Since its proposal in 2008 as a decentralized payment network, blockchain technology has come a long way and is now powering various applications, such as DeFi, GameFi, NFTs, the metaverse, and Web3. As it ventures into mainstream adoption, the issue of scalability becomes increasingly important.
Even though Ethereum and Bitcoin are critical Layer-1 networks, they have limited throughput and lag behind traditional systems regarding transaction processing speed. Bitcoin's network processes about 7 transactions per second (TPS), while Ethereum's Layer-1 handles approximately 15 TPS as of 2024. These figures are significantly lower than traditional systems like VISA, which can handle around 1,700 TPS.
This article examines how Layer-2 solutions can enhance blockchain TPS, the most promising Layer-2 projects in 2024, and how they aim to address the blockchain trilemma.
What are Layer-2 protocols in crypto?
Layer-2 solutions are scaling solutions essential for improving the performance and scalability of Layer-1 blockchains, such as Ethereum. These protocols operate on top of the primary blockchain, significantly reducing congestion, lowering transaction costs, and increasing throughput.
How do Layer-2 solutions work?
Layer-2 networks operate on the off-chain transaction processing principle, resulting in a consolidated summary transaction on the main chain. This method reduces network congestion, processing time, and transaction costs.
Using Layer 2 protocols, transactions are diverted off the main blockchain and processed separately. They act like a dedicated traffic management system. This process reduces congestion on the blockchain, leading to faster transactions, lower fees, and increased throughput.
Types of Layer-2 Solutions
Layer-2 solutions act as express transaction lanes, bypassing traffic jams and congestion on Layer-1 blockchain networks. Various types of Layer-2 solutions are reshaping the blockchain landscape.
— Optimistic rollups
Optimistic Rollups are a popular scaling solution for Ethereum's Layer 2 network. They assume transactions are valid unless proven otherwise, reducing verification costs and allowing for faster processing.
— Zero-Knowledge Rollups (zk Rollups)
Zk Rollups combines transactions into a single proof for enhanced privacy and efficiency. These have some key features, including enhanced privacy and scalability. Zk Rollups also have minimal computational strain on the blockchain, making them popular in DeFi and NFT applications.
— Ethereum Plasma Chains
Plasma chains are Ethereum layer-2 networks that act as specialized sidechains connected to the Ethereum mainnet. They offer faster transactions, lower fees, and a distinct approach compared to rollup-based solutions.
— Validium
Validium is a layer-2 scaling technology that moves transactions off-chain for validation. This ensures security through cryptographic proofs without compromising on scalability. It's perfect for applications that prioritize speed and throughput.
Top 10 Layer-2 networks ranked by throughput
Layer-2 solutions are crucial for faster blockchain transactions. Let's explore some leading blockchain protocols that employ this technology for improved efficiency and scalability.
1. Lightning Networks
Throughput: Up to 1 million TPS
TVL: $198 million+
Market cap: NA
Technology: Bi-directional payment channels, Smart contracts.
The Lightning Network is an off-chain solution for faster, cheaper, and more accessible Bitcoin microtransactions. It offers near-instant transaction confirmation with significantly reduced fees and addresses scalability issues. Lightning Network has advantages for micropayments and everyday transactions but poses challenges like technical complexity, limited adoption, and security vulnerabilities. To decide if it's right for you, weigh the benefits against the risks and consider the network's future potential.
2. Coti
Throughput: 100,000 TPS
TVL: $28.98 million
Market cap: $72.1 million
Technology: ZK Rollup
Coti was initially a scaling solution for Cardano but is now transitioning to a privacy-centric Layer-2 network for Ethereum. The COTI token has multiple uses, including transaction fees, staking, governance, merchant processing, and trust scoring in the Coti network. Current COTI tokens will be migrated to the new L2 network on Ethereum.
Coti is moving from DAG to EVM. Garbled circuits will still be used for privacy. Ethereum Layer-2 will increase transaction speed. This shift creates opportunities for Ethereum developers to build privacy-focused dApps. Coti's IBC protocol allows integration with other blockchains. However, the transition requires careful adaptation and development.
3. Polygon
Throughput: 65,000 TPS
TVL: $4 billion
Market cap: $7.5 billion+
Technology: zk Rollup
Polygon is a multichain ecosystem that offers Layer-2 solutions to scale Ethereum with faster transactions and lower gas fees. It includes zkRollups and Proof-of-Stake consensus mechanisms. The native token, MATIC, is used for gas fees, staking, and network governance. Polygon's throughput surpasses 65,000 TPS, making it ideal for DeFi applications and NFT marketplaces due to its low transaction fees.
It integrates easily with Ethereum and other chains. Popular DeFi protocols like Aave, SushiSwap, and Curve operate on its thriving ecosystem. Top NFT marketplaces like OpenSea and Rarible also use Polygon's solutions. Its developer-friendly tools attract innovative projects and hold one of the highest DeFi TVLs among Layer-2 networks.
4. Dymension
Throughput: 20,000 TPS
TVL: 10.42 million DYM
Market cap: NA
Technology: RollApps
Dymension is a blockchain ecosystem with specialized blockchains called RollApps. It uses enshrined rollups and supports interoperability with other blockchains via the IBC protocol.
Developers can customize RollApps by selecting consensus mechanisms, smart contracts, and data solutions. Dymension Hub's security and rollups ensure a transparent ecosystem. Dymension's modular design allows for scaling individual RollApps without affecting the entire network.
DYM is a multi-functional native token used for gas fees, governance, and staking in the Dymension ecosystem. The platform offers various features like DeFi protocols, NFT marketplaces, and other dApps. However, it may seem complex for beginners as it is still under development.
5. Immutable X
Throughput: 9,000 TPS+
TVL: $169 million
Market cap: $2.51 billion+
Technology: Validium
Immutable X is a Layer 2 network that enhances the Web3 gaming experience. It's fast, affordable, and secure, allowing for over 4,000 TPS with minimal fees. The network is powered by IMX tokens, which enable staking, governance participation, and pay fees.
Gamers benefit from quick transactions, ownership of actual NFTs, and game interoperability, while developers enjoy low costs, easy-to-use tools, and a supportive community. ImmutableX is a popular Ethereum Layer-2 blockchain for NFTs with high throughput and significant market share.
6. Manta Network
Throughput: 4,000 TPS
TVL: $951 million
Market cap: $565 million
Technology: zk Rollup
Manta Network prioritizes privacy by offering anonymous transactions and confidential smart contracts for Ethereum. It has two modules: Manta Pacific for efficient transactions and Manta Atlantic for private identity management using zkSBTs. Manta uses zero-knowledge cryptography to ensure transaction validity without compromising privacy. It also provides Universal Circuits, making it easy for developers to create privacy-centric DeFi apps.
In addition to privacy, Manta Network is highly scalable with 4,000 TPS on Manta Pacific. It is also EVM compatible and interoperable with Ethereum and other blockchains via bridges and IBC.
Manta is the native token used for gas fees, staking, and governance in the Manta Network. It has fueled the network's success, making it the third-largest Ethereum layer-2 network by TVL as of January 2024.
7. Starknet
Throughput: 2,000-4,000 TPS
TVL: $164 million
Market cap: NA
Technology: zk Rollup
Starknet uses STARK proofs to validate transactions off-chain, allowing millions of transactions per second. This reduces transaction fees, making blockchain interactions almost cost-free. It has a developer-friendly environment, powerful tools, and a familiar programming language, Cairo. It aims to be fully decentralized and hosts a growing ecosystem of innovative dApps across DeFi, NFTs, gaming, and more.
While Starknet's cryptographic nature may appear daunting to newcomers, it is essential to note that the platform is still in its developmental stages, and its user base is smaller than that of more established Layer 2 solutions. As such, users may need to adapt to upgrades and potential changes in the future.
8. Arbitrum
Throughput: 2,000-4,000 TPS
TVL: $10.7 billion
Market cap: $2.37 billion+
Technology: Optimistic Rollup
Arbitrum is a developer-friendly Ethereum Layer-2 network with a peak throughput of 4,000 TPS, making it up to 10 times faster than Ethereum's mainnet and reducing gas costs by up to 95%. As of January 2024, it has captured over 51% of the market share among Ethereum Layer-2 networks in terms of TVL and is home to various DeFi protocols, NFT marketplaces, and gaming platforms.
Arbitrum's ARB token has multiple uses, including transaction fees, staking, and network governance. As an L2 solution, it relies on Ethereum's mainnet security. Despite risks associated with its recent launch, Arbitrum is gaining traction and becoming a key player in the L2 space thanks to a strong development team and community.
9. Optimism
Throughput: 2,000 TPS
TVL: $5.5 billion
Market cap: $3 billion+
Technology: Optimistic Rollup
When leveraging Optimistic Rollups, Optimism provides Ethereum security and reliability without scalability issues. It can handle a peak throughput of 4,000 TPS, processing transactions up to 26 times faster than Ethereum's mainnet. Additionally, it reduces gas costs by up to 90%.
The Optimism community is dedicated to becoming self-governing and provides various DeFi protocols, NFT marketplaces, and DAOs. It also offers a developer-friendly environment with accessible tools and a collaborative community. Optimism is committed to becoming a self-governing community and hosts various DeFi protocols, NFT marketplaces, and DAOs. It offers a developer-friendly environment with familiar tools and a collaborative community.
The OP native token serves multiple purposes: transaction fees, staking, and network governance. It should be noted that Optimism's use of the Ethereum mainnet does come with inherent risks, and its decentralization process requires continual monitoring. Nonetheless, Optimism's dedicated team and an engaged community are continuously improving its technology and ecosystem, making it a front-runner in the Layer 2 space.
10. Base
Throughput: 2,000 TPS
TVL: $729 million
Market cap: NA
Technology: Optimistic Rollup
Coinbase has developed a layer-2 protocol called Base to enhance Ethereum's potential by increasing transaction speed and reducing fees. Base uses the OP Stack and Optimistic Rollups to achieve a throughput of 2,000 TPS and promises near-instant transactions. It aims to reduce Ethereum's gas costs by up to 95%, making it more affordable for DeFi and NFT activities.
Base is a developer-friendly platform that guarantees asset safety through off-chain processing while leveraging Ethereum's security. It is worth keeping an eye on Base as it is a constantly evolving Layer-2 solution that focuses on speed, affordability, and developer friendliness.
Conclusion
Layer-2 blockchain protocols have become integral to improving blockchain ecosystems. They play a crucial role in making transactions faster, more cost-effective, and scalable by addressing the limitations of Layer-1 protocols.
These Layer-2 networks represent a transformative phase in the evolution of blockchain technology. They are not just a trend but a tectonic shift, shaping the future of the crypto industry. From booming Ethereum L2 projects to innovative Bitcoin scaling solutions, these networks pave the way for broader adoption, unlocking new opportunities. They prove that blockchain can be fast, affordable, and accessible for everyone, making it a promising technology for the future.
FAQ
1. What is Layer-2 scaling in cryptocurrency?
Layer-2 scaling refers to solutions built on top of existing blockchains to enhance their scalability and performance. These solutions aim to ease congestion and high fees by processing transactions off-chain or in a parallel network.
2. Why are Layer-2 solutions important?
Layer-2 solutions are crucial because they address the scalability limitations of many blockchain networks like Ethereum. They enable faster and cheaper transactions, making decentralized applications (dApps) more accessible and scalable.
3. How were the top 10 Layer-2 crypto projects selected?
The top 10 Layer-2 crypto projects were selected based on factors such as innovation, adoption, team expertise, community support, and potential impact on the blockchain ecosystem.
4. Are Layer-2 solutions interoperable with different blockchains?
Many Layer-2 solutions are designed to be interoperable with multiple blockchains. This interoperability allows users to leverage Layer-2 scaling benefits across various blockchain ecosystems.
5. What are the benefits of investing in Layer-2 crypto projects?
Investing in Layer-2 crypto projects offers potential benefits such as early access to innovative technologies, exposure to growing ecosystems, and the opportunity to contribute to blockchain technology's scalability and mass adoption.
6. How do Layer-2 solutions affect decentralization?
Layer-2 solutions can enhance decentralization by reducing congestion on the main blockchain, enabling more participants to interact with the network without sacrificing security or decentralization.
7. What risks should investors consider when investing in Layer-2 crypto projects?
Investors should be aware of risks such as regulatory uncertainty, competition from other scaling solutions, technical vulnerabilities, and the potential for project failure or underperformance.
8. Are Layer-2 solutions limited to specific use cases?
No, Layer-2 solutions can be applied to various use cases beyond simple transactions, including decentralized finance (DeFi), non-fungible tokens (NFTs), gaming, supply chain management, and more.