Monolithic vs. modular blockchains

Looking at all the cryptocurrency in tracking sites like Coinmarketcap.com may leave most beginners confused at the number of tokens being offered to the public. Layer-1, layer-2, metaverse, DeFi, gaming, liquid staking, real world assets, memes and the like are like the toys in a large toy shop. Each has its own separate world.

One of the more recent types of tokens that have hit the market are called layer-2 scaling solutions. Examples of these tokens are Optimism, Arbitrum, zkSync, Polygon zkEVM, Consensys Linea, Coinbase Base, Starkware and a few that are not yet well known. 

Ethereum founder Vitalik Buterin stated something called the Blockchain Trilemma. A blockchain tries to be secure, fast and decentralized. But according to Buterin, it is very hard to achieve all three. Ethereum, for example, is secure and decentralized, but it is quite slow. Transactions can sometimes take an hour or so to finalize if the network is congested. It is secure and decentralized because more than 500,000 independent validator nodes now secure the network and approve transactions by consensus. That is also why it is slow compared to a blockchain that only has a handful of nodes that validate transactions by consensus.

The early blockchains like Ethereum, Solana, Cardano, Binance Smart Chain and others basically tried to do all the work of a blockchain by themselves. This is somewhat similar to a restaurant manager who is also the one taking orders, cooking the food, chopping the vegetables, manning the cash register, pouring the drinks and cleaning the tables and floors. The next customer would need to wait until the one-man crew is ready to take their order. Hence, a long line forms outside the restaurant.

The new layer-2 scaling solutions basically take some of the blockchain functions and only do the final settlement on the Ethereum chain. To the user, they may not notice and might be surprised that Ethereum is still behind the scenes as the one that records the final transaction. But the front end portion of the transactions are handled by the layer-2 chains.

Some time ago Ethereum underwent an upgrade called Shapella. This upgrade allowed the people who staked their ETH for validator nodes to withdraw these. Another upgrade that was done previously was to shift from Proof of Work (like Bitcoin) to Proof of Stake.

The problem is that Ethereum transactions are still slow and the gas (transaction) fees are still expensive. This is actually what the layer-2 scaling solutions want to address. For example, someone who wants to buy an NFT might not want to pay $50 for transaction fees on a $200 NFT. On the other hand, the buyer might be more amenable if the transaction fee was only $5, but the transaction is done on a layer-2 scaling solution that in turn finalizes on Ethereum. 

Conversely, if you are transacting something worth a million dollars, having the security of Ethereum might be worth a $20 gas fee just for your own peace of mind.

The way the layer-2 solutions work is sort of like dealing with the waiter and server at a restaurant, on the ordering, serving and payment. But you don’t actually see the chef who cooked your food. That’s how a layer-2 scaling solution works. It is still working on top of Ethereum, but you just see the scaling solution fee and speed.

One problem that comes up when you have many Ethereum layer-2 tokens is that when you are using one distributed application (dApp), you need one kind of layer-2; then for another dApp, you need another layer-2. That’s somewhat similar to having non-interchangeable poker chips from one casino to another. Although, right now you can bridge in between these different assets, but everytime you do so, you pay gas fees. 

Whether this strategy of performing most functions on layer-2 over Ethereum will dominate other layer-1 monolithic, “do everything” blockchains is still anyone’s guess. But the upcoming wave of layer-2 tokens looks like they will try to do just that.

Zain Jaffer is the CEO of Zain Ventures focused on investments in Web3 and real estate.

This article was published through Cointelegraph Innovation Circle, a vetted organization of senior executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. Opinions expressed do not necessarily reflect those of Cointelegraph.