Layer 2s: Explained in three levels of complexity

As the Ethereum network continues to evolve and expand, the need for scalability solutions has become increasingly pressing, even in a post-Merge world. Layer-2 solutions have emerged as a potential solution to this problem.

Starting with a simple explanation, to detailed clarification for those in the know, this article provides an overview of what layer-2 solutions are and their potential impact on the future of the Ethereum network.
 

Imagine you have a big treasure chest where you keep all your favorite things, like stickers, toys, and candy. The treasure chest is like the Ethereum network, and the things inside it are all of the transactions and smart contracts that live on Ethereum.

Now, imagine that the treasure chest is getting so full that it's taking a long time to find what you want and make space to put new things in. That is kind of like what's happening on the Ethereum network –  it's getting slower, and more expensive to make transactions.
 

In a perfect world, we want to have a bigger treasure chest. But since this isn’t an option right now, people have invented ways to make organizing the treasure chest easier. We can call these ways "layer-2 solutions". 

Think of layer-2 solutions as secret compartments in the treasure chest where you can put your things. They are separate from the main treasure chest, but you can still put your things in them and take them out. By using these secret compartments, you can find your things faster and it would cost less money.

So, layer-2 solutions on Ethereum are like secret compartments in the treasure chest that make it faster and more affordable for people to make transactions on the Ethereum network.

At its core, the Ethereum network is like a giant excel sheet where every ‘transaction’ represents an action taken, and ‘smart contracts’ are written into all the different apps you can take actions on. Transactions and smart contracts come in all different types. Some are serious like large crypto transfers, but others are more light-hearted like for gaming. 

But the Ethereum network processes all of these the same way, and doesn’t care about what the transaction is or who it’s coming from. As more users come in, the network can get slow and expensive to use. That's where layer-2 solutions come in.
 

Layer-2 solutions are like express lanes that you can use to make transactions faster and cheaper. They're built on top of the main Ethereum blockchain, but they're separate from it. This allows for more transactions to happen off the main chain and thus increasing the overall throughput of the network.
 

Think of it like a highway with a lot of cars. The main Ethereum network is like the highway, and all the cars are the transactions. When there are too many cars on the highway, it can get slow and expensive to drive. But, what if there were different lanes for each type of vehicle? Adding in a carpool car or bus lane could help you avoid the traffic and get to your destination faster and cheaper. That's what layer-2 solutions do for the Ethereum network.

Each of these solutions has its own characteristics and uses, but all share the goal of increasing the network's scalability, security and reducing the cost of transactions.

Layer-2 solutions can help Ethereum scale by moving some of the computational and transactional workload off the main Ethereum blockchain, known as the layer-1, and onto a separate network, known as the layer-2. By moving some of the transactions ‘off-chain’, layer-2 solutions improve overall performance and scalability of Ethereum. 

This allows for more transactions to happen at the same time, which in turn increases the overall throughput of the network and reduces the gas fees needed to process transactions. 
 

One of the major use cases for layer-2 solutions is micropayments, which encompass frequent but small transactions, such as in-game purchases. This is done using ‘rollups’, which bundle multiple transactions together and then record the bundle on the main Ethereum blockchain. This reduces the number of transactions that need to be recorded on the main chain, which increases speed and brings down the overall cost. This can help to enable new business models and use cases such as gaming, where micropayments are a crucial component of the in-game economy.
 

Another use case is the execution of complex smart contracts. Some layer-2 solutions like Optimism and Arbitrum allow for off-chain computation of smart contracts. If this were to be processed on the main Ethereum chain, the computational power needed would result in slower and more expensive execution – resulting in significant bloat to the network. 
 

To summarize, layer-2 solutions can help to improve the scalability, security, and cost-efficiency of the Ethereum network. As the network continues to grow and more people use it, layer-2 solutions help ensure that the network remains performant and accessible to all users. Each of these layer-2 solutions have begun sprouting their own ecosystem as well. Some focus on being DeFi heavy, others focus on being gaming or NFT specific.