Unlocking Crypto Scalability with Layer 2s

It’s a known fact that while crypto is thriving, the scalability challenge remains a very real bottleneck. High transaction fees, slow processing times, and limited throughput ultimately block any type of real world adoption. However, since Layer 2’s were introduced, the solution to scalability is becoming more and more clear (all without compromising security or decentralization).

What is the Scalability Problem?

Crypto is revolutionary, there's no doubt, but it wasn’t designed to handle this kind of global-scale usage, at least not yet. Take Ethereum for example, it processes 15 transactions per second (TPS), while centralized comparisons like Visa manage over 24,000 TPS. This bottleneck limits crypto’s potential to really disrupt.

When demand spikes, Ethereum’s limitations become painfully clear:

1. High Gas Fees

2. Network Congestion

3. User Migration

What Are Layer 2’s?

Layer 2s (L2s), are protocols built on top of Ethereum (or other Layer 1 chains). They take transactions off-chain, process them, and bundle them together before submitting a single record back to the main chain. This approach reduces congestion, lowers fees, and increases throughput, all while still being able to utilize the security of the Layer 1, which in most cases is Ethereum.

How Do They Work?

Think of Ethereum as a congested highway. L2s act as express lanes, moving traffic off the main road and rejoining it only at critical points. They achieve this by executing most of the transactions off-chain and relying on the main chain solely for final settlement and dispute resolution.

Types of Layer 2s

L2s are not a one-size-fits-all solution. Various tech address different use cases and priorities, from high-speed transactions to security.

1.  Rollups - The Front-Runners of L2s

Rollups bundle multiple transactions together and post a single compressed proof to Ethereum, significantly reducing the data needed to validate transactions.

• Optimistic Rollups assume transactions are valid unless proven otherwise. They’re fast but require a challenge period (typically a week) where fraud can be contested. Some common examples are Arbitrum and Optimism.
• Zero-Knowledge Rollups (zk-Rollups) on the other hand use cryptographic proofs (zero-knowledge proofs) to validate transactions. They’re faster and more secure but complex to implement. Some examples include StarkNet and zkSync.

2. State Channels

State channels enable two parties to transact off-chain as much as they like, only submitting the final result to Ethereum. While efficient, they require setup and are best suited for repetitive interactions like micropayments.

Why do L2s Matter?

Layer 2s are essential because they address Ethereum’s biggest pain points (cost, speed, and accessibility), without compromising its decentralization. How you may ask? 

Cost Efficiency

By processing transactions off-chain, L2s drastically lower gas fees. For instance, transferring ETH via Arbitrum can cost as little as $0.10, compared to Ethereum’s average fee of $1.68 (November 2024)...

Improved Throughput

Rollups can handle thousands of transactions per second, making them suitable for high-demand situation like arbitrage.

Accessibility

Affordable fees and faster speeds open the door for smaller users and developers, which directly increases adoption.

Real-World Applications of Layer 2s

Layer 2s are already reshaping how we interact with crypto, for the better.

DeFi

High gas fees have historically priced out smaller users. L2s make DeFi more inclusive by enabling low-cost trading, staking, and yield farming. Protocols like Uniswap on Arbitrum have seen significant growth, as users looked to affordable alternatives.

NFTs

Creators and collectors were directly impacted by Ethereum’s high transaction fees. With L2s like Immutable X, minting and trading NFTs is now faster and cheaper, opening the market to more participants.

Gaming

On-chain games like Axie Infinity rely on frequent, low-cost transactions. Integrating L2s ensures smooth gameplay while keeping fees negligible.

How LYS Will Use L2s

LYS Protocol was built with scalability in mind. Although right now mainnet is the focus, the entire architecture was built around modularity, and is completely EVM-compatible with minimal effort to effectively “turn the switch on”.

This means users will be able to interact easily with L2s, deploying strategies or minting whyETH without worrying about compatibility issues. Transactions will be optimized as deploying assets on L2s drastically reduces gas fees, making LYS accessible to everyone.

Additionally, the LYS AI Pathfinder will be able to process real-time data from L1 and L2 networks, which ensures optimal strategies are identified across multiple layers.

Challenges of Layer 2s

While L2s solve many problems, they’re not perfect. Some challenges include:

1. Bridging Risks

Transferring assets between L1 and L2 involves bridges that can be vulnerable to exploits. In 2022, the Wormhole Bridge hack resulted in a $320 million loss which really showed the need for secure bridging solutions.

2. Fragmentation

The growing number of L2s creates a fragmented user experience, complicating interoperability and requiring users to navigate multiple interfaces and LPs.

3. Sequencer Centralization

Particularly in Optimistic Rollups, centralization of sequencers is a major concern. Sequencers are responsible for ordering transactions and submitting them to the L1. While rollups are designed to inherit Ethereum’s security, their reliance on centralized sequencers means there could be potential threats. 

The Future of L2 and Ethereum Scaling

One of the biggest developments coming to Ethereum is sharding, planned for 2026. Think of it like splitting Ethereum into smaller sections, or shards, that work simultaneously to process transactions. This will enable the network to handle far more activity at once while cutting costs for everyone. L2s stand to benefit hugely from this because a more efficient Ethereum means rollups can operate even better on top of it.

Another big step forward happened this year with Proto-Danksharding (EIP-4844). If you’re not familiar, this upgrade introduced a clever way for rollups to store more data on Ethereum at a fraction of the cost. By using blob-carrying transactions, rollups like Optimism and Arbitrum can handle even more users while keeping fees low.

Outside of Ethereum’s own plans, rollups themselves are evolving fast. zk-Rollups are taking the spotlight for their ability to validate transactions with cryptographic proofs instead of trust-based systems. This means they’re not just faster but also much more secure. Leading the way are projects like zkSync, StarkNet, and Polygon zkEVM, which are already enabling quicker, cheaper transactions. Over time, zk-Rollups are expected to become even more efficient.

But there’s still work to be done. Interoperability (how different rollups and Ethereum work together) is a challenge the community is tackling head-on. Projects like Connext and Hop Protocol are building tools to make it easier to move assets and information across rollups easily. Imagine being able to use multiple L2s without worrying about bridges or complicated steps. That’s the future we’re moving toward.

In Summary

Layer 2s are no longer a nice-to-have but a necessity for crypto’s future. By addressing Ethereum’s core challenges of cost and speed while maintaining decentralization, they’re laying the groundwork for mainstream adoption.

Whether you’re a developer, an NFT creator, or a DeFi enthusiast, understanding and embracing L2 tech is key to unlocking crypto’s full potential.