Hey Edge readers,

In this edition, we explore the different types of Layer 2 (L2) blockchains in the second installment of our L2 mini series and how the differing technologies compare in terms of security and costs.

Here's what we're covering this week:

1. Types of Layer 2 blockchains 📘

   The different types of L2 blockchains and how they compare in terms of security and costs.

2. New in Exponential: Earn 7% yield on BTC

   Reminder to check out our newest investing opportunities featuring 7% yield on BTC and 11% yield on ARB.

3. MicroStrategy adds an additional 11.9K BTC 🗞️

   SEC ends ETH investigation, LayerZero airdrop, and more.

Stay sharp. 🫡

-The Exponential team

Scaling Up: The Essential Guide to Layer 2s

In the next issue of our mini series, “Scaling Up: The essential guide to Layer 2,” we’ll break down the different types of Layer 2 blockchains, and how they compare in terms of security and costs.

Issue 2: Types of Layer 2 blockchains

Optimistic Rollups

Optimistic Rollups take an ‘optimistic’ approach to transaction processing, assuming everything is valid unless proven otherwise. These rollups process transactions off-chain and submit them in batches to the Layer 1. This streamlines verification and reduces costs. To prevent fraud or an invalid transaction, there is a ‘challenge period’ that allows participants to present evidence of fraud. Think of this mechanism as your friendly neighborhood watch group, keeping an eye out for any suspicious activity while letting most transactions flow smoothly. However, this method comes at a cost; moving your assets off the Layer 2 and back to the Layer 1 requires waiting a ~7 day period.

Examples: Arbitrum, Optimism, Base

Zero-Knowledge Rollups

Zero-Knowledge Rollups (zkRollups) improve costs and privacy by allowing transactions to be verified with cryptographic proofs that don’t reveal sensitive information. These zero-knowledge proofs validate transactions off-chain by sending a single mathematical proof that verifies multiple transactions occurred without needing to include each individual transaction detail. This significantly reduces the data storage overhead, offering a theoretical throughput of a million transactions per second (TPS). However, gas costs on most zkRollups are still higher than Optimistic Rollups as the technology is still in the developmental stage.

Examples: zkSync Era, Starknet, Polygon zkEVM

Sidechains

Sidechains are independent blockchains with native tokens and consensus mechanisms whose purpose is to help scale the parent network. They connect to the parent blockchain using a two-way bridge that enables users to move assets to and from the parent chain. This method is more efficient as transactions are verified by a smaller group of validators, leading to lower transaction costs. However, because they operate with their own consensus mechanism, these solutions are considered the least secure type of scaling solution.

Examples: Polygon PoS

Comparing different types of Layer 2s

Each Layer 2 network achieves different transaction costs based on their economic and technical designs. We evaluate how the different Layer 2 scaling solutions stack up against each other in terms of onchain costs and TVL below.

Source: L2BEAT, L2 Fees

Conclusion

Understanding the different types of Layer 2 solutions is crucial for navigating the evolving landscape of blockchain technology. Each type offers unique benefits and trade-offs in terms of cost and security.

In the next issue, we will explore how you can benefit from and earn yield on Layer 2s.

DeFi summer continues on Exponential with our latest additions for you to earn yield on BTC and ARB:

In the news

• Consensys says SEC is ending investigation into ETH as a security - Read

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