What Are Layer-2 Networks and Sidechains? Ethereum Scaling Explained – Yurika.R

Blockchain infrastructure has evolved to encompass an ecosystem of layer-1 and layer-2 networks.

In this article we’ll explore the difference between the two, and how layer-2 networks and other scaling methods like sidechains attempt to address the scalability challenges of layer-1 blockchains.

What are layer-2 networks?

Simply put, layer-2 networks are blockchain networks that live atop a layer-1 network such as Ethereum, with the layer-1 network providing the base layer of infrastructure and security for networks building on it, validating transactions and achieving consensus.

The layer-2 networks use a variety of technologies to address scalability bottlenecks on the layer-1 blockchain, which are caused by throughput and transaction costs.

Ethereum, for example, currently handles around 14 transactions per second (TPS), per blockchain explorer Etherscan. Visa, by comparison, processes around 65,000 transactions per second.

Scalability issues are most pronounced during periods of high network activity, when blockchain networks face increased transaction fees (also known as gas fees), along with network congestion and reduced transaction times.

In 2017, Ethereum creator Vitalik Buterin identified the “scalability trilemma” for blockchains, arguing that they face the challenge of processing thousands of transactions per second while remaining secure and adhering to the ethos of being decentralized, that is, run without the need for centralized control.

The theory, imported from computer science, is that a network can only ever focus on two of these principles by making concessions at the expense of the third.

Ethereum’s solution to the problem of scalability is to focus on making its own layer-1 blockchain network as secure and decentralized as possible, while outsourcing scaling to layer-2 networks built atop its infrastructure.

How do scaling networks work?

Scaling networks deploy a variety of different solutions to help address the scalability challenges of the layer-1 network.

These networks include bundling transactions or processing transactions off-chain, using sidechains or layer-2 rollups.

Sidechains

Sidechains are blockchains that run independently of the layer-1 chain, with their own consensus mechanism and token.

They connect to the layer-1 blockchain by means of a bridge, which uses a smart contract to “lock” assets from the layer-1 chain and mint a mirror image of those tokens on the sidechain, with the value of those tokens pegged to the locked asset.

These mirrored tokens are then used to perform transactions, after which they can be destroyed, releasing the locked tokens on the layer-1 chain.

Rollups

Rollups take a different approach, by rolling up (hence the name) multiple transactions, presenting them to the layer-1 blockchain as a single transaction that can be processed much more quickly than the individual transactions.

There are two main types of rollups: optimistic rollups and zero-knowledge (zk) rollups.

Optimistic rollups assume that all of the rolled-up data is valid, allowing people to contest transactions after the fact to determine whether they’re legitimate or not. The contested transaction is submitted directly to the layer-1 network to settle the dispute, with both parties standing to lose staked tokens should they be proved wrong.

Zero-knowledge rollups employ zero-knowledge proofs, a cryptographic technique that can be used to prove that something is known without revealing the known information directly. Transactions are rolled up into batches that are executed off-chain, with the completed batch submitted to the layer-1 chain using a zk-proof that demonstrates the proposed state changes are correct.

Ethereum scalers you need to know

There are a number of different layer-2 and sidechain networks building atop or alongside Ethereum, each with their own preferred technological solution to scale the layer-1. Per CoinGecko data, the following are the largest Ethereum chains by total value locked (TVL), as of November 2024.

Base

Incubated by crypto exchange Coinbase, Base is built atop Ethereum scaling solution Optimism. It quickly established itself as a leading player in the layer-2 space following its launch in August 2023, surging to over one million addresses in just 11 days. According to Coinbase CEO Brian Armstrong, the exchange has no plans to launch a token for Base, and is attempting to make Base “something that’s much broader” than a Coinbase-led project.

Arbitrum

Created by Offchain Labs, Arbitrum leverages optimistic rollups to scale Ethereum, with a claimed 40,000 tps versus Ethereum’s more stately 14 tps. In March 2023, Arbitrum launched its native ARB token for governance, handing control of the project over to a decentralized autonomous organization (DAO) made up of community members.

Polygon

Formerly known as Matic Network, Polygon takes a multi-pronged approach to scaling, deploying multiple solutions including its main POS Chain (sidechain), Plasma chains, zk-rollups and optimistic rollups. It aspires to be more than just a scaling solution, billing itself as a platform for launching interoperable blockchains. In September 2024, it completed its migration from its original native token MATIC to a new token, POL.

Optimism

Launched on mainnet in January 2021, Optimism—as its name suggests—uses optimistic rollups, which assume that all transactions in the rollup are valid. Optimism further compresses the data in its rollups using a sequencer, before submitting transaction data to the main Ethereum chain. Validators for each rollup are given a week to query the rollup if they believe that it contains fraudulent data.

Scroll

A relatively new entrant to the layer-2 space, Scroll launched on mainnet in October 2023. The platform uses zkEVM technology to batch proofs, leveraging “bytecode-level compatibility” with Ethereum Virtual Machine support to ensure that EVM applications and tools are compatible “out-of-the-box.” Scroll launched its SCR token in an October 2024 airdrop.

Blast

Launched by a team led by Tieshun “Pacman” Roquerre—founder of NFT marketplace Blur—in February 2024, Blast differentiates itself from other layer-2 networks with features including native yield for ETH and stablecoins. The layer-2 conducted an airdrop of its native token BLAST in June 2024

The future of layer-2 networks

Layer-2 networks form a key part of Ethereum’s “rollup-centric roadmap,” according to Ethereum co-founder Vitalik Buterin, who hopes to use layer-2 solutions to increase the blockchain’s capacity to handle over 100,000 transactions per second.

Buterin has outlined plans to converge Ethereum’s two scaling strategies, sharding and layer-2 protocols, in what he described as “The Surge.” This roadmap would see layer-2 blockchains implement cryptographic solutions such as SNARKs (Succinct Non-interactive Argument of Knowledge) to ensure the integrity of transactions. Buterin also seeks to ensure that layer-2 networks inherit Ethereum’s core principles of trustlessness, openness, and censorship resistance.

Layer-2 networks aren’t just confined to Ethereum. In June 2024, coders at BitcoinOS claimed to have verified a zk-proof on the Bitcoin mainnet for the first time, opening up the possibility of using rollups to scale Bitcoin. Solana is also seeing increasing layer-2 activity, such as via the gaming-centric Sonic SVM network.

Meanwhile, new layer-2 networks continue to spring up on Ethereum. In October 2024, decentralized exchange Uniswap announced plans to develop its own layer-2 network, Unichain, using Optimism technology, plus centralized exchange Kraken will launch its own Optimism-based layer-2 called Ink.

Edited by Andrew Hayward