How Will Layer 2 Solutions Affect the Future of Ethereum?

Ethereum (ETH) is going all-in on its Layer 2 (L2) scaling roadmap as the blockchain looks to achieve mass scale by reducing transaction fees and increasing network capacity.

Have you ever wondered why Ethereum needs L2 blockchains or how the focus on L2 scaling will affect the project’s future and ETH price prediction?

In this article, we will explore the pitfalls and benefits of L2 solutions and help you get a better understanding of the relationship between Ethereum and its L2 network.

Key Takeaways

  • Ethereum originally planned on scaling using shard chains. This later changed to an L2-centric scaling roadmap.
  • L2 offers cheap transaction fees, faster transactions, and application-specific use cases.
  • Ethereum fragmentation and sequencer centralization are the biggest risks to Ethereum’s L2 scaling roadmap.
  • Co-founder Vitalik Buterin said Ethereum is “all-in” on its L2 rollup-centric roadmap.

Why Does Ethereum Need Layer 2 Networks?

Blockchain Trilemma

Public crypto blockchains face a challenge known as the blockchain trilemma. The blockchain trilemma theory, proposed by Ethereum co-founder Vitalik Buterin, states that blockchains cannot achieve scalability, decentralization, and security all at the same time.

According to Buterin, blockchain developers will ultimately have to sacrifice one of the three aspects.

In most cases, Layer 1 (L1) blockchains like Bitcoin (BTC) and Ethereum (ETH) prioritize decentralization and security, which handicaps these networks with low transaction throughput and high gas fees.

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Ethereum’s Rollup-Centric Roadmap

Ethereum is counting on using L2 chains to solve the blockchain trilemma.

L2 chains enable Ethereum to scale by executing transactions off-chain, thereby allowing more transactions per second for lower fees in the entire network. These L2 chains “roll up” several off-chain transactions into single batches, which are published on the Ethereum L1 chain.

Ethereum’s quest for achieving mass scale via a “rollup-centric roadmap” looks to find the right balance between scalability, decentralization, and security.

For instance, L2 rollups submit summaries of off-chain transactions to the L1 for security, allowing anyone to verify these immutable records. Simultaneously, there are application-specific L2 rollups that prioritize performance over security or decentralization, making them suitable for gaming and trading applications.

Pitfalls and Benefits of Layer 2 on Ethereum

There are high expectations of Ethereum’s rollup-centric roadmap. L2 users expect lower fees and faster transactions while receiving the same security guarantees as on the Ethereum L1 chain.

Are Layer 2 scaling solutions the future of Ethereum, or is Ethereum’s rollup-centric roadmap a flawed plan?

In this section, we will discuss how L2 will change Ethereum’s future for the better or worse.

Could Cheap Transactions and Specialized App Chains Lead to Mass Scale?

If you are a regular blockchain user, you might have already noticed how much cheaper it is to transact on L2 chains such as Optimism, Arbitrium, and Base compared to the Ethereum L1.

For context, as at the time of writing this article, Ethereum is quoting about $7 to execute a simple ETH-DAI token swap on Uniswap. The same transaction costs $0.23 on Base, $0.33 on Arbitrium and $0.27 on Optimism.

The best part is that L2 gas fees are going to get even cheaper once Ethereum completes its danksharding upgrade. The near-zero gas fees will ultimately allow Ethereum to compete with global payment players like Visa and Mastercard.

In addition to cheap transactions, L2 rollups will bring added flexibility to the Ethereum blockchain. Today, numerous Ethereum L2 chains differentiate themselves from the competition by offering expanded use cases and optimizations.

For example, blockchain gaming applications that prioritize fast transactions and zero gas fees can choose to build on top of a specialized L2 that meets its needs.

Meanwhile, social media applications can optimize user experience by executing high-value activities like username registration and account recovery on-chain on the L2 network while off-loading low-value activities like posts and likes.

The greater freedom and flexibility for Ethereum developers will support innovation, which could ultimately result in high-value applications that draw new developers and users from other blockchain ecosystems and non-crypto sectors.

Will Ethereum Fragmentation and Sequencer Centralization Cause L2 Scaling Failure?

Ethereum L2 networks face a major centralization problem. L2 rollups have a single, centralized entity called sequencer that is responsible for vital operations that include:

  1. Confirming L2 transactions and L2 state
  2. Constructing and executing L2 blocks
  3. Submitting L2 transactions to Ethereum L1

The question that critics of Ethereum’s rollup-centric scaling roadmap are asking is what happens when the centralized sequencer misbehaves, defrauds, and censors users.

Furthermore, Ethereum’s fragmentation is an equally pressing issue for L2 networks. The ubiquity of Ethereum L2 networks has resulted in the Ethereum ecosystem being divided into hundreds of “blockchain silos” that are alienated from each other. This fragmentation has resulted in poor user experience and has become a major hurdle that Ethereum must overcome to achieve mass scale.

Today, an Ethereum L1 user has to send over ETH tokens to Base and Optimism in order to start using the two L2 chains. Users cannot seamlessly use their tokens across different L2s, requiring bridges and gas fees every time they move tokens across different L2 chains.

“ETH core devs have finally acknowledged the problem of fragmentation with “L2 scaling”. [They are] proposing “shared sequencing” as the solution. This will not work, as it relies on all L2s agreeing to use a single sequencer,” said crypto researcher Justin Bons.

Analyst’s View on Layer 2 Solutions for Ethereum

There are multiple Layer 2 solutions for Ethereum, and the question is whether we already have too many of them. Ruslan Tuktarov, Head of Blockchain Solutions Department at Itransition, believes the demand for L2 rollups is still high.

“I believe that the demand for Layer 2 is currently high, and the ecosystem’s development limits have not been reached yet. Even dApps built on Layer 2 solutions still have relatively high transaction costs (from a few cents to a dollar). Transaction speeds on Layer 2 are already noticeably faster and more pleasant compared to Layer 1, but there is room for improvement in terms of cost.”

“Therefore, Layer 2 solutions will continue to emerge, at least until transaction costs are comparable to near-zero values in centralized registries,” he said.

But is the value of Layer 2 solutions fading after Ethereum 2.0?

The development of the value of Layer 2 solutions and the value of ETH 2.0 are parallel vectors. The increased performance and scalability of ETH 2.0 will simply provide even more fertile ground for further acceleration and cost reduction of Layer 2 solutions,” Tuktarov told Techopedia.

“As the ETH ecosystem continues to evolve, the future of Layer 2 looks promising – they complement the L1 ecosystem with speed and low transaction costs.

“This is their main impact on ETH. However, this impact is derivative. The fate of L1 ETH will play a key role in the future of Layer 2 as concerns grow about the increasing centralization of ETH and the core team’s willingness to accommodate political groups seeking to control the ecosystem. Yet, the genesis of the crypto community has an entirely different vector.”

The Future of Ethereum L2 Solutions

Despite the uncertainty and risks, Ethereum is “all-in on rollups as a scaling strategy for the near and mid-term future,” co-founder Buterin said in an October 2020 post.

However, Ethereum’s scaling plan is still in a nascent phase. As shown in Buterin’s Ethereum scaling roadmap diagram, at the time of writing, Ethereum had only completed one of its six scaling phases.

Completed in September 2022, “The Merge” saw Ethereum transition from a proof-of-work (PoW) blockchain to a proof-of-stake (PoS) blockchain. This event laid the foundation for Ethereum to work on its next phase called “The Surge”, which will see the network focus on increasing transaction throughput and lowering gas fees.

The succeeding phases, called The Scourge, The Verge, The Purge, and The Splurge, will focus on mitigating centralization risks, making block verification easy, reducing costs of running nodes, and “fixing everything else”, respectively.

As for the major L2 scaling risks – Ethereum fragmentation and sequencer centralization – developers have proposed solutions such as ‘smart contract wallets’ and ‘shared sequencing’ to mitigate them.

“Few realise Ethereum L1 can also provide shared sequencing for rollups, with preconfirmations. There’s a simple design with no hard fork required. Such an Ethereum shared sequencer would be maximally secure and credibly neutral, and would enjoy a half-trillion dollar TVL head start. Ethereum L1 as the canonical shared sequencer—isn’t that a compelling and unifying Schelling point?” wrote Ethereum researcher Justin Drake in a report.

The Bottom Line

In its goal to achieve global scale, Ethereum is trying to pull off something that has never been done before by a crypto blockchain network.

The developers – aware of the uncertainties – are taking a measured and flexible approach. Originally, Ethereum had planned on scaling using shard chains. However, as new information and technology became available, Ethereum developers saw L2 rollups as a better way to attain its goal.

This adaptive process highlights that nothing about the Ethereum scaling roadmap is set in stone.

FAQs

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Mensholong Lepcha
Crypto & Blockchain Writer

Mensholong is an experienced crypto and blockchain journalist, now a full-time writer at Techopedia. He has previously contributed news coverage and in-depth market analysis to Capital.com, StockTwits, XBO, and other publications. He started his writing career at Reuters in 2017, covering global equity markets. In his free time, Mensholong loves watching football, finding new music, and buying BTC and ETH for his crypto portfolio.