There has been a lot of discussion about how blockchain opens up endless business opportunities. And while all of these rumors haven’t quite translated into tangible results, the boom in decentralized finance and non-distributed tokens (NFTs) has paved the way for the achievable and how blockchain can really affect even the most conservative industries.
In contrast to two to four years ago, developers, entrepreneurs and companies are not just blindly joining in. It’s no longer about what blockchain can do. The question now arises as to how best to use technology for the best results. As a result, blockchain has slowly evolved from a buzzword to an applicable mainstream technology. If this doesn’t indicate real growth and development, what then?
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However, this does not mean that things have gone smoothly so far. Ever since we started looking at blockchain as a viable technology for mainstream applications, the throughput performance of blockchains, especially blockchains that are already widely used, has been closely monitored. Understandably, scalability is still a metric to measure the readiness of blockchain networks to take over enterprise applications.
Using Ethereum as a case study, it can be said that many Ethereum users have directly addressed the disadvantages of a non-distributed blockchain infrastructure. In my experience, high transaction fees due to network congestion are a potential deal breaker for retail investors. There is no way for the average user to justify paying a $ 70 fee for a transaction that might not even be worth $ 100.
In particular, Ethereum’s inability to scale accordingly has to some extent hampered the establishment of DeFi and NFT sectors, with retail investors and traders keen to do so. Even Vitalik Buterin recently acknowledged the gravity of the situation, stating that the current scale and fee system is unsustainable if the goal is for social networking projects run by NFTs to thrive on the Ethereum network.
So the question is: how did blockchain developers respond to this repetitive problem?
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I believe the ultimate goal is to solve the blockchain dilemma, which is to strike a balance between decentralization, security and scalability. In most cases, blockchains have to do without one of these three functions. In most legacy blockchains, including Bitcoin and Ethereum, infrastructure design sacrifices scalability for security and decentralization.
It has to be said that Bitcoin and Ethereum are the two most popular blockchains, not only because they are the first of their kind, but also because they established themselves as the most secure and decentralized blockchain network on the market. What they lack in scalability, they essentially make up for in other core blockchain requirements. While this was sufficient in the early years of operation, the influx of blockchain applications has certainly put a lot of pressure on Layer 1 chains to develop and integrate infrastructures geared towards scalability.
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While newer blockchains are much easier to manage by implementing scalable infrastructure from the ground up, it is much more difficult for those with existing infrastructure. As seen in the case of Ethereum, this could require a complete overhaul of the existing infrastructure. Moving an existing multi-billion dollar blockchain economy to a new blockchain infrastructure carries many risks. A lot can go wrong, especially since it has never been seen on such a scale before.
Therefore, it is usually obvious for DApp developers and users to opt for scalable, centralized Layer 1 chains. As expected, the list of Layer 1 chain solutions trying to capitalize on the boom in demand for fast blockchain infrastructure has grown over the years – notable mentions include Binance Smart Chain, Tron, and EOS. However, as we have found, decentralization does not appear to be the strongest of these options. Given the blockchain dilemma mentioned earlier, most of the alternatives to Ethereum and Bitcoin were resolved for the speed of decentralization. So it becomes a question of the developers’ preferences and willingness to compromise.
Perhaps a third and more advantageous option is to use Layer 2 solutions. With this, developers can at least be sure that they have access to all the little things that are required to create optimal blockchain applications.
Are Layer 2 solutions the immediate answer to the blockchain’s triad of dilemmas?
The Ethereum blockchain’s scalability flaws forced solutions to build on top of existing networks and take on some of the transaction and compute loads that are clogging the main network. The layered approach ensures that developers continue to enjoy the high liquidity of the Ethereum blockchain while still avoiding bottlenecks related to the ecosystem.
The idea is to make all calculations and payments outside the chain scalable and to continuously record the final state of these operations on the layer 1 blockchain, be it an optimistic roll-up, the state channel, plasma or zero-knowledge (zk rollups) . , the goal remains the same: bypass the obvious limitations of decentralized blockchains.
Currently, Polygon (formerly known as Matic) has gained a lot of importance due to network congestion as the ideal second tier solution for Ethereum applications that want to enable a scalable platform without compromise. For example, according to DappRadar, SushiSwap’s polygon version of Sushi recorded a 75% increase in user numbers in the first week of September. Aside from the recent drop in activity on Polygon, which I think is a temporary setback, users have become aware of the opportunities that Layer Two solutions offer, especially when it comes to speaking to DeFi in retail.
Interestingly, it is not only the DeFi industry that is experiencing this dynamic change. The NFT marketplace has also started moving to the second level with a specific solution that claims to save over $ 400,000 in gas fees just 24 hours after launch. In July, OpenSea announced that it had integrated with Polygon to enable gas-free trading on the NFT marketplace. Note that Polygon is not the only two-tier waveforming solution available today. Other Layer 2 infrastructures that have caused a stir are the Celer Network and Arbitrum.
The wave of Layer 2 adoption has led me to believe that developers have chosen a layered blockchain infrastructure as the ideal architecture for creating world-class blockchain experiences. If this trend continues, which seems safe, at least until Ethereum 2.0 is online, Layer 2 applications will become just as valuable as their Layer 1 applications. Therefore, joining a Layer 2 team is an affordable option for developers looking to improve the existing blockchain infrastructure or build new decentralized applications.
Andrey Sergeenkov is an independent researcher, analyst and author in the crypto space. As a staunch advocate of blockchain technology and a decentralized world, he believes the world yearns for such decentralization in government, society, and business. He is the founder of BTC Peers, an independent media company.