Table of Contents
15th Sep 2022 is written down in the history of Crypto space as the Ethereum mainnet completely transitioned from the Proof-of-Work (PoW) consensus mechanism to Proof-of-Stake (PoS). This transition was known as “The Merge,” a highly anticipated event for the Crypto community. The event has majorly impacted various Ethereum-based Layer 2 projects, causing their token price to rise; for example, Polygon’s price rose by approximately 36%, which is also a famous Ethereum Layer 2 project.
Before we move ahead, do you know there were some misconceptions that surrounded “The Merge?” You can check them out here!
In this blog, check out the top Ethereum Layer 2 Crypto projects you can consider investing in post-merge.
Wait, what are Layer 2 protocols? Before moving forward, let’s have a quick look at it.
What are Layer 2 protocols?
Layer 2 protocols are off-chain solutions that are responsible for improving scalability and minimizing transaction costs while running on top of the Layer 1s, like Ethereum. Layer 2 protocols are also responsible for providing security to Layer 1. Some famous types of Layer 2 protocols examples are optimistic and zk rollups, state channels, and Plasma. (Explained in detail in the following section!)
Layer 1s, like Bitcoin and Ethereum, are the blockchains that have experienced a blockchain trilemma – security, scalability, and decentralization. To function properly, these blockchains have to sacrifice one of these features. For example, Bitcoin and Ethereum sacrifice scalability for security and decentralization. These networks face slow transaction speeds due to the continually growing number of network users, despite the fact that they store data in a secured and distributed ledger.
Bitcoin boasts about its average Transaction Per Second (TPS) speed to be 7, whereas the average TPS for Ethereum is around 15. Compared to other settlement providers like Visa, which boasts a TPS of roughly 45,000, these speeds are extremely slow. And this is where Layer 2 protocols come into play.
Types of Layer 2 Protocols
Many Ethereum Layer 2 solutions have emerged in the past two to three years. Among the well-known techniques are state channels, Plasma, and rollups. Each of these has benefits and drawbacks. The following is a quick summary:
- State Channels
Instant peer-to-peer Ethereum transactions are made possible by state channels, which let users do transactions with one another outside of the blockchain. State channels have limited cross-chain interoperability despite their high transaction throughput, quick withdrawal, and low fees. Cross-chain state channels, however, may offer more flexibility now.
- Plasma
Another well-known Layer 2 solution is Plasma, which combines Merkle trees and smart contracts to generate almost infinite sidechains. Ethereum can manage significantly larger data sets since the transaction and computation happen inside sidechains. Sadly, the withdrawal period can last anywhere from 7 to 14 days.
- Rollups
Plasma and blockchain rollups are relatively similar, although rollups retain part of the data from Ethereum. The innovative mechanism enhances security while minimizing centralization. Even an Ethereum Virtual Machine (EVM) can be used inside a rollup. Optimistic rollups and zero-knowledge (ZK) rollups are the two types of rollups. ZK rollups may ultimately prove more practical because of their quicker withdrawal time.
Top 5 Ethereum Layer 2 Crypto Projects
#1 Polygon (MATIC)
Polygon is a layer-2 blockchain protocol that provides infrastructure for developing blockchain networks that can interface with each other. It facilitates interchain scalability and adaptability, which are alt chains’ characteristics, while assuring the security, interoperability, and liquidity offered by Ethereum to the projects hosted on its network. It is popular because of the low gas fees and high transaction throughput it provides developers and clients on its platform.
#2 Arbitrum (ARB)
By offering 40,000 Transactions Per Second (TPS) at a price of no more than two cents, Arbitrum aims to alleviate Ethereum’s congestion.
Optimistic rollups are used to validate the smart contracts on Arbitrum. The EVM compatibility of Arbitrum, however, makes it unique. It implies that DApp creators can create their applications on the Arbitrum mainnet without having to learn a new programming language. For instance, you don’t need additional skills if you are already familiar with the coding language used to create smart contracts on Ethereum.
#3 Optimism (OP)
Optimism is a big competitor of Arbitrum. Although it resembles Arbitrum somewhat, Optimism makes use of the optimistic rollups developed by the Optimism Foundation. These optimistic rollups presuppose that each transaction is valid. Any fraudulent transaction is rolled back following the submission of fraud proofs by participants.
Due to the fact that Optimism and Arbitrum only deploy when incorrect blocks are found, they are similar. Tokens can therefore move between Layer 1 and Layer 2 on these networks. The method for verifying a block is also the same.
Optimism contributes to maintaining the security of transactions while boosting the Ethereum ecosystem’s scalability. Each node on the network can contest the transaction’s validity by placing a stake to suggest a new block.
#4 Shibarium (SHIB)
Shibarium, an upcoming Layer 2 blockchain based on Ethereum, will increase the utility of the renowned Shiba Inu ecosystem.
Shiba Inu, the meme coin, has had tremendous success over time, mostly due to the buzz generated about the idea. Despite the expansion, the community has always wished for an ecosystem to support its expansion long-term. The Shibarium L2 layer’s introduction provides a solution to these issues.
SHIB won’t need to rely on the Ethereum network because a sizable amount of its transactions will be handled by the sidechain. Users will probably see significant increases in transaction speeds as well as decreases in gas prices as a result.
#5 Loopring (LRC)
Layer 2 scaling protocol, Loopring, facilitates non-custodial order book-based DEXs and payment methods. It is reported that it runs more than 2,000 TPS while keeping the same degree of security as Ethereum. It was deployed in December 2019 on the Ethereum mainnet. The payment mechanism that enables users to trade digital assets like Crypto uses ZK-rollups.
Conclusion
The majority of industry insiders believe that Ethereum Layer 2 projects will endure and grow over time. In fact, it’s possible that the competition will bring new ideas and developments to these blockchain networks. Investors will benefit from this circumstance without a doubt. This is the perfect time to invest in Layer 2 solutions amidst the hype and anticipation.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
