The emergence of the smart contract feature in blockchains, popularized by Ethereum, demonstrated the technology’s potential to transform all aspects of the finance industry through tokenization, trustless platforms, and decentralized governance.
Although this was a major leap from Bitcoin’s rigid network, next-gen blockchains required unprecedented scalability. To compete with traditional finance systems, blockchains need a lot of processing power to handle thousands of transactions per second while keeping costs feasible. Ethereum set the standard but has faced persistent issues like
The growing need for scalability paved the way for the development of layer 2 networks, which are blockchains built atop existing layer 1s to boost scalability.
The Genesis of Layer 2 Networks
While layer 2 networks have surged in popularity around Ethereum, the first-ever layer 2 was built for Bitcoin. Launched in 2015, the Lightning Network introduced a payment channel solution capable of handling thousands of transactions per second off-chain. It enables any two parties to create an off-chain channel and exchange high volumes of BTC at a low cost.
During the initial coin offering (ICO) craze in 2017-2018, Ethereum saw the first wave of layer 2 networks as well, including Raiden Network, Matic (now Polygon), and OmiseGO (now OMG).
Raiden, launched in 2017, has operated as a state channel to handle Ethereum transactions off-chain. It shares similarities with the Lightning Network, but it doesn’t support decentralized applications (dApps).
To unlock the full potential of Ethereum dApps, developers introduced more advanced layer 2 technologies, including sidechains and rollups, enabling compatibility with the Ethereum Virtual Machine (EVM), greater scalability, and lower transaction costs.
Types of Layer 2 Solutions
To better understand the evolution of layer 2 networks, let’s discuss the main types in roughly chronological order:
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State channels – this is the most primitive form of layer 2. It enables the development of a peer-to-peer (P2P) channel between two parties to transact unlimited amounts of assets off-chain. A state channel will record only the first and the last transactions on the mainnet. A multi-signature wallet holds the channel’s funds, and participants sign off-chain transactions until they close the channel.
While channels like the Lightning Network can greatly increase the speed of transactions between two parties, they are suitable for payment use cases only and cannot be integrated into dApps. -
Plasma chains – this methodology uses Merkle trees to build additional chains to the underlying mainnet – they’re usually called child chains. These smaller chains execute transactions off-chain and commit proofs to the mainnet. The chains have a waiting period for users to dispute the validity of transactions by submitting fraud proofs. The child chains are connected to the mainnet via smart contracts stipulating all the rules dictating how they must behave. Plasma technology was __first introduced __by Ethereum’s Vitalik Buterin and eventually integrated by Matic (now Polygon) and OmiseGO. Plasma solutions partially support smart contracts, being capable of operating as bridges. However, they’re not suitable for more complex dapp transactions.
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Sidechains – these are independent blockchains that run in parallel to the underlying mainnet, e.g., Ethereum. They operate based on their independent consensus algorithms and are connected to the mainnet via bridges. Polygon started as a plasma chain and eventually turned into a sidechain, offering faster Ethereum transactions at a lower cost. Sidechains are dApp-friendly and have been used in decentralized finance (DeFi), non-fungible tokens (NFT), and Web3 gaming markets.
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Rollups – rollups have become the most popular scaling solution. They bundle Ethereum transactions off-chain and submit proofs on the mainnet, sharing its security while reducing transaction load. The great thing about rollups is that they can be fully integrated into dApps as they support complex smart contract operations. There are two types of rollups: optimistic and zero-knowledge (ZK) rollups. The former ones assume that all transactions are valid by default, offering a seven-day window to dispute invalid activity. While this greatly reduces costs, it offers true finality only after one week. Elsewhere, ZK rollups verify all transactions with ZK proofs before submitting them to the mainnet, offering greater privacy and security compared to optimistic rollups. However, due to the complexity of ZK rollups and their initial lower EVM compatibility, optimistic rollups have experienced a much higher adoption rate. Popular optimistic rollups include Arbitrum, OP Mainnet (ex Optimism), and Base.
Key Developments in Layer 2 Networks
With the emergence of decentralized finance (DeFi) and Web3 trends (including gaming, metaverse, and decentralized gambling), Ethereum has become the main ground for new layer 2 technologies. Due to their limitations, state channels and plasma have lost competition. Since 2021, the main layer 2 battle has been fought between optimistic and ZK rollups. In December 2024, the total value locked (TVL) on Ethereum layer 2s hit a record $60 billion, with Arbitrum, OP, and Base accounting for 75% of it.
Ethereum layer 2s have grown into complex ecosystems offering development and integration tools across all use cases. Some platforms even provide layer 3 networks for enhanced performance and customization. For example, Arbitrum Orbit is a layer 3 on Arbitrum, while zkSync has introduced the concept of hyperchains, a network of customizable and trustless linked layer 3 chains. The success of Ethereum layer 2s has been extended to Bitcoin as well, which saw the rapid development of layer 2s supporting smart contracts and sharing compatibility with Ethereum. Most of these are sidechains. Some examples include Stacks, Rootstock, Merlin, and Core. The TVL of Bitcoin sidechains soared to nearly $3 billion.
In addition to Ethereum and Bitcoin, other blockchains have developed their own layer 2 solutions. For example, the BNB Chain introduced opBNB, while Solana is preparing to launch
Challenges and Opportunities for Layer 2 Networks: How They Impact the Future of Blockchain
While many layer 2s offer impressive scaling, their adoption is hindered by several market-wide challenges, such as complexity, liquidity fragmentation, and security trade-offs. When it comes to Ethereum, interoperability remains a major concern, as assets and data transferred across different layer 2s can become siloed. The network needs cross-chain bridges to improve asset mobility and liquidity, but they can become vulnerable to hacking attacks. Another problem is that some layer 2 solutions rely on centralized validators, posing risks to network security.
Despite challenges, layer 2 adoption continues to grow. As DeFi and Web3 apps expand, developers are building more user-friendly dApps using rollups and sidechains.
Looking ahead, layer 3 protocols could redefine scalability by offering custom-built sub-networks for specialized apps. Given their ability to cut costs and boost throughput, layer 2s could power the next wave of mainstream blockchain adoption.