Vitalik Buterin has releavled his latest take on Bitcoin. During a Twitter Space hosted by Bitcoin developer Udi Wertheimer, the Ethereum co-founder shared his belief that the Bitcoin network needs Layer 2 solutions like zero-knowledge rollups (ZK-rollups) to evolve into more than just a payment network. Visa can handle up to 24,000 transactions per transaction, while Bitcoin struggles to manage 7. Ethereum, Bitcoin’s closest competitor, can handle around 20 to 30 TPS.
So what exactly are these Layer 2 blockchain solutions, and how are they critical to the future of blockchain? We answer this and much more in this article. Read on.
What Is a Layer 2 Blockchain?
Blockchain technology has revolutionized the world of finance and its potential is undeniable. However, one of the main challenges faced by blockchain networks such as Bitcoin and Ethereum is scalability. Fortunately, Layer 2 or L2 solutions have been developed to tackle this issue and enhance the performance of these networks.
These channels allow parties to conduct multiple transactions off-chain without broadcasting each transaction to the entire network. This results in improved scalability, reduced fees, and instant settlement.
The Lightning Network is a perfect example of the power of state channels. Operating on top of the Bitcoin blockchain, it allows users to conduct multiple transactions without broadcasting them to the entire network. This boosts scalability, ensures instant settlement, and significantly reduces transaction fees.
They enable the transfer of assets between different blockchains. Sidechains are additional blockchains that are connected to a main chain, which enables the transfer of specific assets between them. This breakthrough technology improves liquidity, faster transactions, and lower costs.
One notable example is the Liquid Network, a sidechain of the established Bitcoin blockchain. With Liquid BTC (LBTC), users can peg BTC to the Liquid Network, improving liquidity and enabling faster, cheaper transactions. Plus, this allows for other assets to be defined on the network, leading to endless possibilities for growth and innovation.
Regarding Ethereum sidechains, two impressive examples are Polygon PoS and XDai/Gnosis.
Optimistic Rollups don’t require broadcasting every transaction to the entire network. This makes everything way more scalable and efficient. Optimistic Rollups are secured by Ethereum Layer 1, so you can rest assured that your funds are safe.
The only thing is a seven-day verification challenge before you can withdraw your funds to the Ethereum main chain. But it’s not as bad as it sounds. It’s just a measure to make sure everything’s legit before funds are moved around.
These improve privacy by allowing transactions to be verified without revealing sensitive information. They make transactions on a blockchain more private by verifying them without giving away sensitive information. Basically, they use Zero Knowledge Proofs to check if up to thousands of transactions are legit, and then only post a summary of the data to the main chain.
Here are three examples of ZK-rollup blockchains:
Starknet: Starknet by Starkware is currently in Alpha release on the Ethereum Mainnet. It’s a decentralized layer-two blockchain that also uses zk-rollups to execute transactions in batches and then relay the transaction data back to the mainnet. And it’s secured with STARK proofs, which is basically another layer of protection.
Polygon ZK EVM: Polygon ZK EVM which is still in Testnet but is planning to release on Mainnet in 2023. But what’s really cool about Polygon is that they have a Privacy oriented ZK-enabled roll-up called ‘Nightfall’ that they’re developing alongside Ernst & Young. They’re targeting enterprise use cases, so you know it’s going to be legit.
ZKSync: ZKSync by MatterLabs is currently in ‘baby alpha’ on Mainnet, which basically means they’re still testing it out, but you can already try out ZkSync 1.0 with wallets like Argent.
The rapid growth and evolution of Layer 2 solutions in the blockchain space highlights their vital role in enhancing the underlying blockchain technology’s scalability, privacy, and overall efficiency. With broader adoption across various industries, Layer 2 blockchains are set to address business challenges more effectively.