Benzinga - With the aim of improving the security of blockchain networks and record-keeping, the "Layer-2 solution" or second-layer scaling solution was created. Its objective is to combat blockchain scalability problems such as slow transaction times and high gas fees.
Before delving into these solutions, let's talk about the Blockchain Trilemma.
What Does The Blockchain Trilemma Mean? The scalability trilemma refers to a blockchain's ability to balance three fundamental principles that make up its essence: security, decentralization, and scalability. Scalability in cryptocurrencies refers to a blockchain's ability to adapt to demand increases by carrying out more transactions per second without affecting its performance.
This trilemma establishes that a blockchain can only have two of these properties at the same time but never all three simultaneously. Therefore, current blockchain technology must always give up one of these basic characteristics for proper functioning. Bitcoin is a good example of this, where its blockchain prioritized decentralization and security but sacrificed scalability (resulting in very few transactions per second and the creation of Lightning Network). Ethereum, for instance, can only process 12 transactions per second. Is it possible for Ethereum to perform more transactions per second? Yes, through ZK Rollups. But we will cover that later in this article. Let's continue with the trilemma.
Currently, no cryptocurrency has fully satisfied all three main characteristics of the trilemma. Instead, cryptocurrencies prioritize two or three of them at the expense of the rest.
To solve the blockchain trilemma, many developers are working hard on implementing techniques and ideas that address the scalability problem. Depending on the level of blockchain implementation, these techniques and concepts manifest as solutions in Layer 1 (L1) or Layer 2 (L2).
In the case of Ethereum, Lido holds 75.6% of the market share of Ethereum. It's important to remember that with the proof of stake algorithm, the more cryptocurrencies one holds, the more decision-making power they have (centralization) and the more prone the network is to suffer a 51% attack (the one who holds 51% of the stake market can control the network). Coinbase holds 17%. Now, the U.S. Office of Foreign Assets Control (OFAC) controls more than 72% of Ethereum's blocks and can censor transactions (this number varies constantly). On the other hand, Cardano, Avalanche, and Solana are layer 1 cryptocurrencies that have gained prominence by capitalizing on the deficiencies of Bitcoin and Ethereum in terms of scalability. However, Solana has considerably sacrificed its security and decentralization, with its network being restarted several times due to technical problems.
Now let's go back to the first and second layer of the blockchain.
What is meant by a layer 1 chain? A layer 1 chain is a blockchain that operates within a decentralized system. Examples of layer 1 blockchains include Bitcoin, Ethereum, Binance BNB Chain (formerly BSC), Litecoin, Avalanche, and others we saw in the course such as Cardano or Polkadot. In the context of layer 1 scaling, the blockchain protocol is modified to achieve scalability and increase transaction capacity and speed, allowing for the processing of more transactions and users. In other words, the base protocol is improved to achieve greater scalability in the system as a whole.
There are three approaches to implementing layer 1 solutions: Proof of Stake (PoS), Proof of Work (PoW) (you already know these two), and Sharding or Fragmentation: Fragmentation is one of the most popular scalability methods in Layer 1. Sharding is a technique used by blockchain companies in which, instead of making a network work sequentially in each transaction, sets of transactions are divided into data fragments that can be processed by the network in parallel. The goal is to improve scalability, allowing for a higher number of transactions per second (TPS).
Now let's see what a layer 2 solution is: Layer 2 blockchains, also known as layer-2, can process new transactions faster and with lower fees by reducing the load on layer 1.
Now let's take a look at what a layer 2 solution is:
Layer 2 blockchains, also known as layer-2, can process new transactions more quickly and with lower fees by reducing the load on layer 1. It is built on an existing blockchain system and solves the problems of scalability and transaction speed. Two notable examples of layer 2 solutions are Bitcoin Lightning Network, Ethereum Plasma, and Polygon (MATIC).
Layer 2 works by creating a secondary framework where blockchain transactions and processes can take place independently of layer 1. This increases the capacity and processing speed of transactions while reducing congestion on layer 1, improving scalability. While the main chain (layer 1) provides security, the second layer offers high performance by processing hundreds or even thousands of transactions per second.
There are different types of layer 2 scaling solutions, such as Zero-Knowledge Rollups and Optimistic Rollups. These solutions inherit the underlying security of the main chain, meaning they can scale without sacrificing security or decentralization. Additionally, layer 1 and layer 2 scaling solutions are not mutually exclusive and can be combined to achieve greater scalability.
Blockchain networks are exploring the best way to combine these solutions to better cater to a constantly growing user base.
These two types of solutions are derived from a concept - zero-knowledge proofs (ZK proofs): Zero-knowledge proofs are a class of cryptographic protocols that allow a person to prove that they have knowledge of certain information without revealing the information itself. In other words, it is possible to demonstrate that one knows something without revealing what that something is.
This is achieved by creating a mathematical proof that demonstrates a certain statement is true, without revealing the underlying information that supports that statement. For example, in a financial transaction, it could be demonstrated that there is enough balance in the account to make a transaction, without revealing the exact balance or additional account details.
Zero-knowledge proofs are useful in situations where it is necessary to demonstrate confidential information without revealing additional details, such as in the privacy of financial transactions, identity authentication, or online credential verification.
Authentication using a ZK proof does not require the sharing of secrets to demonstrate that one possesses particular secret information. This is valuable because it does not expose secrets to potential theft. This feature allows for the creation of highly secure communication channels.
The fundamental idea of this protocol is that the "Prover" demonstrates clearly that they know the secret, without having to reveal it, which is the responsibility of the "Verifier". The great advantage is that there is no need to resort to a third party to check the information; the protocol is sufficient for the information.
In summary, a zero-knowledge proof is a cryptographic method that allows one party to demonstrate the veracity of information to another without revealing sensitive information about that information. Let's look more into this concept and an example of a Zero-Knowledge Protocol to understand the logic. Imagine a cave that is divided into two paths: right and left. However, there is a door at the end of the paths that connects them. This door opens with magical words, making the cave circular. In this way, one can enter one path and exit through the other.
In the world, only certain individuals know these magical words, and one day, one of them wants to prove that they know them without revealing them to the public. To prove this fact, two people are needed: Alice, who knows the words, and Bob, who will verify that what Alice says is true.
The method followed is as follows:
Alice enters the cave and takes a random path, let's say path B (to the right). Bob enters some time later, without knowing which path Alice has chosen, and tells her the route she must take to return. Let's say the route is A (to the left). In this case, Alice has to open the door with the secret word, but there is a probability that she chooses route A from the beginning or that Bob tells her to return by path B. Therefore, she could have tricked Bob into believing she has that information. To avoid this, the process is repeated a predetermined number of times. This number has to be sufficiently high so that the probability of success without knowing the secret word is practically nil.
The Characteristics Of ZKP Method The above example is considered zero-knowledge proof because it fulfills the following three requirements:
Integrity: it is assumed that both parties involved are honest and will follow the protocol.
Soundness: assuming honesty is scarce or non-existent, it is highly unlikely that the prover can deceive the verifier.
Zero-knowledge: if the prover knows the information, the verifier learns nothing more than this fact, so if there is any deceptive verifier, the knowledge of the secret would be null.
Let's continue with the two aforementioned solutions. Zero-Knowledge Rollups (ZK-Rollups) are a layer 2 scalability solution used in blockchain networks like Ethereum. They use what is called "proof of validity," where essentially someone provides an immediate proof to Ethereum that transaction batches are correct, secure, and non-fraudulent. Then, the list of transactions and proofs is sent to layer one blockchain. This occurs OUTSIDE the main chain. Essentially, Ethereum offloads part of its work to a verifier called ZK-SNARK.
To accomplish this, ZK rollups utilize the concept of ZK-SNARK, a mathematically complex cryptographic proof that all calculations in a batch correspond to the state transition path. ZK-SNARK stands for "Zero Knowledge" (they don't have to see all the transaction data), "Succinct" (short), "Non-Interactive" (they don't need to deal with people verifying their work), and "Argument of Knowledge" (proof that they provided that these transactions are good).
Currently, in order to perform zk-SNARK proofs, it is necessary to establish a trusted setup between a prover and a verifier. This involves the need for a set of public parameters to construct zero-knowledge proofs and, therefore, to perform private transactions. These parameters are a kind of "rules of the game" since they are encoded in the protocol and are necessary to demonstrate the validity of a transaction. However, this can generate a potential centralization problem, as these parameters are often formulated by a very small group of people.
The cryptocurrency Zcash is a pioneering application in the use of zk-SNARKs, a technique that radically changes the way data is shared to protect privacy.
Unlike other cryptocurrencies that use "ring signatures", Zcash allows transactions on the network to remain encrypted and still be verified as valid through zero-knowledge proofs. This means that regulators do not need to know all the details of each transaction to enforce consensus rules. It is important to note that privacy in Zcash is not enabled by default, but is optional and requires manual configuration.
In summary, ZK-Rollups are smart contracts that allow for processing multiple transactions off the main blockchain. These transactions are grouped and "rolled up" into a single transaction that is sent to the main chain. By doing this, ZK-Rollups can process a large number of transactions (up to 2,000 transactions per second on Ethereum) without increasing the workload on the main chain.
The key to ZK-Rollups is that they use a cryptographic technique known as "zero-knowledge protocol" to ensure the privacy and security of transactions. Basically, this means that ZK-Rollups can prove that transactions are valid without revealing sensitive information such as wallet addresses or transaction amounts.
On the other hand, Optimistic Rollups are a layer 2 scalability solution that is also used on blockchain networks such as Ethereum. Unlike ZK-Rollups, Optimistic Rollups run on top of the main chain of the blockchain. Instead of processing transactions off-chain, Optimistic Rollups process transactions on the main chain and then publish a summary of the processed transactions on the main chain.
Optimistic Rollups are called as such because they "assume" that all transactions are valid and legitimate until proven otherwise, a sort of "presumption of innocence". If a fraudulent transaction is found, the entire block of processed transactions can be reverted. Although Optimistic Rollups offer greater scalability than the main chain, they have less processing capacity than ZK-Rollups and other types of layer 2 solutions.
In summary, Optimistic Rollups assume that everyone is telling the truth. However, what they publish is verifiable by other parties. Assuming that there will always be people verifying on Ethereum (Staking), if someone were to demonstrate that a transaction was suspicious, the transaction would be reversed, and the block validator would be slashed, meaning that the validator who validated that block will lose part of the Staking they provided as collateral, and the person who found the error will be rewarded economically.
Another advantage of ORs is that they can be used for smart contracts and transactions involving tokens other than Ether. Disadvantages: Vitalik Buterin (the face of Ethereum and co-founder) doesn't have much confidence in ORs because he believes there will be better alternatives in the future. While different types of rollups serve the same purpose, they are good for different protocols. Optimistic Rollups are suitable for general Ethereum Virtual Machine calculations, while ZK Rollups are suitable for simple payments or exchanges.
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