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02
Jun
arbitrum

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Ethereum’s Layer 2 scaling solutions

The blockchain ecosystem consists of four layers: Layer 0, Layer 1, Layer 2, and Layer 3. Ethereum’s Layer 2 solutions are mainly implemented with two technologies: Optimistic Rollups and ZK-Rollups. The most popular Ethereum Layer 2s are Arbitrum, Optimism, Blast, Manta Pacific, Base, and Starknet. Polygon is one of the oldest and most well-known scaling solutions for Ethereum.

In summary, Ethereum’s Layer 2 solutions are essential in utilizing blockchains.

What are Layer 0, Layer 1, Layer 2 and Layer 3

The blockchain ecosystem consists of four layers: Layer 0, Layer 1, Layer 2, and Layer 3. Next, we’ll review these terms and explain how each layer differs.

What is Layer 0?

Layer 0 refers to a bottom-level infrastructure for Layer 1 blockchains. Its purpose is to increase compatibility between Layer 1 blockchains; the term interoperability is often used to describe Layer 0s.

A Layer 0 infrastructure makes communication between blockchains smooth and efficient. This enables the creation of a broader and more versatile ecosystem than in the traditional model, where Layer 1 blockchains are separate silos.

Cosmos and Polkadot are the most well-known Layer 0 projects. Avalanche also has similar technology. You can find detailed reviews of each project by clicking Crypto from the main menu and selecting Crypto Guides.

All Layer 0s operate on a similar principle. At the core is a “master chain” that acts as a data validation and security hub. Other blockchains will be linked to this master chain. This type of implementation enables shared security and fast connections between blockchains.

The image below describes the Polkadot ecosystem. It helps to understand how a Layer 0 infrastructure is built.

Each Layer 0 has its native token staked by the master chain’s validators. For example, Polkadot’s native token is DOT, and Cosmos has ATOM.

Each Layer 0 implementation is a unique ecosystem. Layer 1 blockchains are created into this ecosystem according to specific rules. Typically, app developers create one Layer 1 for each application. For example, a blockchain-based game could have a custom Layer 1 and a custom token.

Layer 0 vs. Token Bridge

Layer 0 and a token bridge are different solutions, although both connect blockchains. Next, let’s examine the differences between these technologies.

The Layer 0 implementation is an ecosystem where dozens or hundreds of interconnected blockchains are linked via a master chain (hub). On the other hand, a token bridge is built between two blockchains that are not necessarily compatible.

Token bridges exist between all major blockchains. For example, Ethereum and Solana have several token bridges, such as Wormhole, Allbridge, and Carrier. A token bridge is also required to move tokens between Layer 1 and 2 blockchains. Below is a picture of the token bridge between Ethereum and Base (Layer 2).

ethereum base bridge

As the name suggests, a token bridge enables the transfer of tokens from one blockchain to another. For example, if Ether (ETH) is transferred to the Solana blockchain, the ETH is locked in a smart contract at the Ethereum end of the bridge. After this, the smart contract on Solana creates a corresponding number of tokens on Solana’s blockchain.

The person who used the bridge can also transfer the tokens back at any time and get the original ETH for themselves on the Ethereum blockchain. The corresponding logic works in all token bridges.

Note that a Layer 0 infrastructure can also have bridges to other blockchains. For example, Polkadot can build a bridge to Ethereum, linking the Ethereum blockchain to all blockchains in the Polkadot ecosystem.

What is Layer 1?

The term Layer 1 has become familiar through Ethereum, as Ethereum’s Layer 2 levels have risen in popularity in recent years. Because of this, many crypto investors have started to study the content of the terms Layer 1 and Layer 2.

Note that Layer 1 is not a synonym for Ethereum. For example, Bitcoin has had a Layer 2 (the Lightning Network) for over five years. The Bitcoin blockchain, or MainNet, is thus a Layer 1. Almost all known blockchains, including Bitcoin, Ethereum, Solana, Cardano, and so on, are Layer 1s. Transactions performed on Layer 1 are paid with the native token of that blockchain.

A Layer 1 does not mean there should be a Layer 0 below it. This is very unusual. For example, there is no Layer 0 infrastructure below Bitcoin or Ethereum. The Layer 0 can only be found if the Layer 1 blockchain has been created in a Layer 0 ecosystem (e.g., Cosmos or Polkadot).

A Layer 1 blockchain guarantees security for a Layer 2. This means that all Layer 2s are linked to a Layer 1 blockchain.

What is Layer 2?

As the name suggests, Layer 2 blockchains are built on top of Layer 1 blockchains. The purpose of Layer 2 is to reduce the transaction load on Layer 1 and thus increase its performance. Layer 2s can handle a more significant number of transactions at lower costs compared to Layer 1 blockchains.

The term Layer 2 has become familiar to the general public through Ethereum. In this case, Layer 2 refers to scaling solutions built on Ethereum. They aim to ease congestion on the Ethereum blockchain and offer cheap and fast transactions – without sacrificing Ethereum’s security.

The most well-known Layer 2 solutions are Arbitrum, Optimism, Base and Blast. They utilize Optimistic Rollups technology. Ethereum’s Layer 2s are also built to be EVM (Ethereum Virtual Machine) compatible, so applications created on the Ethereum platform can be easily cloned to Layer 2 levels.

The table below lists basic information about the most essential Ethereum’s Layer 2s.

NameTechnologyTokenMarket share
Arbitrum Optimistic Rollups ARB 41 %
Optimism Optimistic Rollups OP 17 %
Base Optimistic Rollups - 15 %
Blast Optimistic Rollups BLAST 7 %
Mantle Optimum MNT 3 %
Linea ZK Rollups - 2 %
Starknet ZK Rollups STRK 2 %

The market share is based on funds locked in escrow smart contracts.

Note that transactions performed at Layer 2 are paid with the native token of Layer 1. For example, Bitcoin’s Lightning Network transactions are paid with Bitcoin. The transactions of Arbitrum, Optimism, and other Ethereum L2 levels are paid with Ether (ETH).

Layer 2 can also have a token. For example, the Lightning Network does not have one, but many Ethereum Layer 2 levels have a token. If there is a token, it is a governance token.

What is Layer 3?

Layer 3 provides an additional scaling level on top of Layer 2. Although Layer 2 significantly improves the scalability of Layer 1, you can never have too much performance.

Layer 3 is also known as the distributed application layer. The idea is to create a Layer 3 for each application. Layer 1 and 2 are general-purpose operating systems capable of supporting a wide range of applications.

Although Layer 3 solutions bring more efficiency and scalability, adding new layers inevitably decreases security. Certain compromises must be made to achieve better speed and scalability.

The development of Layer 3 solutions is currently in the early stages. The most famous Layer 3 is the Degen Chain, which has its own DEGEN token. Degen is a Layer 3 solution built on top of the Layer 2 solution Base.

Optimistic Rollups vs. ZK Rollups

Ethereum’s Layer 2 solutions are mainly implemented with two technologies: Optimistic Rollups and ZK-Rollups. Next, let’s go through their most important features.

Optimistic Rollups

Optimistic Rollups is the most popular technology for Ethereum’s Layer 2 solutions. It enables building an additional processing layer on top of Ethereum. Transactions are bundled into groups at regular intervals and then sent to the Ethereum blockchain (Layer 1) for safe storage.

Optimistic Rollups offers significantly faster and cheaper transactions than the Ethereum blockchain. It also maintains the security of Ethereum, as it utilizes the Ethereum consensus layer to finalize transactions.

Arbitrum, Optimism, and Base are the most well-known Layer 2 solutions using Optimistic Rollups technology. We will discuss these projects in more detail later in this article.

ZK Rollups

ZK-Rollups is a Layer 2 technology that has received considerable attention. Its basic principle is the same as that of Optimistic Rollups technology. ZK-Rollups enables the creation of a new processing layer on top of Ethereum, whose transactions are stored in bundles on the Ethereum blockchain.

Technically, there is one key difference between ZK-Rollups and Optimistic Rollups. When Optimistic Rollups is utilized, a group of validators checks and processes transaction data before adding it to the Ethereum mainnet. ZK-Rollups, on the other hand, is based on zero-knowledge proofs.

Zero-knowledge proofs enable transactions to be verified without revealing their content. This provides users with significantly better privacy protection but makes the authentication process slightly more complex and computationally expensive.

Although ZK-Rollups are not widely used, several projects have announced plans to integrate them into their future Layer 2 solutions. ZK-Rollups will likely be the next megatrend in Layer 2 solutions as decentralized applications and blockchains seek to improve their scalability and provide better privacy protection. Polygon is one of the pioneers of this technology.

The most popular Ethereum Layer 2 solutions

The most popular Ethereum Layer 2s are Arbitrum, Optimism, Blast, Manta Pacific, Base, and Starknet. Next, you will get basic information about all these projects. Other blockchains have their Layer 2s, but implementations built on Ethereum are the most popular.

We have also published a comprehensive beginner’s guide on Bitcoin’s Layer 2, i.e., the Lightning Network. You can read it here.

Arbitrum

Arbitrum is a Layer 2 scaling solution created by Offchain Labs. It utilizes the Optimistic Rollups technology. Arbitrum aims to reduce Ethereum’s network congestion by adding a new processing layer. Below is a picture from Arbitrum’s official website (arbitrum.io), where you can find more information about the project.

arbitrum

Like other popular Layer 2, Arbitrum is compatible with EVM (Ethereum Virtual Machine). This compatibility has made developing applications on Arbitrum very easy. Numerous popular apps have already been cloned from Ethereum to Arbitrum.

Arbitrum is the most successful Layer 2 solution in the DeFi sector. When writing the article, its liquidity is the 5th largest in the DeFi sector even when all Layer 1s are included.

In addition to EVM compatibility, Arbitrum has developed its own Arbitrum Virtual Machine (AVM). Thanks to that, Arbitrum supports several different programming languages, which makes it very approachable for app developers.

Arbitrum also has its native token called ARB. It works as a governance token of the Arbitrum protocol. Owners of ARB tokens can participate in the protocol decision-making processes and decide on the future development of Arbitrum.

Optimism

Optimism is one of the most popular Layer 2 solutions on the market. Optimism utilizes Optimistic Rollups technology, guaranteeing users an efficient and scalable alternative for developing distributed applications.

Optimism is a fast, stable, and highly scalable Layer 2 implementation. It allows users to complete transactions significantly quicker and cheaper than the Ethereum blockchain. Optimism is an attractive option for developers and users who want to efficiently utilize smart contracts and decentralized applications without high transaction costs or delays.

Below is a picture from the Optimism website (optimism.io), where you can find more information about the project.

optimism

Optimism and Arbitrum were initially the only significant competitors in the Layer 2 race. Now, this sector has expanded to dozens of projects, ten of which have gained considerable popularity. Optimism has somewhat surprisingly fallen far behind Arbitrum. Especially in the DeFi sector, its liquidity is only a third of Arbitrum’s.

Optimism has its governance token, OP. Its holders are entitled to participate in the decision-making process regarding the future of the Optimism protocol.

Blast

Blast is one of the new entrants to Ethereum’s Layer 2 competition. Technically, Blast is an EVM (Ethereum Virtual Machine) compatible scalability solution that utilizes Optimistic Rollups technology. It enables Blast to process transactions quickly and cost-effectively.

Blast has gained popularity because it enables users to earn yield for Ether (ETH) and selected stablecoins that are transferred to the platform. Investors can earn interest on their funds without having to participate in the staking process and lock their tokens. This is Blast’s apparent strength compared to Arbitrum and Optimism. Technically, the implementations are pretty identical.

Blast also has a native token called BLAST. A significant portion of the tokens will be distributed to Blast users using a scoring method. Blast users have accumulated points by being active on the platform for some time.

Manta Network

Manta Network (MANTA) is one of the most popular projects utilizing the ZK technology. It has recently gained tremendous popularity among investors. Manta Network aims to solve the limitations faced by blockchains by using two separate networks: Manta Pacific and Manta Atlantic.

Manta Atlantic is a Layer 1 blockchain that utilizes Polkadot’s infrastructure, meaning it is a Polkadot parachain. Manta Atlantic supports zk-SNARK proofs (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge), which encrypt the data of online transactions and increase user privacy. Manta Atlantic combines the security and scalability offered by Polkadot, providing developers with an excellent platform for building ZK-based applications.

Manta Pacific uses Celestia’s modular blockchain and Polygon’s CDK (Chain Development Kit) to achieve the best scalability in its operations. Manta Pacific enables the development of EVM-compatible ZK-based applications with low transaction costs.

Manta Network also has its native token called MANTA. Its primary function is to act as the governance token of Manta Network. MANTA has become very popular among cryptocurrency investors in a relatively short time. The main reason for this can indeed be found in investors’ high expectations for ZK-based scalability solutions.

Base

Base is a Layer 2 developed by the cryptocurrency exchange Coinbase. Coinbase developed Base as a scaling solution that offers a secure, affordable, and developer-friendly platform. Like its main competitors, Base utilizes Optimistic Rollups technology.

Below is a picture from the Base’s official website (base.org), where you can find more information about the project.

base

Base is often compared to Arbitrum and Optimism, which are technically equivalent implementations. Base’s trump card is the Coinbase exchange, which allows applications to access the crypto exchange’s huge customer base and resources.

Base also differs from its competitors in that Base will (probably) never launch its token. This is terrible news for investors who want to profit from the growth of this ecosystem. The only way you can do that is to purchase Coinbase’s shares.

Base is one of the most promising Layer 2 solutions on the market. Its success will depend on how well it integrates into Coinbase’s ecosystem. Base has quickly become relatively popular in the crypto world, and its user base has grown steadily.

Check also our Base guide, which has more detailed information about the project.

Starknet

Starknet is a Layer 2 solution based on ZK-Rollups technology. This distinguishes it from the most popular Layer 2s, built with Optimistic Rollups technology. Starknet is EVM compatible, so transferring Ethereum applications (Dapp) to Starknet is not an issue.

One of Starknet’s core technologies is STARK (Scalable Transparent ARgument of Knowledge). This refers to technology that enables transactions to be authenticated without revealing their content. This ensures high privacy and security for platform users. Thanks to STARK technology and ZK-Rollups, Starknet is one of the most capable Layer 2 solutions regarding privacy and security.

Starknet has also launched its governance token, STARK. In addition, Starknet offers its users the option to pay the network’s transaction fees using ETH or the STARK token. In addition to the above features, STARK token holders can earn passive income by staking.

Polygon vs. Layer 2 solutions

Polygon is one of the oldest and most well-known scaling solutions for Ethereum. It is a versatile Layer 1 blockchain, best known for its Ethereum-compatible Polygon PoS Chain sidechain. It’s important to understand that Polygon is not a Layer 2 but a sidechain of Ethereum.

Polygon offers various scaling solutions and tools for application developers. In addition to the PoS sidechain, Polygon’s most significant innovations are Polygon Miden, Polygon CDK, and Polygon zkEVM.

Polygon Miden is a modular execution platform utilizing ZK technology that aims to extend the capabilities of the Ethereum network. Polygon Chain Development Kit (CDK) is an open-source toolkit for application developers who want to create ZK-based Layer 2 solutions for the Ethereum ecosystem.

Polygon has focused considerable resources on zkEVM technology. Polygon zkEVM is a scalability solution utilizing ZK technology and is compatible with EVM (Ethereum Virtual Machine). EVM compatibility means that existing Ethereum infrastructure and tools are compatible. Polygon zkEVM offers developers the same user experience as Ethereum’s blockchain but with better scalability.

Below is an image from Polygon’s website.

polygon zkevm

Despite Polygon’s expansion in recent years, its Ethereum sidechain (Polygon PoS Chain) is still the most well-known and used solution. Polygon’s PoS Chain differs significantly from Ethereum Layer 2 solutions.

As the name suggests, Layer 2s are built on Ethereum, while Polygon’s sidechain operates as an independent blockchain alongside Ethereum. This makes it less dependent on Ethereum than Layer 2s. In addition, the technical implementation gives Polygon greater autonomy and a more comprehensive range of functionalities.

Polygon’s PoS chain allows developers to create scalable and complex distributed applications (Dapp) without the limitations of Ethereum, which Layer 2 solutions may face. Polygon’s PoS chain also has its native token, MATIC, used for transaction payments and staking. Ethereum’s Layer 2 solutions do not have staking, and their transaction fees are paid in Ether (ETH).

Read more about the project in our comprehensive Polygon guide.

Layer 2s as investments

In summary, Ethereum’s Layer 2 solutions are essential in utilizing blockchains. They offer efficient and scalable alternatives to numerous innovations, of which GameFi and RWA are excellent examples. With the help of Layer 2 solutions, the Ethereum ecosystem can expand further and offer more versatile and innovative applications that enable the full utilization of blockchains’ potential.

From investors’ perspectives, both Ethereum and Layer 2 solutions can be attractive investments, as they offer the opportunity to participate in the growth of the Ethereum ecosystem. The vigorous development of Layer 2s can be seen directly in the increased competitive advantage of the Ethereum ecosystem compared to other blockchains, such as Solana.

Solana’s biggest trump card has always been its speed and low transaction costs. However, the popularity of Ethereum Layer 2s has diminished this competitive advantage while raising expectations for the development of the Ethereum ecosystem.

From an investor’s point of view, the problem is the fragmentation of the Layer 2 sector. There are many options, so how do you choose the right one? If you include Layer 0 and Layer 3 projects, there are even more tokens to choose from. There is no correct answer to this question.

Binance is a good choice if you are interested in investing in Ethereum Layer 2 solutions and the largest Layer 0 projects.

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