There has been a lot of talk about how blockchain could unleash endless institutional opportunities. And while all the hype hasn’t fully translated into tangible results, the explosion of decentralized finance and the non-perishable token (NFT) market has put signs of what can be achieved and how blockchain can truly impact even the most conservative industries.
So unlike two to four years ago, developers, entrepreneurs and companies aren’t just blindly joining the bandwagon. It is no longer about what the blockchain can do. The questions now revolve around how best to use technology to get the best results. Therefore, blockchain has slowly evolved from a buzzword into an adoptable technology. If this does not indicate real growth and development, what does it mean?
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However, that doesn’t mean he’s been cruising smoothly yet. Since we started looking at blockchain as a viable technology for powering mainstream applications, the performance of blockchain throughput, especially those that are widely adopted, has been subject to intense scrutiny. Understandably, scalability remains a criterion for judging the willingness of blockchain networks to take up enterprise applications.
Using Ethereum as a case study, it is safe to say that many Ethereum users have directly dealt with the downsides of the scalable blockchain infrastructure. In my experience, high transaction fees resulting from network congestion are a potential deal-breaking factor for retail investors. For the average user, there is no way to justify paying up to $70 in fees to carry out a single transaction that might not even be $100.
Notably, Ethereum’s inability to scale accordingly has somewhat stifled the creation of the DeFi and NFT sectors, as retail investors and traders interested in executing low-value transactions often have to watch from the sidelines. Even Vitalik Buterin recently acknowledged the gravity of this situation, pointing out that the current scaling and fee system is unsustainable if the goal is for NFT-powered social networking projects to thrive on the Ethereum network.
Thus, the question is: How have blockchain developers responded to this recurring problem?
Is the first layer sufficient?
I think the ultimate goal is to solve the blockchain trilogy, which is to find a balance between decentralization, security and scalability. Often times, the blockchain has to sacrifice one of these three features. In most legacy blockchains, including Bitcoin and Ethereum, infrastructure design made sacrifices of scalability for security and decentralization.
It must be said that Bitcoin and Ethereum are the two most popular types of blockchain not only because they are the first of its kind but also because they have proven their existence as the most decentralized and secure blockchain network. In essence, what they lack in scalability, they make up for in other core blockchain requirements. While this was sufficient in its early years of operation, the influx of blockchain applications has certainly placed enormous pressure on Layer 1 chains to evolve and integrate infrastructures that focus on scalability.
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While it is much easier for new blockchains to adapt accordingly by implementing a scalable infrastructure from scratch, it is much more difficult for those with an existing infrastructure to do the same. As shown in the case of Ethereum, this may necessitate a complete overhaul of the existing infrastructure. Moving an existing multi-billion dollar blockchain economy to a new blockchain infrastructure comes with bags of risks. A lot can go wrong, especially since it hasn’t been done before on this scale.
Therefore, the obvious choice is usually for DApp developers and users to choose concentrated, scalable Layer 1 threads. The list of Layer 1 chain solutions that are trying to capitalize on the surge in demand for fast blockchain infrastructures is expected to grow over the years – notably Binance Smart Chain, Tron, and EOS. However, as we found out, decentralization does not appear to be the strongest of these options. In the face of the aforementioned blockchain trio, most Ethereum and Bitcoin alternatives to speed have settled on decentralization. Therefore, it becomes a matter of preference and developers are willing to trade-off.
Perhaps the third and most convenient option is to look for second-tier solutions. With this, developers can at least ensure that they have access to all the bits and pieces needed to build optimal blockchain applications.
Are Layer 2 Solutions The Immediate Answers To The Blockchain Trilogy?
The scalability shortcomings of the Ethereum blockchain have forced solutions to build networks on top of existing networks and take over some of the transactions and computing loads clogging the main network. The multi-tiered approach ensures that developers continue to enjoy the high liquidity of the Ethereum blockchain while avoiding bottlenecks associated with the ecosystem.
The idea is to do all scalable off-chain computations and payments and log the end state of such activities intermittently on the Layer 1 blockchain. Whether it’s optimistic rollups, state channels, plasmas, or zk-rollups, the goal remains the same: to avoid the obvious limitations of decentralized blocks.
Already, Polygon (formerly known as Matic) has achieved a lot of traction as the ideal second layer solution for Ethereum applications looking to enable a scalable platform that is free from the impact of network congestion. For example, Polygon’s version of SushiSwap, Sushi, recorded a 75% increase in the number of users in the first week of September, according to DappRadar. With the exception of the recent indulgence in activities on Polygon, which I believe is a temporary setback, users have woken up to the possibilities offered by Layer 2 solutions, especially when it comes to DeFi fragmentation.
Interestingly, this dynamic shift is not only the DeFi sector. The NFT market is also beginning to move into Layer 2 with a specific solution that is said to save more than $400,000 in gas fees just 24 hours after launch. In July, OpenSea announced that it had merged with Polygon to enable gas-free deals in its NFT marketplace. Note that the polygon is not the only second layer solution that is currently making waves. Other Layer 2 infrastructures that have spattered are Celer Network and Arbitrum.
The flow of Layer 2 adoption led me to believe that developers have settled on a multi-layered blockchain infrastructure as the ideal architecture for creating a first-class blockchain experience. If this trend continues, which seems very certain, at least until Ethereum 2.0 goes online, Layer 2 applications will become just as valuable as their Layer 1 counterparts. Therefore, joining a Layer 2 party is a reasonable option for developers looking to improve blockchain-based infrastructures or create new decentralized applications.
The opinions, ideas and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Andrei Sergenikov He is a freelance researcher, analyst, and writer in the cryptocurrency field. As a strong supporter of blockchain technology and the decentralized world, he believes that the world yearns for such decentralization of government, society and business. He is the founder of BTC Peers, an independent media outlet.