Layer 2 Scaling Solutions

Last Updated on December 26, 2021

Traditional cryptocurrency projects especially Bitcoin & Ethereum 1.0 have faced issues regarding speed and scalability. Bitcoin at 3–7 transaction per second, and Ethereum 1.0 at 10–15 transaction per second, compared to Visa which can process about 20,000 transaction per second.
Solutions include:

  1. State Channels: Transactions off-chain, only the initialization and closing transaction states are imprinted on the main chain
  2. Rollups: Proof of transactions resides on layer 1 chain with the rollup (smart contract) which enforces enforce correct transaction execution on layer 2 (off-chain) by using the transaction data lying on layer 1.
    • Zero-knowledge (Z-K) rollups: runs computation off-chain and submits a validity proof to the chain
    • Optimistic rollups: assumes transactions are valid by default and only runs computation, via a fraud-proof, in the event of a challenge.
  3. Side Chains: Independent blockchain which runs in parallel to the main-chain (Mainnet of Ethereum, Bitcoin, etc) and is free to operate as a decoupled entity with their own behavior and attributes.
    • Plasma (ex: Ethereum) – A decoupled blockchain that is bound to the main chain and mainly and it makes us of fraud proofs like Optimistic rollups to arbitrate disputes.
    • Liquid (Bitcoin) – Attached to bitcoin’s main chain and offloads some of the validation and transaction processing to another child blockchain.
  4. Parachains: (ex: Polkadot) parallelized chains that run parallel to the Relay Chain. They share in the security of the entire network and other parachains, through Cross-chain Message Passing (XCMP.) Cross-chain transactions are resolved using a simple queuing mechanism based around a Merkle tree.
    • Merkle Tree: A tree in which every “leaf” (node) is labelled with the cryptographic hash of a data block, and every node that is not a leaf (called a branch, inner node, or inode) is labelled with the cryptographic hash of the labels of its child nodes. (https://en.wikipedia.org/wiki/Merkle_tree)
    • WINNG A PARACHAIN SLOT: Projects that wish to run as parachains on Polkadot need to lease a slot on the Relay Chain by winning a parachain slot auction. A parachain slot is a scarce resource on the Polkadot Network and only a limited number will be available. Over time, as parachains ramp up, there may only be a few slots that are unlocked every few months but the end goal is to eventually have 100 slots available on Polkadot.
    • RELAY CHAIN: The foundational layer the base architecture containing all of the protocol’s validators and authenticators staked in DOT (Polka-dot assets).
    • PARACHCAIN SLOT TYPES:
      1. Governance granted or ‘common good’
      2. Auction granted parachains
      3. Parathreads
  5. Sharding: Splitting the network into different partitions across a P2P network, with different sets of workloads to expedite the block creation.