By Andreas Freund, EEA Mainnet Interest Group Member
The following is a current state of the Ethereum scalability ecosystem mini report, which is longer and more in depth than a typical blog post.
Many enterprises have abandoned private Blockchain consortia due to several factors: the absence of meaningful network effects in private Blockchain implementations –which tend to make them more expensive and cumbersome to manage within a consortium of competing entities than a shared database system – as well as the lack of accessibility of the DeFi ecosystem with its new and rapidly growing, and, therefore, very profitable asset classes. Ethereum Layer 2 (L2) scalability solutions offer an opportunity to fit the square peg of Ethereum Mainnet into the round hole of enterprise security, privacy, and compliance requirements since many L2 solutions are de facto centralized databases with clever cryptography. They can also provide access to the world of DeFi asset classes, allowing Mainnet network effects to spill over to enterprise solutions through those DeFi asset classes. This makes for a new, and symbiotic, relationship between enterprise use cases on L2 and the Ethereum Mainnet through both asset and user growth.
A Brief Introduction to Layer 2 and other Scalability Solutions for Ethereum
The Ethereum Mainnet has become a victim of its own success in that it currently serves as a significant bottleneck for the growth of its ecosystem; network issues have arisen due to high transaction fees and the limited number of transactions allowed per block, endangering the economic viability of Ethereum-based protocols, start-ups, and others with sound business models. While Eth2, the next version of Ethereum, promises a 100x increase in transaction scalability and significantly reduced transaction fees, its rollout is still 12 months or more away. Ethereum scalability challenges need to be addressed today if Ethereum wants to retain its leadership position as the most popular, and most used blockchain network in the world.
Over the last 2 – 3 years several types of solutions have emerged that address the scaling and transaction cost challenges. What they have in common is that all perform the heavy transaction processing off the Ethereum Mainnet (i.e off-chain) in various forms of centralized or decentralized computing environments, while Mainnet is used as the security and data integrity anchor in various forms. These solutions are what is colloquially called Layer 2 (L2) because they are solutions sitting above the Ethereum Mainnet, also often referred to as Layer 1.
Below is a brief overview of the major scalability solution categories followed by a brief description of the characteristics of each solution category:
- State Channels
- Optimistic Rollups
- Zero-Knowledge (zk) Rollups