Explanation & Significance
Layer 2 solutions are like the peanut-butter and jelly of the financial application layer built on Ethereum, also known as “DAPPs” (Decentralized Applications). The reason that Roll-Ups and L2’s are so important for the growth and competition to Ethereum is because of the scalability factor.
An example of why this is important is the ever-growing NFT space, also known as the “metaverse”. NFT drops (when a new NFT is released) or day-to-day transactions in metaversal gaming each require submitting new transactions into the blockchain. These type of interactions with the Ethereum blockchain require higher volume capacity and paying a $20+ gas fee just to breed the newest character on your favorite NFT game would completely kill momentum and distract the user from the in-game experience.
Let’s take a moment and compare this functionality and process to the TRADFI (Traditional Finance) way of approaching these topics. We will use metrics to compare traditional finance and decentralized finance.
Fiat vs. Crypto Base Layer
Underneath every transaction you make with your VISA card to purchase anything has to pass through a “Settlement Layer” where the bank agrees that you have enough money to pay for the item that you just ran your card for. This is very interesting considering VISA will start settling transactions via USDC soon. Traditionally, there was an intermediary that would settle transactions for VISA by providing collateral until your transaction was fully processed.
You may consider these layers stacking like so:
Credit Card > 3rd Party Settlement > Bank > Fiat
Crypto greatly increases the speed and throughput of this transaction method by removing the requirement of a third party, the conversion of cash to credit and in the process, creates a trust-less environment.
Layer 2 Solutions
L2BEAT | Layer 2 Tooling Solution
🌐 https://polygon.technology/ | 🔎 https://polygonscan.com/
Polygon is without question the most well-known and utilized L2 solution, harboring over 6 million daily transactions. Polygon is described as “Ethereum’s Internet of Blockchains”, a protocol and a framework for building and connecting Ethereum-compatible blockchain networks. This is extremely important because while other chain solutions boast lower fees or quicker transactions, Polygon actually created a protocol for developers to build upon and expand, creating more solutions for a broader scope of issues plaguing L1’s.
Polygon claims multiple benefits for developers, such as a 1-click scaling solution, allowing Dapp’s already released on base-layer Ethereum to be instantly deployed on Polygon. Full compatibility with smart contracts and the native code used to write them, solidity.
In my opinion, Polygon is the most all-inclusive solution to the bottleneck that currently exists on Ethereum. Greater security, faster transactions and all of this, incorporated to work with Ethereum, while also using it’s own native token “MATIC” for the gas fees. This provides governance and community incentive for the Polygon network and its investors.
In conclusion, the reason I am giving Polygon its own section on this article is because it has continually proven to be a strong asset in the ETH ecosystem and it has only done more and more to improve the interoperability between Ethereum and its users.
Roll-Ups
Arbitrum, started by the team at Offchain Labs is a “Rollup” for Ethereum that is similar to a wrapper or shell that functions just like the original product and adheres to the rules set in place by that product. There is no native token on Arbitrum, nor is there almost any difference between Ethereum and Arbitrum.
Arbitrum has already rolled out for developers to port their DAPP’s onto the chain. This developer roll out will help with the health of the chain by letting developers onto their platform before the end-user, creating an ecosystem similar to what is seen on Ethereum with Uniswap, Compound, Balancer, AAVE (Coming Soon), etc.
Arbitrum One launched on September 1st for public adoption. Arbitrum is the technology and Arbitrum One is the chain. Etherscan and Alchemy are supporting the Arbitrum One chain. But it’s possible that at some point in the future there will be other rollup chains that also use the Arbitrum technology, and to make sure this never gets confusing, the tech is called “Arbitrum” and the name of the chain is “Arbitrum One”.
🌐 https://optimism.io/ | ⛩️ https://gateway.optimism.io/
Optimism or, Optimistic Ethereum (OE) is very similar to Arbitrum in most senses. It is a rollup of Ethereum with reduced gas fees and offers a few different state-of-the-art implementations of blockchain technology.
Optimism boasts 10x less in gas fees in its current state, later to be greatly reduced when “sharding” goes live on Ethereum Mainnet. Sharding will affect all roll-ups that communicate with the Ethereum mainchain. Sharding is a method of splitting and storing a single logical dataset in multiple databases. This allows for a greater volume of requests to be accepted by Ethereum when rollups like Optimism take advantage of the distribution of the EVM data.
Key Takeaway
When using rollups, the user should consider the asset that is stored on the mainnet of the chain that is being “rolled up”. If you are using a rollup of Ethereum, you would be inherently bullish on Ethereum the asset, because all transactions performed on rollups actually use the original chain, by paying the gas fees in Ethereum. Rollups are like the broadband internet of digital finance. We are no longer in the dial-up age of DeFi.
How Does All this Work - Technically?
Let’s use Arbitrum as an example. Arbitrum “batches” transactions into a single transaction on Ethereum, basically. Every 6 minutes a batch of transactions from Arbitrum One is posted into a block on Ethereum, determined by the gas fees and transactional volume. If the required amount is posted into an Abrtrium One batch before the time limit is up, the batch will be posted to Ethereum before the standard time. This functionality is the main perpetrator for the lower gas fees and throughput volume via Arbitrum and Optimism.
Now, if I still have the interest of you, the reader, let us jump into some of the other chains, and the tokens that fuel them! This kind of research is important, because these chains will be at the core of all financial functionality eventually.
“Ethereum Killers”
I would like to preface this section with this: “Ethereum Killer” is just a buzzword and does not represent my view of these tokens. I do not believe that the goal of any of these tokens is to be an “Ethereum Killer”. In reality, most developmental work regarding blockchain technology is to further all development as a whole and healthy competition is one of the key ways to encourage development.
🌐 https://solana.com/ | 🔎 Solana Explorer
Solana is a very similar Layer 1 solution, like Ethereum and while the term “Ethereum Killer” may be a bit obtuse, it gets the point across. Solana is in the business of competing with Ethereum to offer faster throughput of transactions and lower settlement times. Solana boasts transaction speeds of much greater than it is currently handling, which is about 1,500–2,100 transactions per second.
The fact of the matter with Solana is that it just secured over $300 million in funding earlier this year and plans on putting 100% of it towards further development of smart contract functionality and mass adoption.
Let’s discuss a little bit of the technicals…Solana has PoS as its consensus mechanism, from the start. No merge from POW to POS is needed and it has already helped immensely with gas fees and network congestion. However, the key innovation is Solana’s proof-of-history (PoH) protocol. Under a PoS system, it may be difficult for validators to find chronological order in incoming blocks of transactions. PoH’s way around this is by establishing a historical record that cryptographically verifies the passage of time between two events.
🌐 https://cardano.org/ | 🔎 CardanoScan | Cardano Explorer
Cardano is a little bit different than the other chains we have mentioned earlier. It doesn’t have smart contracts… So why am I telling you about it? Smart contracts are coming to Cardano September 12th…or so we are told.
Many people argue that this will never happen, they have overpromised this adoption in the past and have failed but the claims of smart contracts coming are stronger and stronger as the day approaches. Only time will tell.
Cardano is another high-efficiency chain with a large throughput ability of transactions and very low gas fees in comparison to other L1’s. The only issue with the transactional volume is, will it be able to handle network activity once there is a strong use-case like smart contracts on the chain. Again, only time will tell. The only reason that I even put Cardano in the “Ethereum Killers” section of this article is because of the development team and the huge fanbase/cult following.
Products like Ethereum and Cardano can be extremely technically advanced and work perfectly, but without hype and user adoption, the tech is worthless. Hype and meme culture is definitely not something lost on Cardano and it is the main reason as of now that I consider it somewhat of an “Ethereum Killer”. ADA, the native token on Cardano grew $2 in price (over 100% price appreciation) just due to the hype of releasing smart contracts on September 12th, so an actual use-case being implemented could be great for the long-term adoption of Cardano.
🌐 https://www.avax.network/ | 🔎 AVAX Explorer’
Avalanche is a high volume, low transaction cost, EVM compatible (Ethereum Virtual Machine) blockchain just like some of the others listed in this article, however, AVAX offers true decentralization and security (on a smaller scale), just like Ethereum.
Launch Ethereum dapps that confirm transactions instantly and process thousands of transactions per second, far beyond any decentralized blockchain platform today.
Deploy blockchains that fit your own application needs. Build your own virtual machine and dictate exactly how the blockchain should operate.
Stake, or lock up, your AVAX to help process transactions and further secure the platform–providing security guarantees well-above the 51% standard. You probably have the hardware required to join the platform.
🌐 https://fantom.foundation/ | 🔎 FTM Scan
Fantom is another fast-paced, high throughput layer 1 chain that boasts similar improvements to Ethereum as other layer 1’s. One of the most easy-to-use offerings from Fantom is it’s multichain bridge offering quick transfers or “on-ramps” to and from the FTM ecosystem.
Thankfully, Fantom uses standard blockchain language (Solidity) unlike competitors such as Cardano. This language gives users the ability to Stake, Mint and Lend on Fantom very easily and all trust-less.
Ethereum has over 200,000 validators where Fantom has only 47. Compare that to Binance Smart Chain, which has 21 validators. Now let’s break that down into terms that a 5 year old could understand. Would you rather trust over 200,000 to on average agree on something that is true and not an ulterior motive? Or 21 people… 21 people are going to have a much easier time providing incorrect data and finding a consensus to agree with each other than 200,000 validators are.
“Alt-Chains”
These are alternative chains to the main L1 crypto networks and L2 solutions listed above. Some of them serve very specific services and others exist just for speed and adoption, pushing decentralization off to the side.
🌐 https://www.algorand.com/ | 🔎 Algo Explorer
Algorand boasts the “Greenest” crypto network that exists with a “Carbon Negative” footprint. Algorand offers the same L1 solutions as other high-throughput alternative blockchains and has been in development for almost 3 years.
Algorand blockchain contains a stack engine that executes smart contracts signatures, enabling developers to easily take advantage of powerful functionality by writing smart contracts in either Python or Reach, a simple javascript-like language. This is different than the native language used for Ethereum: Solidity. This means that Algorand is not 100% EVM compatible out of the gate, making it harder to port applications from Ethereum.
Algorand has a lot of features to unpack and you can read all about the network and the complicated, developer-speak here.
🌐 https://iotex.io/ | 🔎 IOTX Explorer
The IoTeX blockchain is a very specific one made for something called “The Internet of Things”. Think about the devices around you on a daily basis (Lime scooters, automatic rental cars, thermostats) and how important their interconnectivity is without a wi-fi router or hard wired connection.
Recently, I wrote a very in-depth explanation of this blockchain and all the aspects of its development and purpose. You may read that article here. IoTeX has a plethora of products, digital services and smart contracts available on their blockchain that I highly recommend checking out.
🌐 https://www.kcc.io/ | 🔎 KCC Explorer
Launched by an unaffiliated team from KCC to help with adoption of KuCoin, KCC is one of the newest high speed chains out there. KuCoin claims “no affiliation” with KCC, but you may withdraw funds from KuCoin via the KCC network directly to the chain and transact with DeFi protocols such as KoffeeSwap, KuSwap and KuKennel.
Currently KCC has only just been created and has a lot of work to do before it reaches more user adoption. Check out my friend’s website on KCC! This website allows you to track all the tokens as they are promoted and adopted by users in the ecosystem.
🌐 https://www.vechain.org/ | 🔎 VeChain Explorer
Vechain Thor offers multi-party payment, multi-task transaction, controllable transaction lifecycle and transaction dependency. All of these features make the development more user-friendly for enterprise adoption.
Vechain also uses “POA, Proof of Authority”. Authority Masternode Operators, with the aligned interest in the development of VeChain ecosystem, maintain the VeChainThor protocol according to the Foundation’s governance policy. PoA addresses enterprise’ common concerns of inefficient upgrade and waste of energy. This grants high levels of security for the blockchain but a centralized approach to node operations.
Multi-Chain Tools
🌐 https://polkadot.network/ | 🔎 PolkaScan
PolkaDot has been a crowd favorite among decentralized communities for a little while now. Polkadot is a network protocol that allows arbitrary data — not just tokens — to be transferred across blockchains. Polkadot gives developers the ability to build cross-chain registries and cross-chain computations. This basically allows all the networks on PolkaDot to communicate with each other, while this is not technically what it means, that is a simplified explanation.
Polkadot can transact with permission-less blockchains as well as private, permission requiring blockchains. This makes it possible to build applications that get permissioned data from a private blockchain and use it on a public blockchain. For instance, a school’s private, permissioned academic records chain could send a proof to a degree-verification smart contract on a public chain. These are the types of use-cases I look for when investing into a new blockchain network. The last one I recommended was IOTX (read about it below), which is now being adopted for HealthNet to track medical assets through IOT technology.
Below we will look into some of the multi-networks built on top of PolkaDot and discuss how they work together instead of competing to push out the others for total network dominance.
All four of the chains listed below would not be possible without the PolkaDot foundation. These systems are inter-operable and each store value on their own chains but can communicate and interact with each other.
— Kusama
🌐 https://kusama.network/ | 🔎 Kusama Explorer
Let‘s start with the main layer 2 network built on top of the layer 1 network; PolkaDot. Kusama is a network built as a risk-taking approach to its cousin, Polkadot. It’s a living platform built for change agents to take back control, spark innovation and disrupt the status quo. None of this would be possible without PolkaDot.
Kusama is a scalable network of specialized blockchains built using Substrate and nearly the same codebase as Polkadot. The network is an experimental development environment for teams who want to move fast and innovate on Kusama, or prepare for deployment on Polkadot.
Kusama was founded in 2019 by Gavin Wood, founder of Polkadot and co-founder and former CTO of Ethereum.
— MoonBeam
🌐 https://moonbeam.network/ | 🔎 MoonBeam Explorer
— MoonRiver (MOVR)
🌐 https://moonbeam.network/ | 🔎 MoonRiver Explorer
— Shiden (SDN)
🌐 https://shiden.astar.network/ | 🔎 Shiden Scan
Shiden is a platform for DAPPs on the Kusama network. Shiden is built to support L2 solutions, improving upon the network’s scalability and transaction speeds. Shiden is intended to operate on Kusama as a parachain.
Parachains are custom, user-generated blockchains that are linked to Kusama’s Relay Chain, the main blockchain and heart of its network. The Relay Chain is responsible for Kusama’s shared security, consensus and transaction settlements. By being integrated into the Relay Chain, parachains benefit from the Relay Chain’s base features. This doubles up on security, similarly to how Arbitrum settles on Ethereum.
In Conclusion
We are in the “Layer 2 Era” of the cryptographic space. There are obviously many competitors in this space all trying to get your capital on their network. Personally, I see the success of each of these networks in their own way, as the range of adoption is still huge. There are many, many more networks and blockchains available out there, not mentioned in this article. Please comment on this article or DM me on Twitter about your favorite chain and its qualities. I am always happy to learn through research as it is the only reason this article was written in the first place.
