There has been a lot of talk about how blockchain opens up endless business opportunities. And while all of that excitement hasn’t fully led to tangible results, the explosion in the decentralized finance and non-fungible token (NFT) markets has set markers of what is achievable and how blockchain can really affect even the most conservative industries.
In contrast to two to four years ago, developers, entrepreneurs and companies are not just blindly joining the train. It’s no longer about what blockchain can do. Now the questions asked are more about how to best use the technology for the best results. Because of this, blockchain has slowly evolved from a buzzword to an acceptable mainstream technology. If this doesn’t indicate real growth and development, what then?
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However, that doesn’t mean it has gone smoothly so far. Ever since we started looking at blockchain as a viable technology for mainstream applications, the throughput performance of blockchains, especially widespread blockchains, has been studied intensely. Understandably, scalability remains a benchmark for assessing the readiness of blockchain networks to accommodate enterprise applications.
Using Ethereum as a case study, it’s safe to say that many Ethereum users have grappled with the disadvantages of a non-scalable blockchain infrastructure firsthand. In my experience, high transaction fees due to network congestion are a potential deal breaker for retail investors. For the average user, there’s no way to justify paying $ 70 as a fee to run a single transaction that might not be worth even $ 100.
In particular, Ethereum’s inability to scale accordingly has stifled the establishment of the DeFi and NFT sectors to some extent, with retail investors and traders interested in executing low-value transactions often being forced from the sidelines to watch. Even Vitalik Buterin recently acknowledged the gravity of this situation, noting that the current scaling and fee system is unsustainable if the goal is for social networking projects run by NFTs to thrive on the Ethereum network.
So the question is: how did blockchain developers respond to this recurring problem?
Is shift one ever enough?
I believe the ultimate goal is to solve the blockchain trilemma, which is striking a balance between decentralization, security and scalability. In most cases, blockchains have to do without one of these three functions. In most legacy blockchains, including Bitcoin and Ethereum, the adopted infrastructure design sacrifices scalability for security and decentralization.
It must be said that Bitcoin and Ethereum are the two most popular blockchains, not only because they are the first of their kind, but also because they have established themselves as arguably the most decentralized and secure blockchain networks. What they lack in scalability, they essentially make up for in other core blockchain requirements. While this was sufficient in the early years of their operation, the influx of blockchain applications has certainly put immense pressure on Layer 1 chains to develop and integrate infrastructures geared towards scalability.
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While it is much easier for the newer blockchains to adapt accordingly by implementing scalable infrastructure from scratch, it is much more difficult for those with existing infrastructure to do the same. As can be seen in the case of Ethereum, this can entail a complete overhaul of the existing infrastructure. Moving an existing blockchain economy worth billions of dollars to a new blockchain infrastructure carries many risks. A lot can go wrong, especially since it has never been seen on such a scale before.
Therefore, it is usually obvious for DApp developers and users to opt for scalable, focused Layer 1 chains. As expected, the list of Layer 1 chain solutions attempting to capitalize on the explosive demand for fast blockchain infrastructures has grown over the years – notable mentions include Binance Smart Chain, Tron, and EOS. However, as we have found, decentralization does not appear to be the strongest of these options. In view of the blockchain trilemma already mentioned, most alternatives to Ethereum and Bitcoin have been satisfied with speed compared to decentralization. Hence, it becomes a matter of preference and what developers are willing to compromise.
A third and cheaper option might be to opt for Layer 2 solutions. With this, developers can at least ensure that they have access to all the little things that are necessary to create optimal blockchain applications.
Are Layer 2 Solutions the Immediate Answers to the Blockchain Trilemma?
The scalability flaws of the Ethereum blockchain have forced solutions to build networks on top of the existing ones and take on some of the transaction and computing loads that clog the mainnet. A layered approach ensures that developers continue to enjoy the high liquidity of the Ethereum blockchain while still bypassing the bottlenecks associated with the ecosystem.
The idea is to do all of the computation and scalable payment off-chain and temporarily record the final state of such activities on the Layer 1 blockchain. Whether optimistic rollups, state channels, plasma or zero-knowledge rollups (zk-rollups), the goal remains the same: bypass the apparent limits of decentralized blockchains.
Polygon (formerly called Matic) has already gained a lot of attraction as a second-layer solution ideally suited for Ethereum applications that want to enable a scalable platform without network congestion. For example, according to DappRadar, the polygon version of SushiSwap, Sushi, recorded a 75% increase in user numbers in the first week of September. Aside from a recent slump in activity on Polygon, which I think is a temporary setback, users have awakened to the possibilities that Layer Two solutions offer, especially when it comes to DeFi in retail.
Interestingly, it is not only the DeFi sector that is subject to this dynamic change. The NFT market has also begun migrating to Layer 2 with a specific solution that reportedly saves over $ 400,000 in gas charges just 24 hours after launch. In July, OpenSea announced that it had integrated with Polygon to enable gas-free trading on its NFT marketplace. Note that Polygon isn’t the only Layer 2 solution that’s making waves right now. Other Layer 2 infrastructures that have caused a stir are the Celer Network and Arbitrum.
The influx of Layer 2 adoption has led me to believe that developers have chosen a layered blockchain infrastructure as the ideal architecture for creating a world class blockchain experience. If this trend continues, which seems very safe, at least until Ethereum 2.0 is online, Layer 2 applications will become just as valuable as their Layer 1 counterparts. Therefore, joining the Layer 2 party is a sensible choice for developers who want to improve existing blockchain infrastructures or create new decentralized apps.
The views, thoughts, and opinions expressed herein are those of the author alone and do not necessarily reflect the views and opinions of Cointelegraph.
Andrey Sergeenkov is an independent researcher, analyst and author in the cryptocurrency space. As a firm proponent of blockchain technology and a decentralized world, he believes the world yearns for such decentralization in government, society, and economy. He is the founder of BTC Peers, an independent media company.