Scaling a blockchain while maintaining decentralization and not compromising on Security is the biggest challenge the blockchains have faced since dawn. Many have come up with ideas like sharding, nested blockchain, rollups, relay chains, layer-2 etc. to attain scaling but Layer 2 blockchains/Rollups have grabbed the most spotlight in recent times. 

Layer 2 Blockchains/rollups are fast, and highly scalable compared to layer 1 blockchains, and they are not compromising security. But how do they do that?

let’s dig into it.

What is a Rollup?

Rollup compresses Layer 2 transactions into a “batch” and uploads it to Layer 1, and proves the validity of state transition on Layer 1 through Fraud Proof (Optimistic-rollup) or Validity Proof (ZK-rollup). This means that users can benefit from the speed and cheapness of the rollup while also benefiting from the security of the layer-1 blockchain (mainnet).

For Ethereum (L1 blockchain), the EVM-compatible rollups are Optimism, Arbitrum, Polygon, loopring etc. (L2 blockchain).

There are mainly 2 types of rollups- optimistic rollups and zk rollups.

1. Optimistic rollups- it optimistically assumes that all the transactions contained within a rollup are valid and give everyone on the network a certain amount of time, usually a week, to contest fraudulent transactions. that is why it takes around 7 days to transfer funds from Optimism/Arbitrum to Eth from the native bridge. examples are Optimism, Arbitrum….

2. zk-rollups- also known as zero-knowledge rollups, These protocols use a complex piece of cryptography called a Zero-Knowledge proof to determine that a transaction is valid using only minimal information about that transaction. It’s privacy-preserving, and most importantly, fast and cheap. ZK-rollups hold a no. of advantages over Optimistic rollups in terms of speed and security, but they are considerably more complex under the hood. examples- zkSync, Polygon-Hermez….

Problems with Layer-2 Blockchains/Rollups

EVM-based rollups can be pictured as computational shards. The design’s flaws come up as more and more applications are gradually deployed on them and share the same VM. The zero-sum fight for a slice of the VM’s CPU capacity will lead to the exact same problem that these Rollups were created to solve. Only a tiny fraction of applications are viable on each shard; the others are driven out. It is just a matter of time before these networks become congested and expensive.

Some of you might think, why not just deploy another rollup with the same functionality on top of the existing one?

The answer is simple- Data can be compressed only once! As we saw Rollups compresses the transactions of layer-2 into a batch. Compressing the same data again will nullify the result of the previous compression and the resulting size of the tx-batch will be greater than the previous one. 

So we can get the Scalability boost only once.

Furthermore, layer-2 networks don’t address the issue of interoperability. These days, most users of DeFi protocols expect some degree of cross-chain compatibility. In addition, cross-chain DeFi helps to improve liquidity among lending protocols and creates stability throughout the ecosystem.

And this demand for cross-chain dapps and interoperable protocols has given rise to a new application layer The Layer-3 Network.

App Specific rollups/Layer 3 - The future for scaling?

A layer-3 network enhances existing blockchain protocols and enables L1 and L2 networks to interoperate without friction. The primary objective of the layer 3 solutions would focus on achieving actual interoperability without depending on intermediaries or custodians. One of the interesting highlights of layer 3 solutions is the similarity with the layered structure of the internet. 

Layer-3 network can also be called an Application layer. The idea is to create a separate network specially designed to optimize the functionality of the Applications. This means that every dapp will have its own layer specially designed to cater for its needs in order to provide the best experience to the users. We can also call them “App-Specific Rollups”. 

App-Specific Rollups or layer-3 networks will facilitate the seamless transfer of data packets between protocols on multiple chains. This application layer consists of various protocols and services that help different chains connect. As a result, the user experiences of cross-chain applications improve.

The various applications and protocols within the layer-3 network umbrella will supplement the vast blockchain ecosystem. Moreover, layer-3 networks could be a driving factor of blockchain technology adoption by providing users with a higher degree of flexibility. 

Although the concept of Layer-3 network is mainly theoretical and only a handful of projects like Stackr Labs, dYdX’s sovereign chain, etc has implemented layer-3 concept. Let us see How devs will implement the idea of layer-3 to facilitate interoperability between protocols, reduce congestion and drive more adoption. 

P.S. - This is my first attempt at writing a blog and If you made it this far, Hit a like on the tweet and give a feedback in the comments. Twitter- @jagrit_chawla_

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