Understanding Ethereum Layer 2: What it is, and What it Solves.

The Ethereum Gas Cost Problem:

Imagine you're trying to send a letter, but every time you send or receive mail, you have to pay really expensive postage. In this example, let’s say that sending one letter costs $100.00 USD. Even if the post office is very nice and delivery happens very quickly, who would pay $100 to deliver one letter? This is the biggest problem the Ethereum ecosystem faces and it is the most significant reason more people are not adopting the platform directly.

Someone must pay the node operators for the use of their hardware and the energy it takes to run them. Welcome to “Gas” fees—almost every Ethereum transaction costs gas. 

Ethereum allows users to execute smart contracts and make transactions, but transactions use compute resources, and they are not free.  Someone must pay the node operators for the use of their hardware and the energy it takes to run them. Welcome to “Gas” fees—almost every Ethereum transaction costs gas.  When many people are trying to use Ethereum at once, these gas fees skyrocket and the time it takes to complete your transaction increases exponentially. This congestion makes it so expensive for everyday users to interact with the network that many people choose not to—as they wait for a better solution to be developed.  Enter “Layer 2” technology…

What is Layer 2 Technology?

Think of Layer 2 technology as a clever system that helps deliver letters more efficiently without crowding the main post office. In technical terms, Layer 2 solutions are built on top of the Ethereum mainnet (Layer 1) and are designed to handle transactions off the main blockchain. By processing transactions off-chain and then recording the results back to the main blockchain, Layer 2 reduces the load on Ethereum, which in turn lowers gas fees and speeds up transaction times.

By processing transactions off-chain and then recording the results back to the main blockchain, Layer 2 reduces the load on Ethereum, which in turn lowers gas fees and speeds up transaction times.

How Does Layer 2 Work?

Imagine a small town where everyone mails their letters to a central post office. The post office gets overwhelmed, and people have to pay more to get their letters delivered. To solve this, the town sets up smaller collection points (Layer 2 solutions) where people can drop off their letters. These collection points bundle the letters and send them to the central post office in bulk, reducing the load and cost.

Popular Layer 2 Solutions

Optimistic Rollups and zk-Rollups are currently leading the way in Layer 2 technology. Optimistic Rollups are like sending a package with a tracking number, where the post office assumes everything is fine unless there's a problem. zk-Rollups are like sending a package with a security seal that guarantees its contents. Both methods significantly reduce gas fees and increase transaction speed.

Sidechains, such as Polygon, offer another approach. Imagine a special courier service that operates alongside the regular postal system but is faster and cheaper for certain types of deliveries. Think of sidechains as inexpensive letter courier services that tell the post office periodically about all of the letters they have delivered.  Polygon and other sidechains allow for transactions to occur off the main Ethereum chain, with periodic synchronization to ensure everything stays secure and up-to-date.

The Future of Layer 2

Despite these advancements, there's still much work to be done in the Layer 2 space. Scalability and interoperability are two major areas where further development is needed. Scalability refers to the ability of Layer 2 solutions to handle an increasing number of transactions without compromising performance. In essence, without a scaling solution, Layer 2 platforms could become just as congested as the mainnet.  Interoperability involves ensuring different Layer 2 solutions can work together seamlessly and integrate well with Ethereum Layer 1 and other blockchain networks. 

User adoption and education are also critical. Many users are still unaware of how Layer 2 solutions work or how to use them effectively. Simplifying the user experience and providing more educational resources will help bridge this gap and encourage broader adoption.

Wrap Up

Gas fees are the most significant barrier to main-stream adoption of Ethereum and other blockchain technology.  Users are used to low-cost or no-cost internet access, and trading that for a system that requires you to pay for everything you do is a pretty hard sell. Ethereum Layer 2 technology offers a promising solution by offloading transactions to secondary layers.  These solutions are net yet mature, but we are on the right path. As the Ethereum ecosystem continues to evolve, Layer 2 solutions will play a crucial role in driving user adoption and making blockchain solutions accessible to everyday users.  I’m excited to see where we go from here!

For additional explorations of blockchain and Ethereum-related ideas, consider checking out my other articles:

Ethereum is WAY Different from Bitcoin: Learn How, and Why It Matters

What is a Zero-Knowledge Proof, and Why Should I Care?

Proving Your Identity in the AI Era: The Power of Ethereum Blockchain Technology