L2 Scaling Solutions

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interests include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency ecosystems.

What are Primary L2 Scaling Solutions’ Limitations?

Layer 2 Scaling Solutions on Ethereum (source: medium.com )

As illustrated, developers offer several different categories of scaling solutions, each offering advantages, disadvantages, and limitations. Primary scaling solutions include plasma, state channels, side channels, and rollups.

Plasma 

Plasma scaling solutions create a secondary chain to the main blockchain. Transactions occur on this secondary chain, resulting in cost-effective and fast transactions. Data is not stored on the primary chain since blocks are validated on the secondary chain. Plasma, however, is limited since it only supports transactions of a specific type.

For example, complex DeFi activity is not supported. Moreover, withdrawals are subject to potential challenges and longer waiting times. Plasma also requires the act of monitoring the network to confirm asset safety.

State Channels

State channels lock up a portion of the blockchain via a smart contract. The smart contract establishes a state channel off of the primary network which provides for bidirectional communication between two or more blockchain participants. Participants communicate with one another off-chain and within the state channel to change the state between themselves.

When off-chain communication is completed, the change of state between the blockchain participants is then noted on the blockchain. Importantly, state channels require that participants need to be known in advance and are required to deposit funds into a multi-signature contract. Funds also cannot be sent off-chain to any entity that is not currently a blockchain participant. That means the network needs to be regularly monitored to ensure asset security.

Side Chains

Side chains are different than state channels. A side chain is a side blockchain that includes its own consensus mechanism, independent from the original layer. The main chain confirms transaction records, maintains security and handles disputes. Importantly, if a sidechain experiences some type of security breach, this breach will neither taint the primary chain nor the other side chains within the network.

Rollups

Rollups perform transaction operations off the main blockchain. However, L1 is responsible for the security measures since the transaction data is stored onto L1. Since all data must be stored on the primary chain, compression is usually used which can add complexity to off-chain to on-chain data transfer.

General Limitations of these L2 Solutions?

Composability

Composability relates to the concept of networks' ability to interoperate or work with one another. When envisioning the concept of network composability, think of how Legos are designed to work together. There are many different types of Lego building blocks, yet they all have a common integration or locking feature. A similar blockchain scalability feature will be required to support the “World Computer.” The primary L2 solutions summarized above operate in fundamentally different ways. This leads to a potential limitation going forward as to how the various L2 solutions will work together. That is, how will the interoperability of these differing L1/L2 networks work together in the future.

Liquidity

Ethereum’s market cap is enormous. When dApps create an additional, tokenized separate layer, it becomes likely that Ethereum’s liquidity will be negatively affected. How this liquidity degradation will affect Ethereum or other primary blockchains remains to be seen.

Bridging

Using a number of different L2 solutions will require a number of blockchain bridges for the transfer of data and information amongst the various chains. Additional accounts will often be needed to keep track of these inter-chain transfers. From a user viewpoint, if funds have been sent to numerous different L2 protocols, the difficulty of keeping track of them all and keeping them secure will greatly increase.

Security and Privacy

Additional layers necessarily lead to additional security measures. Developers will need to be cognizant to ensure privacy and security on each new L2 solution. Compared with an established primary blockchain like Bitcoin or Ethereum and their established nodes, these L2 solutions can be operated on much smaller numbers of nodes, which could be controlled or manipulated by a centralized authority. 

Conclusion

L2 developers are working to enhance TPS and have proposed multiple different types of solutions, each has advantages, disadvantages, and limitations. It will be interesting to see which of these solutions achieve maximum TPS to scale, while at the same time trying to solve the blockchain trilemma.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity whatsoever with which Thomas Wettermann has been, is currently, or will be affiliated.

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