Can Ethereum 2.0 kill Layer 2 projects?

Although Ethereum (ETH) has migrated to the proof-of-stake (PoS) consensus model, its network has yet to show significant improvements in scalability. Therefore, in addition to altcoin competitors, Layer 2 projects such as Polygon (MATIC), for example, are still attracting a lot of attention.

Many investors end up choosing not to use a rival network to ETH, as they feel they are not as secure as the largest smart contract platform. Investors who have been in the crypto-currency market for a while have already noticed this – Solana (SOL), which has experienced eight network outages since its launch in 2020, as of this writing.

Therefore, to avoid this headache and save on costs, a layer 2 may be the most suitable option.

But what is layer 2?

Layer 2 is a secondary protocol built on top of an existing blockchain system.

The big goal of Layer 2 is to solve the problem of transaction speed and how a blockchain manages to scale its ability to perform many transfers at once. In achieving this goal, Layer 2 is also able to reduce transaction costs.

There are four types of Layer 2. The best known is the sidechain model, which is gaining notoriety for always managing to have the same operation regardless of Layer 1, which helps by providing scalability.

The second type of layer 2 is the plasma chain. This solution has its own consensus and transaction block generation algorithm.

The third type of Layer 2, rollup, although it sends blocks back to Layer 1, has a long transaction validation time: up to seven days.

The last type on the Layer 2 list is the state channel. It has more complex operations than the other forms of network scaling. In this one, the token is deposited on the Ethereum blockchain and, therefore, a channel is opened, and the whole operation takes place through tickets that are signed at layer 2 and then at layer 1.

Polygon is the flagship project as far as Layer 2 is concerned. It promises to perform up to 65,000 transactions per second with extremely low costs. In comparison, the ETH blockchain manages to offer an average of 15 to 20 transfers in the same period.

However, with the new advances in Ethereum 2.0, the leading altcoin is expected to make up to 100,000 transactions per second, according to its co-founder Vitalik Buterin. The rate of these transfers is also expected to be lower.

Is there risk in Layer 2 projects?

Actually, Layer 2s are only looking to bring scalability to the ETH blockchain, and they could lose market share with the full transition of altcoin to Ethereum 2.0. After all, what’s the point of using a solution when the main network is already sufficient? In that sense, projects that don’t think about reinventing themselves now can expect to have a place reserved for them in the crypto-currency graveyard.

This should not be a reality for Polygon, as it did not become the Layer 2 leader by accident. There are significant partnerships with the scalability solution, and more development is underway on the MATIC network.

One step that could impact institutional usability of Layer 2 is Polygon ID. This enterprise-focused feature aims to provide data privacy on credit histories, for example, and a decentralized organization, realized by Polygon.

In addition, Polygon has three features in development that show it could grow even more, regardless of the arrival of Ethereum 2.0. Let’s take a closer look at them:

Polygon Avail : A blockchain focused on data scaling and mainstream use. It will arrive to provide off-chain scaling solutions.

Polygon Miden Support for arbitrary smart contracts.

Polygon Zero : In addition to working with Plonky2, this will be one of the fastest solutions in the blockchain market.