DeFi Space: Layer 2 Scaling Solutions
Ever since its nascence, Ethereum has had a plethora of decentralized applications dApps developed on it, which sparked a boom of decentralized economy and decentralized finance (DeFi). dApps are different from standard web applications, such as Twitter, that run on a computer system owned and operated by an organization, in a way that dAPPs run in a decentralized way- on a network of computers.
It makes a difference because a decentralized ecosystem is free from control and interference by any single authority. We are creating a new model of the economy, which largely depends on computer programs, computing efficiency and relies on the strength of the network rather than on a single entity.
The Ethereum blockchain operates as a distributed computing network that is run by miners. Ethereum miners- computers running software- use their time and computation power to process transactions and produce blocks.
Mining creates a block of transactions to be added to the Ethereum blockchain. For this, miners are rewarded- they earn revenue through a combination of transaction fees and block rewards- newly issued ETH.
Whilst earlier the transaction fees were reasonable, today, users are complaining about the high cost to conduct transactions. High fees mean that there is a high demand for usage, which also causes network congestion and prices out certain users.
Why Are Scaling Solutions Necessary?
Scaling solutions can tackle the aforementioned problems by providing respite for the blockchain without needing to increase block sizes or introduce other measures that would tamper with the technology’s capacity for decentralization and high levels of security.
The explosion of DeFi applications- lending, investing protocols such as Compound and Aave, decentralized exchanges such as Uniswap, and new token launches contributed to a sharp rise in competition for transaction priority. The gas price is dependent on demand block space- for the transaction to be included in the next block.
While this is fantastic for the development of the decentralized economy, increased demand and use of applications, high gas fees in a congested and slow network are creating friction.
At such gas prices, trading at decentralized exchanges (DEX), which are based on Automated Market Makers (AMMs), has become relatively expensive. AMM- based DEXs operate in a framework of smart contracts, that automatically send the tokens to the liquidity pool and then exchange them for the counterpart token from the pair.
Ethereum Layer 2 Solutions
An L2 solution runs on top of the main chain (Layer 1 or L1) of Ethereum. It exists on the Ethereum network as a smart contract and does not need changes to the base level protocol to interact. L2 solutions have different functions, like scaling payments, off-chain computation, or smart contracts. However, they all have one similar feature — to move most of the transactions off the chain. This allows L2 solutions to improve the transaction processing rate (TPS) while lowering the gas fee. As the Ethereum network gets congested and incurs high gas fees on even simple transactions, many L2 solutions have come up in the crypto space to solve the inherent issues.
Arbitrum
A product of Off-chain Labs, Arbitrum interoperates closely with Ethereum to allow Solidity developers to easily cross-compile their smart contracts. The platform consists of three main components — Compiler, EthBridge, and Validators.
As the name says, the Compiler compiles a set of smart contracts written in Solidity into a single executable file that can run on the Arbitrum Virtual Machine (AVM). Eth Bridge is a decentralized application (dApp) deployed on Ethereum that serves as a bridge between Arbitrum and Ethereum networks. On the other hand, Validators are responsible for working almost entirely off-chain and keeping track of the state of the AVM. It is also important to note the platform doesn’t have a native token and has no plans to launch one soon.
Furthermore, Arbitrum also supports a sidechain aggregation of transactions called rollup technology. It is set to launch on May 28, 2021, with developers’ support from Alchemy. Additionally, the platform has a huge list of partners, including Graph Protocol, OKEx, ChainLink, to name a few.
Optimism
Optimism is an L2 scaling protocol designed to make transactions affordable and faster for Ethereum users. With only a few exceptions, developers can build Solidity smart contracts that can run on Optimism. Additionally, off-chain codes like wallets and UIs can interact with L2 contracts of the platform. The mainnet public launch of the Optimism network was scheduled for March, which didn’t happen, and now the project is expected to launch in July.
The platform has a strong partnership with SynthetiX as it recently allowed SNX token holders to stake on Optimism L2 solution. Additionally, Optimism has partnered with Etherscan and Rubicon.
Polygon (formerly Matic)
Polygon is a framework for building and connecting Ethereum-based blockchain networks. The platform provides all necessary tools and components, which developers can utilize to create optimized instances of Ethereum. These instances combine standalone blockchain features like scalability, sovereignty, and flexibility with Ethereum’s security and developer experience.
As Ethereum delays its transition to ETH2.0, the Polygon network is growing at an exponential rate. Despite the ongoing slow market, the native Matic token’s price is hovering around the $2 price range. Besides, the platform has a reputable list of partners, including Graphlink, Umbrella Network, Mogul Productions, Kambria Open Innovation, and many more.
In fact, the creator of Ethereun, Vitalik Buterin, says that rollups are the only choice for scalability of Ethereum:
‘In the short term, I just don’t see rollups as being one choice among many things; I see them as being the only choice.’
What to expect from Layer 2, what benefits does it bring to an every- day crypto user and Ethereum network-powered economy?
Expect much faster transaction confirmations on L2, cheaper gas fees, and more seamless and quick interaction between transactions overall. On L2, decentralized finance transactions and trading on a decentralized exchange are set to come very come to the feeling of being implemented on a centralized finance platform.
forbitswap is an open-source decentralized finance space protocol an advanced transaction builder made simple — a system where anyone can swap tokens, trading, contribute tokens to a pool and earn fees, or list a token on forbitswap. Also, readily manage a range of various activities, That’s at the core value of what makes forbitswap protocol a more robust and transparent financial infrastructure.
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