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Glossary

Layer 2

Layer 2 refers to blockchain protocols built on top of Layer 1 networks to enhance scalability, reduce transaction costs, and improve efficiency while leveraging the security of the underlying Layer 1 blockchain. Layer 2 solutions process transactions off-chain or in parallel and submit proofs or summaries back to the Layer 1 blockchain for validation. Examples include Optimistic Rollups, zk-Rollups, and State Channels.

It is important to distinguish Layer 2 solutions from other scaling solutions like sidechains. Sidechains, such as Polygon, operate as independent blockchains with their own consensus mechanisms and do not directly inherit Layer 1 security. As a result, they are distinct from true Layer 2 solutions, which rely on the security model of the base Layer 1 blockchain, such as Ethereum.

Layer 2 addresses the scalability challenges faced by Layer 1 blockchains, including high gas fees, network congestion, and slow transaction speeds. By offloading computation and transaction processing to an auxiliary layer, Layer 2 improves throughput and reduces costs while maintaining the security guarantees of Layer 1.

Types of Layer 2 Solutions

  1. Optimistic Rollups
    Optimistic Rollups process transactions off-chain and assume they are valid unless proven otherwise. A fraud dispute window, typically lasting around 7 days, allows participants to challenge potentially fraudulent transactions by submitting fraud proofs. This design relies on the assumption of economic honesty, but the delay can be a drawback for time-sensitive applications. Examples include Arbitrum and Optimism.
  2. zk-Rollups (Zero-Knowledge Rollups)
    zk-Rollups use cryptographic proofs, known as zero-knowledge proofs, to instantly verify and settle transactions on Layer 1. This eliminates the need for a fraud dispute period, making zk-Rollups faster and more secure than Optimistic Rollups. However, zk-Rollups require specialized technology and have historically been more computationally intensive, which has slowed their development compared to Optimistic Rollups. Examples include zkSync and StarkNet.
  3. State Channels
    State Channels enable two parties to conduct multiple transactions off-chain by opening a private channel. Only the final state is recorded on Layer 1, making this solution ideal for high-frequency, low-value interactions like gaming or micropayments.
  4. Sidechains (Not Layer 2)
    Sidechains, like Polygon, operate independently of Layer 1 and use their own consensus mechanisms. While they provide scalability and lower transaction costs, sidechains do not inherit Layer 1 security, making them less secure than rollups. Bridges connecting sidechains to Layer 1 introduce additional vulnerabilities, as demonstrated by past exploits.

Key Features

  • Scalability: Processes transactions off-chain or in parallel, reducing the workload on Layer 1.
  • Cost Efficiency: Significantly lowers gas fees by minimizing Layer 1 computation and storage requirements.
  • Security Inheritance: True Layer 2 solutions, like rollups, leverage the security of the Layer 1 blockchain.
  • Interoperability: Bridges allow for asset transfers between Layer 1 and Layer 2, though they can introduce vulnerabilities.
  • Centralization Risks: Sequencers in rollups are often controlled by a single entity, which may create temporary centralization concerns until decentralized sequencers are implemented.

Risks and Challenges

  • Smart Contract Vulnerabilities: Bugs in Layer 2 protocols can lead to asset loss.
  • Bridge Exploits: Bridges between Layer 1 and Layer 2 are potential attack vectors.
  • Fraud Proof Delays: Optimistic Rollups require a dispute window, delaying transaction finality for up to 7 days.
  • Technical Complexity: zk-Rollups require advanced cryptographic technology, which can slow development and increase costs.

Examples of Layer 2 Solutions

  1. Optimism: An Optimistic Rollup solution designed to scale Ethereum with low-cost transactions and support for dApps.
  2. Arbitrum: A widely adopted Optimistic Rollup offering fast, affordable transactions while relying on Ethereum for security.
  3. zkSync: A zk-Rollup providing fast and secure transactions with instant finality and low fees.
  4. Polygon (Scaling Solution): While technically a sidechain, Polygon provides a scalable and cost-effective platform for Ethereum-compatible dApps.

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