Cryptocurrency trends to watch out for in 2020


Ethereum, the world’s second-largest cryptocurrency by market capitalization, is facing a scalability problem. As more users and applications are added to the Ethereum network (ETH), the amount of data that needs to be processed and stored is increasing exponentially. This has led to slow transaction times and high fees, making it difficult for Ethereum to be used as a practical and scalable platform for decentralized applications (dapps). Click here if you’re interested in beginning to trade bitcoins.

However, there is hope for Ethereum’s scalability in the form of Layer 2 solutions. Layer 2 solutions are protocols built on top of the Ethereum network that aim to solve the scalability problem by processing transactions off-chain and then settling them on-chain. In this article, we will explore the different types of Layer 2 solutions and their potential to improve Ethereum’s scalability.

Types of Layer 2 Solutions

There are four main types of Layer 2 solutions: state channels, sidechains, plasma, and rollups. We will be covering all these type 2 solution in detail now:

State channels are off-chain channels that allow two parties to conduct multiple transactions without having to write each transaction to the Ethereum blockchain (ETH). The final outcome is then recorded on-chain, reducing the number of transactions that need to be processed on the Ethereum network.

Sidechains are separate blockchains that can process transactions independently of the Ethereum network. Sidechains can then periodically settle the final outcome of transactions on the Ethereum mainchain.

Plasma is a Layer 2 solution that uses a hierarchical tree structure to process transactions off-chain. Each branch of the tree represents a different subset of transactions, allowing for parallel processing of transactions.

Rollups are a Layer 2 solution that allows for off-chain computation and storage of data, while still settling the final outcome on the Ethereum mainchain. Rollups come in two flavors: ZK-rollups and Optimistic rollups.

ZK-rollups use zero-knowledge proofs to verify the validity of off-chain transactions. This allows for a high degree of scalability, as the amount of data that needs to be processed on-chain is greatly reduced.

Optimistic rollups, on the other hand, rely on the assumption that most transactions are valid. Transactions are processed off-chain and then verified on-chain, with any invalid transactions being rolled back. While optimistic rollups may not be as scalable as ZK-rollups, they offer a more flexible and user-friendly approach.

Rollups in Action

Two of the most promising rollup solutions for Ethereum (ETH) are Optimism and Arbitrum. Let’s elaborate these reliable roll up solutions in detail.

Optimism is a Layer 2 solution that uses Optimistic rollups to process transactions off-chain. Optimism has already launched its mainnet and has partnered with several high-profile Ethereum projects, including Uniswap and Chainlink.

Arbitrum is another Layer 2 solution that uses Optimistic rollups to process transactions off-chain. Arbitrum is designed to be a fully compatible and interoperable Layer 2 solution, meaning that it can be used with any Ethereum application without requiring any changes to the application itself.

The Potential of Layer 2 Solutions

Layer 2 solutions have the potential to greatly improve Ethereum’s scalability and make it a more practical platform for dapps. By processing transactions off-chain, Layer 2 solutions can greatly reduce the load on the Ethereum network and increase transaction throughput. This, in turn, will reduce transaction fees and make it easier for users to interact with Ethereum-based applications.

However, there are still challenges that need to be addressed before Layer 2 solutions can be fully implemented. These challenges include security, decentralization, and interoperability. For example, rollups rely on a small number of trusted validators to verify transactions, which could pose a security risk if those validators are compromised.


Finally, Layer 2 approaches have the potential to significantly increase Ethereum’s scalability and make it a more useful platform for decentralized applications. By processing transactions off-chain while still concluding the transaction on the Ethereum mainchain, rollups like Optimist and Arbitrum present a viable option. Before Layer 2 solutions can be fully implemented, there are still issues that must be solved. Decentralization, interoperability, and security are a few of the major issues that need to be addressed. Layer 2 solutions may aid in realizing the full potential of the Ethereum network and propelling the expansion of the decentralized economy with continuing innovation and improvement.

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Kshitij does business research and content writing for VCBay. Pursuing BBA from Symbiosis Center Of Management Studies (SCMS) Pune, he is skilled in Financial Modeling, Stock valuation and Microsoft Excel. He is passionate about Entrepreneurship and Finance.


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