification process is more complicated than in the Optimistic Rollups solution. This is reflected in slightly lower scalability.
ZK-Rollups technology isn’t widely used yet. For example, Polygon has announced that it will release a ZK-Rollups blockchain in the future. Many analysts say that ZK-Rollups technology could be the next hot trend in the Layer 2 world.
What is Arbitrum?
Next, let’s take a closer look at Arbitrum, which is Ethereum’s most popular Layer 2 solution.
Arbitrum is an Ethereum scalability solution developed by a company called Offchain Labs. As mentioned earlier, it utilizes the Optimistic Rollups technology. Arbitrum’s goal is to reduce Ethereum network congestion by processing most of the transactions on Layer 2.
The Arbitrum project has been ongoing for a long time. It managed to attract a large number of dapps to its platform even before the Arbitrum token (ARB) was launched. Making applications on top of Arbitrum has been easy from the developers’ point of view due to EVM compatibility. Many well-known Ethereum dapps have also expanded to Arbitrum in recent years.
Arbitrum’s TVL number has risen steadily. At the time of publication of the article, Arbitrum’s blockchain is the fourth largest dapp platform in the market, right after Ethereum, BNB Chain, and Tron. It’s also worth noting that Arbitrum’s TVL is more than two times bigger than the TVL of Optimism.
| Platform | Native token | TVL | Market share |
|---|---|---|---|
| Ethereum | ETH | $27.8 billion | 57.8% |
| Tron | TRX | $5.8 billion | 11.9% |
| BNB Chain | BNB | $4.5 billion | 9.5% |
| Arbitrum | ARB | $2.4 billion | 4.9% |
| Polygon | MATIC | $1.0 billion | 2.1% |
| Optimism | OP | $0.9 billion | 1.9% |
In recent years, the use of Ethereum has often been unsustainable for many from the perspective of high transaction costs. With low fees and a wide range of applications, Arbitrum can be seen as a very user-friendly platform, which is likely to grow in popularity even more after it launched its own token to govern the blockchain.
Arbitrum as an investment
The long-awaited Arbitrum (ARB) airdrop saw the light of day on March 23, 2023. Arbitrum distributed as much as $1.4 billion worth of its tokens to long-time Arbitrum users. Trading with the ARB token started immediately after the launch on the biggest cryptocurrency exchanges.
Arbitrum’s governance token became a hit among investors immediately after its launch, as its trading volume rose to nearly four billion dollars on its first day.
Arbitrum and Optimism have strongly increased their popularity among both investors and developers. The benefits of Ethereum’s L2 solutions are indisputable. It’s very likely that Arbitrum and Optimism are going to gain users from Ethereum’s competitors, like BNB Chain, Avalanche, Tron, etc.
The main selling argument of these so-called “Ethereum killers” has been fast transactions. This was a valid argument before Ethereum Layer 2 solutions existed. Now there is no need to go outside the Ethereum universe since Layer 2 solutions like Arbitrum can provide scalability.
Investors should remember the difference between L2 tokens and Ethereum’s native token (ETH). Arbitrum (ARB) and Optimism (OP) are governance tokens, as are DeFi app tokens AAVE, LDO, etc. They are not used to paying transaction fees, unlike Ether. This means ETH has much more natural demand than these governance tokens do.
If you believe in the growth of Ethereum’s L2 scalability solutions in the future, Arbitrum is definitely an investment worth looking at.
How to buy Arbitrum
If you want to buy Arbitrum, go to the market’s leading exchange, Binance. Binance has the best liquidity for the ARB-USDT trading pair and also fiat pairs.
In addition to Binance, Arbitrum can also be found in the selections of Coinbase and Kraken. All these exchanges are well-known and reliable trading places. The Arbitrum token can be bought on the Ethereum network, which makes it easy to deposit it in e.g. MetaMask or other wallets that support Ethereum tokens.
