Blockchain networks face scalability challenges as they grow. Layer 1 solutions modify the base protocol, increasing block size or changing consensus mechanisms. Layer 2 solutions build on top of existing blockchains, using off-chain processing to boost speed and reduce costs.

Layer 1 tweaks like larger blocks can improve throughput but may increase storage needs. Layer 2 options like state channels, sidechains, and rollups process transactions off-chain, settling only final states on the main chain. This approach significantly enhances scalability without compromising security.

Layer 1 Scaling Solutions

Increasing Throughput and Transaction Speed

• Layer 1 scaling involves making changes to the base protocol of a blockchain network to improve its scalability
• Focuses on increasing the throughput, which is the number of transactions that can be processed per second
• Aims to enhance the transaction speed by reducing the time required to validate and add transactions to the blockchain
• Modifying parameters such as block size and block generation time can lead to higher throughput and faster transaction speeds

Adjusting Block Size and Consensus Mechanisms

• Block size refers to the maximum amount of data that can be stored in a single block on the blockchain
• Increasing the block size allows more transactions to be included in each block, potentially improving the overall throughput (Bitcoin Cash)
• However, larger block sizes can lead to increased storage requirements and longer propagation times across the network
• Consensus mechanisms play a crucial role in maintaining the security and integrity of the blockchain while achieving scalability
• Alternative consensus mechanisms like Proof-of-Stake (Ethereum 2.0) and Delegated Proof-of-Stake (EOS) aim to provide faster and more efficient transaction processing compared to Proof-of-Work

Layer 2 Scaling Solutions

Off-Chain Scaling with State Channels and Sidechains

• Layer 2 scaling involves building additional protocols or networks on top of an existing blockchain to offload some of the transaction processing
• State channels enable participants to conduct multiple transactions off-chain and settle the final state on the main blockchain
  • Participants can transact directly with each other without broadcasting every transaction to the entire network
  • Reduces the load on the main blockchain and enables faster and cheaper transactions (Lightning Network)
• Sidechains are separate blockchains that are interoperable with the main blockchain
  • Transactions can be moved from the main chain to the sidechain, processed on the sidechain, and then settled back on the main chain
  • Allows for experimentation with different consensus mechanisms, block sizes, and features without impacting the main blockchain (Liquid Network)

Scalability through Rollups

• Rollups are a Layer 2 scaling solution that combines multiple transactions into a single transaction before submitting it to the main blockchain
• Optimistic rollups assume transactions are valid by default and only perform fraud proofs in case of disputes
  • Transactions are executed off-chain, and the state updates are periodically submitted to the main chain
  • Relies on a challenge period where anyone can dispute the validity of a transaction (Optimism, Arbitrum)
• Zero-Knowledge rollups (ZK-rollups) use zero-knowledge proofs to validate transactions off-chain
  • Transactions are processed off-chain, and a validity proof is generated and submitted to the main chain
  • Provides faster transaction finality and higher security compared to optimistic rollups (Loopring, zkSync)

Specific Layer 2 Technologies

Lightning Network for Bitcoin Scalability

• Lightning Network is a Layer 2 solution built on top of the Bitcoin blockchain
• Utilizes payment channels to enable fast and low-cost transactions between participants
• Transactions are conducted off-chain through a network of interconnected payment channels
• Only the final state of the payment channels is settled on the Bitcoin blockchain, reducing the load on the main chain

Optimistic Rollups and ZK-Rollups in Ethereum

• Optimistic rollups and ZK-rollups are actively being developed and deployed on the Ethereum network to improve scalability
• Optimistic rollups, such as Optimism and Arbitrum, leverage the security of the Ethereum mainnet while offering faster and cheaper transactions
  • Transactions are executed off-chain, and the state updates are periodically submitted to the Ethereum blockchain
  • Relies on a challenge period to dispute invalid transactions
• ZK-rollups, like Loopring and zkSync, use zero-knowledge proofs to validate transactions off-chain
  • Transactions are processed off-chain, and a validity proof is generated and submitted to the Ethereum blockchain
  • Provides faster transaction finality and higher security compared to optimistic rollups