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Who Will Win The Layer 2 Race?

Who will win the layer 2 race
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Ethereum, the second most popular cryptocurrency, has a massive problem – it can’t scale all that well. This has become an actual problem on Ethereum with high gas fees for transactions and slow transaction times. 

However, there is good news with all this. Developers working independently of Ethereum are building something called “layer 2 solutions.” Basically, a layer 2 solution operates as, well, a layer on the Ethereum blockchain. It is still Ethereum, but it has the benefit of significantly lower gas fees and faster transaction times. 

We’ll put it bluntly, layer 2 solutions are the future of Ethereum. This article will hypothesize about likely winners of the layer 2 race.

The Types of Layer 2 Solutions

There are three main types of layer 2 solutions with one that is kind of considered a layer 2 solution despite not actually being one. These different types are the following:

  • Sidechains
  • Rollups
  • State Channels
  • Plasma

Sidechains

Sidechains are not technically a layer 2 solution – they have a separate blockchain, security protocols, and are not technically Ethereum like other layer 2 solutions.

That said, they still are a solution to the Ethereum scaling problem, so it’s worth mentioning sidechains in the layer 2 discussion. 

Now, they might be a separate blockchain, but that does not mean sidechains do not communicate with Ethereum. Sidechains are able to communicate with Ethereum through the Ethereum Virtual Machine (EVM). 

Assets are moved by locking them into a smart contract on Ethereum and minting them on the sidechain (or the other way around). It is essentially creating value by locking it into a smart contract on Ethereum. 

Again, these are not layer 2 solutions because they have their own nodes, consensus methods, and security protocols. Sidechains are more of a hybrid between a layer 2 and a completely separate blockchain.

Rollups

Rollups are, in our opinion, the most likely solution to the layer 2 race. They are also the newest layer 2 solution to hit the market. 

The technical details of how rollups work are kind of complicated to fully understand. The basics are that there are two types of rollups – optimistic rollups and zero knowledge rollups (ZK Rollups).
ZK Rollups require zero knowledge proofs as the name sort of implies. Anyway, they work by having an operator rollup a bunch of transactions, a cryptographic zero knowledge proof (SNARK) is generated alongside that, the state is updated on the mainchain, and the SNARK is used to verify that proof. 

Optimistic Rollups work in a similar fashion with operators rolling up transactions to the mainchain. But verification is done by other nodes and any fraudulent updates will be reverted and the fraudster will have their bond revoked. 

The big selling point with Optimistic Rollups is that they are compatible with the EVM, which makes it a really simple task for dApps to integrate Optimistic Rollups. 

State Channels

State channels are the original layer 2 solution on Ethereum. Sadly, they are not a particularly good layer 2 solution because of how they operate. The basics are that funds are locked in a multi-sig contract, transactions are signed off-chain, and funds are withdrawn off the multi-sig contract when the offchain contract is posted to the mainchain.

The only time that gas fees are paid is when funds enter the multi-sig contract and when one party wants to take Ethereum off the contract. There are only ever two times that gas fees are paid when using state channels.  

Again, state channels are not the best layer 2 solution for mass adoption. But they do have their uses if two parties want to exchange funds on a somewhat regular basis. 

Plasma

Plasma is the final layer 2 we will talk about. The basics are that Plasma uses something called child chains of the main Ethereum blockchain. These chains remove a lot of bloat from the main Ethereum blockchain and do a decent job at lowering transaction fees. 

The downside with Plasma is that it can take a few weeks to withdraw funds off the child chains. Most Ethereum users are not particularly happy with using Plasma, so Plasma likely has no hope of winning the layer 2 race. 

The Top 4 Contenders to Win The Ethereum Layer 2 Race

We have offered a brief overview of the three types of layer 2 solutions (and sidechains that are not technically layer 2 solutions). The important part to note, however, is that just because a layer 2 solution exists does not mean it will automatically be successful. 

In fact, the only layer 2 solutions most in the Ethereum community believe actually have a chance at succeeding are rollups and sidechains. And sidechains are not technically layer 2 solutions!

Polygon

The first contender to win the layer 2 race is Polygon. You probably recognize this layer 2 solution because its native token (MATIC) has experienced tremendous growth over the past few months. Also, Polygon used to be known as Matic, but there was a rebranding after Polygon and Matic merged together. 

Anyway, Polygon is attempting to connect a bunch of different Ethereum blockchains together to form an “Internet of Ethereum.” Now, Polygon is not using one layer 2 solution. Instead, they are using a bunch of different layer 2 solutions together to make this very comprehensive layer 2 solution on Ethereum.

Some solutions that Polygon uses include ZK rollups,Plasma, Optimistic Rollups, and even some sidechains like Matic’s PoS sidechain. 

It really is a massive undertaking to do all this. Fortunately, Polygon has seen some level of success by getting SushiSwap, Aave, 1inch, and other small dApps on DeFi make the move to Polygon. 

To summarize, Polygon is definitely the layer 2 solution that you should keep your eye on in the future. You can even make an investment in it by purchasing MATIC, which is probably something you should do to get some exposure to an asset that can rise in value.

Optimism Rollups

Optimism is a layer 2 solution that uses Optimistic Rollups as its scaling solution. We covered Optimistic Rollups in a previous section. The main advantage of Optimistic Rollups are there compatibility with the EVM, which makes it extremely simple for dApps to integrate them. 

In fact, this has led to a lot of announced partnerships that include Chainlink and Uniswap. 

The only problem Optimism has is that the mainnet has not been launched. The good news, however, is that the mainnet will be launched within a month barring any unexpected delays. 

Overall, Optimism is another layer 2 that has a very solid chance of success. We would rank it higher than Polygon because of how well Optimism interacts with the EVM. But it loses a rank because Optimism has not yet been released to the public. 

Also, it isn’t possible to invest in Optimism directly. Our recommendation for investing in Optimism is to simply purchase Ethereum. If Optimism does well, then Ethereum is almost certainly guaranteed to perform well. 

Loopring

Loopring is the ZK Rollups layer 2 scaling solution. Basically, Loopring with match orders on exchanges off the mainchain and then upload them in a single batch to the mainchain. This saves a lot in gas fees because each batch can hold ~2000 transactions. 

A fully detailed breakdown of Loopring is far beyond the scope of this article. However, Loopring is certainly a contender to win the layer 2 scaling race. 

The important thing to note with Loopring is that it will likely work better with Ethereum 2.0 and sharding than the current version of Ethereum, so this is a scaling solution that will likely become more popular after Ethereum 2.0. 

For the record, the redundancy of layer 2 solutions after Ethereum 2.0 is a major concern. 

Anyway, you can invest in Loopring by purchasing its native currency Loopring (LRC). It surged in 2018 when it was launched and has had some mild success in 2021, but it still has not eclipsed its 2018 high. 

OMG Network

OMG Network is a layer 2 solution that uses Plasma for its architecture. There is a native token – OMG – used for paying for transaction fees and can even be staked. Yes, OMG will eventually be a proof of stake cryptocurrency on the Ethereum blockchain. 

More interestingly, OMG Network has also launched something called OMGX that supports the Ethereum Virtual Machine.

OMG Network is a viable layer 2 solution in our opinion. It’s actually one of the more underrated layer 2 solutions, but it does use Plasma and many users are not big fans of Plasma. 

Can Layer 2s Save Ethereum?

Yes, layer 2 scaling solutions will ‘save’ Ethereum. We put save in quotes because Ethereum does not really need saving. But the high gas fees are scaring off a lot of smaller investors and layer 2 scaling solutions offer a good fix to this problem. 

That said, it is still a temporary fix. Ethereum cannot simply run on layer 2 solutions – the layer 1 needs to find a way to fix the gas fees to fully maximize the layer 2 solutions.

Will Ethereum 2.0 Make Layer 2s Irrelevant?

No, Ethereu 2.0 will probably not make layer 2 solutions irrelevant. It actually seems more likely that Ethereum 2.0 will make layer 2 solutions even more powerful. 

Sure, Ethereum 2.0 will have lower gas fees and faster transaction times. Layer 2 solutions on Ethereum 2.0 will have even lower gas fees and even faster transaction times, which will certainly give them some appeal. 

We find it likely that there will be a golden age of layer 2 solutions with the release of Ethereum 2.0. This obviously makes it the perfect time to invest in a layer 2 solution like MATIC or OMG.

Closing Thoughts

That sums it up for the layer 2 race in Ethereum and the likely winners. If we had to pick a winner right now, then we would go with Polygon. 

However, it is still far too early in the layer 2 race to accurately pick a winner. There will likely be a few major failures of layer 2 projects and a few brand new layer 2 projects that emerge out of nowhere to much popularity. 

This is all part of the excitement of being involved on the ground floor of highly innovative technology. 

Ethereum, the second most popular cryptocurrency, has a massive problem – it can’t scale all that well. This has become an actual problem on Ethereum with high gas fees for transactions and slow transaction times. 

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However, there is good news with all this. Developers working independently of Ethereum are building something called “layer 2 solutions.” Basically, a layer 2 solution operates as, well, a layer on the Ethereum blockchain. It is still Ethereum, but it has the benefit of significantly lower gas fees and faster transaction times. 

We’ll put it bluntly, layer 2 solutions are the future of Ethereum. This article will hypothesize about likely winners of the layer 2 race.

The Types of Layer 2 Solutions

There are three main types of layer 2 solutions with one that is kind of considered a layer 2 solution despite not actually being one. These different types are the following:

  • Sidechains
  • Rollups
  • State Channels
  • Plasma

Sidechains

Sidechains are not technically a layer 2 solution – they have a separate blockchain, security protocols, and are not technically Ethereum like other layer 2 solutions.

That said, they still are a solution to the Ethereum scaling problem, so it’s worth mentioning sidechains in the layer 2 discussion. 

Now, they might be a separate blockchain, but that does not mean sidechains do not communicate with Ethereum. Sidechains are able to communicate with Ethereum through the Ethereum Virtual Machine (EVM). 

Assets are moved by locking them into a smart contract on Ethereum and minting them on the sidechain (or the other way around). It is essentially creating value by locking it into a smart contract on Ethereum. 

Again, these are not layer 2 solutions because they have their own nodes, consensus methods, and security protocols. Sidechains are more of a hybrid between a layer 2 and a completely separate blockchain.

Rollups

Rollups are, in our opinion, the most likely solution to the layer 2 race. They are also the newest layer 2 solution to hit the market. 

The technical details of how rollups work are kind of complicated to fully understand. The basics are that there are two types of rollups – optimistic rollups and zero knowledge rollups (ZK Rollups).
ZK Rollups require zero knowledge proofs as the name sort of implies. Anyway, they work by having an operator rollup a bunch of transactions, a cryptographic zero knowledge proof (SNARK) is generated alongside that, the state is updated on the mainchain, and the SNARK is used to verify that proof. 

Optimistic Rollups work in a similar fashion with operators rolling up transactions to the mainchain. But verification is done by other nodes and any fraudulent updates will be reverted and the fraudster will have their bond revoked. 

The big selling point with Optimistic Rollups is that they are compatible with the EVM, which makes it a really simple task for dApps to integrate Optimistic Rollups. 

State Channels

State channels are the original layer 2 solution on Ethereum. Sadly, they are not a particularly good layer 2 solution because of how they operate. The basics are that funds are locked in a multi-sig contract, transactions are signed off-chain, and funds are withdrawn off the multi-sig contract when the offchain contract is posted to the mainchain.

The only time that gas fees are paid is when funds enter the multi-sig contract and when one party wants to take Ethereum off the contract. There are only ever two times that gas fees are paid when using state channels.  

Again, state channels are not the best layer 2 solution for mass adoption. But they do have their uses if two parties want to exchange funds on a somewhat regular basis. 

Plasma

Plasma is the final layer 2 we will talk about. The basics are that Plasma uses something called child chains of the main Ethereum blockchain. These chains remove a lot of bloat from the main Ethereum blockchain and do a decent job at lowering transaction fees. 

The downside with Plasma is that it can take a few weeks to withdraw funds off the child chains. Most Ethereum users are not particularly happy with using Plasma, so Plasma likely has no hope of winning the layer 2 race. 

The Top 4 Contenders to Win The Ethereum Layer 2 Race

We have offered a brief overview of the three types of layer 2 solutions (and sidechains that are not technically layer 2 solutions). The important part to note, however, is that just because a layer 2 solution exists does not mean it will automatically be successful. 

In fact, the only layer 2 solutions most in the Ethereum community believe actually have a chance at succeeding are rollups and sidechains. And sidechains are not technically layer 2 solutions!

Polygon

The first contender to win the layer 2 race is Polygon. You probably recognize this layer 2 solution because its native token (MATIC) has experienced tremendous growth over the past few months. Also, Polygon used to be known as Matic, but there was a rebranding after Polygon and Matic merged together. 

Anyway, Polygon is attempting to connect a bunch of different Ethereum blockchains together to form an “Internet of Ethereum.” Now, Polygon is not using one layer 2 solution. Instead, they are using a bunch of different layer 2 solutions together to make this very comprehensive layer 2 solution on Ethereum.

Some solutions that Polygon uses include ZK rollups,Plasma, Optimistic Rollups, and even some sidechains like Matic’s PoS sidechain. 

It really is a massive undertaking to do all this. Fortunately, Polygon has seen some level of success by getting SushiSwap, Aave, 1inch, and other small dApps on DeFi make the move to Polygon. 

To summarize, Polygon is definitely the layer 2 solution that you should keep your eye on in the future. You can even make an investment in it by purchasing MATIC, which is probably something you should do to get some exposure to an asset that can rise in value.

Optimism Rollups

Optimism is a layer 2 solution that uses Optimistic Rollups as its scaling solution. We covered Optimistic Rollups in a previous section. The main advantage of Optimistic Rollups are there compatibility with the EVM, which makes it extremely simple for dApps to integrate them. 

In fact, this has led to a lot of announced partnerships that include Chainlink and Uniswap. 

The only problem Optimism has is that the mainnet has not been launched. The good news, however, is that the mainnet will be launched within a month barring any unexpected delays. 

Overall, Optimism is another layer 2 that has a very solid chance of success. We would rank it higher than Polygon because of how well Optimism interacts with the EVM. But it loses a rank because Optimism has not yet been released to the public. 

Also, it isn’t possible to invest in Optimism directly. Our recommendation for investing in Optimism is to simply purchase Ethereum. If Optimism does well, then Ethereum is almost certainly guaranteed to perform well. 

Loopring

Loopring is the ZK Rollups layer 2 scaling solution. Basically, Loopring with match orders on exchanges off the mainchain and then upload them in a single batch to the mainchain. This saves a lot in gas fees because each batch can hold ~2000 transactions. 

A fully detailed breakdown of Loopring is far beyond the scope of this article. However, Loopring is certainly a contender to win the layer 2 scaling race. 

The important thing to note with Loopring is that it will likely work better with Ethereum 2.0 and sharding than the current version of Ethereum, so this is a scaling solution that will likely become more popular after Ethereum 2.0. 

For the record, the redundancy of layer 2 solutions after Ethereum 2.0 is a major concern. 

Anyway, you can invest in Loopring by purchasing its native currency Loopring (LRC). It surged in 2018 when it was launched and has had some mild success in 2021, but it still has not eclipsed its 2018 high. 

OMG Network

OMG Network is a layer 2 solution that uses Plasma for its architecture. There is a native token – OMG – used for paying for transaction fees and can even be staked. Yes, OMG will eventually be a proof of stake cryptocurrency on the Ethereum blockchain. 

More interestingly, OMG Network has also launched something called OMGX that supports the Ethereum Virtual Machine.

OMG Network is a viable layer 2 solution in our opinion. It’s actually one of the more underrated layer 2 solutions, but it does use Plasma and many users are not big fans of Plasma. 

Can Layer 2s Save Ethereum?

Yes, layer 2 scaling solutions will ‘save’ Ethereum. We put save in quotes because Ethereum does not really need saving. But the high gas fees are scaring off a lot of smaller investors and layer 2 scaling solutions offer a good fix to this problem. 

That said, it is still a temporary fix. Ethereum cannot simply run on layer 2 solutions – the layer 1 needs to find a way to fix the gas fees to fully maximize the layer 2 solutions.

Will Ethereum 2.0 Make Layer 2s Irrelevant?

No, Ethereu 2.0 will probably not make layer 2 solutions irrelevant. It actually seems more likely that Ethereum 2.0 will make layer 2 solutions even more powerful. 

Sure, Ethereum 2.0 will have lower gas fees and faster transaction times. Layer 2 solutions on Ethereum 2.0 will have even lower gas fees and even faster transaction times, which will certainly give them some appeal. 

We find it likely that there will be a golden age of layer 2 solutions with the release of Ethereum 2.0. This obviously makes it the perfect time to invest in a layer 2 solution like MATIC or OMG.

Closing Thoughts

That sums it up for the layer 2 race in Ethereum and the likely winners. If we had to pick a winner right now, then we would go with Polygon. 

However, it is still far too early in the layer 2 race to accurately pick a winner. There will likely be a few major failures of layer 2 projects and a few brand new layer 2 projects that emerge out of nowhere to much popularity. 

This is all part of the excitement of being involved on the ground floor of highly innovative technology. 

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