Layer 2 solutions are advanced frameworks built on top of an existing blockchain system (the "Layer 1" blockchain). These solutions are designed to address some of the inherent limitations of the base layer blockchain, particularly scalability, transaction speed, and cost.
Layer 2 solutions aim to improve the scalability and efficiency of the blockchain without altering the Layer 1 blockchain's protocol. They help in processing transactions more rapidly and cheaply than the main blockchain.
Layer 2 solutions typically process transactions off the main blockchain (off-chain) and then record the final state on the main blockchain. By doing so, they reduce the burden on the main blockchain, leading to faster and cheaper transactions.
Types of Layer 2 Solutions
State Channels: These involve two parties engaging in transactions off-chain. Only the initial and final states of these transactions are recorded on the blockchain. An example is the Lightning Network for Bitcoin.
Sidechains: These are separate blockchains that are connected to the main blockchain via a two-way peg. Sidechains operate independently and can have their own consensus mechanisms and block parameters.
Rollups: These solutions execute transactions outside the main chain (off-chain) but store transaction data on-chain. Rollups come in two types - Optimistic Rollups and ZK-Rollups (Zero-Knowledge Rollups), each with its own method of handling transactions and ensuring security.
Plasma: This is a framework for building scalable applications by creating child chains that are anchored to the main Ethereum blockchain.
The Layer 2 solutions to watch for in 2024 are:
Polygon,
Optimism,
Immutable,
Arbitrum, and
Mantle.
Polygon (MATIC)
Polygon, previously known as Matic Network, is a Layer 2 scaling solution for Ethereum. It aims to provide faster and cheaper transactions on Ethereum using sidechains, which are blockchains that run alongside the Ethereum main chain.
MATIC, its native token, is used for governance, staking, and paying transaction fees. Polygon stands out for its high scalability, security, and its ability to seamlessly connect with the Ethereum ecosystem.
Price: $0.86
Market Capitalization: $8.3 billion
Circulating Supply: 9.6 billion MATIC
Optimism
Optimism is a Layer 2 scaling solution that leverages Optimistic Rollup technology to improve the scalability of Ethereum. It enables faster and cheaper transactions by handling most transaction processes off the main Ethereum chain while still ensuring the security of the Ethereum network.
It’s designed to be simple and easy to use, with minimal changes required for developers to migrate Ethereum apps onto Optimism.
Price: $3.61
Market Capitalization: $3.3 billion
Circulating Supply: 911 million OP
Immutable X
Immutable X is a Layer 2 scaling solution for NFTs on Ethereum, offering instant trade confirmation, massive scalability, and no gas fees. This platform is specifically designed for NFT projects, aiming to provide a seamless and user-friendly experience for trading NFTs.
It uses a technology called ZK-Rollups to ensure scalability without compromising security, making it an attractive platform for NFT creators and traders.
Price: $2.14
Market Capitalization: $2.8 billion
Circulating Supply: 1.3 billion IMX
Arbitrum
Arbitrum is a Layer 2 scaling solution that enhances Ethereum's capabilities by using Optimistic Rollup technology. It offers a significant increase in scalability and reduces costs, all while inheriting the security model of Ethereum.
Arbitrum is particularly notable for its compatibility with Ethereum’s existing tools and smart contracts, requiring minimal changes for developers looking to transition to this Layer 2 platform.
Price: $2
Market Capitalization: $2.6 billion
Circulating Supply: 1.275 billion ARB
Mantle (by Optimism)
Mantle, developed by the Optimism team, is another Layer 2 scaling solution focused on Ethereum. It leverages the strengths of Optimistic Rollups, like Optimism, to offer increased scalability and faster transaction speeds.
Mantle aims to provide an even more efficient and developer-friendly environment for building decentralized applications, further enhancing the capabilities of Ethereum’s Layer 2 ecosystem.
Price: $0.63
Market Capitalization: $1.97 billion
Circulating Supply: 3.1 billion MNT
Data source: CoinMarketCap on 3 Jan 2024