$1 Billion Now Locked Up in Ethereum Layer 2 Scaling Solutions

Second-layer scaling solutions designed to counteract network congestion on Ethereum are booming, with over $1 billion locked up in scaling protocols, according to layer two ecosystem tracker L2Beat. 

Heading up the list is crypto exchange dYdX, with $285.6 million locked.

Scaling solutions enable decentralized apps (dapps) to circumvent network congestion, using a variety of different technologies. L2Beat tracks layer two rollups, a type of scaling solution that sits atop the Ethereum blockchain, processing a series of transactions in a batch before submitting them to the main chain as a single transaction.

Different versions of rollups—including Optimistic, Plasma, Validium, and ZK-rollups—bundle and verify these series of transactions in different ways; of the top ten protocols by value locked, fully half are based around ZK-rollups, for a total of $547.56 million locked.

The key difference between different types of rollup is whether they keep data on- or off-chain, and whether they employ Fraud Proofs (which present evidence that a block was incorrect) or Validity Proofs (which present evidence that a block was correct).

ZK-rollups employ validity proofs with data stored on-chain, while Validium uses validity proofs with data stored off-chain. Optimistic rollups, meanwhile, use fraud proofs with data stored on-chain; Plasma and State Pools use fraud proofs with data kept off-chain.

One scaling solution that L2Beat doesn’t track is Polygon, which the site’s authors define as a proof of stake sidechain (essentially a clone of the Ethereum main chain, where assets can transactions are processed and moved, and can be called back to the main chain). 

L2Beat defines layer two as “a chain that fully or partially derives its security from L1 Ethereum so that users do not have to rely on the honesty of L2 validators for the security of their funds.”

The Ethereum network is in the process of switching to Ethereum 2.0, which will bring with it a new consensus mechanism—proof of stake—and a new scaling mechanism, sharding. Sharding involves breaking large amounts of data into smaller pieces. 

However, there’s still a place for rollups as a scaling mechanism, with the Ethereum network potentially able to reach an estimated 100,000 transactions per second by combining sharding with rollups and other scaling solutions.