Ethereum Layer-2 solutions bundle several transactions and process them as a single transaction. This is possible through a computation called the Merkle tree. Since a bunch of transactions are finalized as one, the cost of processing is reduced severalfold.
Despite the low cost of each transaction, often a few cents, these layer-2 solutions process a lot of transactions and are able to sustain themselves.
The Power of Scaling
The unique aspect of layer-2 solutions is their ability to process a large number of transactions in a very short period of time. They achieve this by having a lesser degree of decentralization.
For example, Ethereum has 1 million validators but is able to process around 10-15 transactions per second (natively) because each transaction has to go through multiple validators, at least 30.
On the other hand, blockchains like Polygon have far lesser validators at 105. This helps Polygon finalize transactions in a relatively short time. This helps Polygon handle 65,000 transactions per second.
Due to this high capacity, it costs less to transact on Layer-2 chains like Polygon.
Here is a deeper dive into the actual technology that goes into making Layer 2s cheaper.
Quantity Compensates for Quality
In a straightforward manner, it is easy to understand that the low fees would indeed lead to a short revenue and hence have to be compensated with a high volume of transactions.
Layer-2 chains rely on the high number of transactions that are often generated from Dapps, DeFi protocols, and low-valued but frequent transactions.
At a point where Ethereum charges around $1 for each transaction and processes an average of around a million transactions per day, these Layer 2s barely charge a few cents. However, with a fairly large no. of transactions every day, they manage to survive despite charging pennies on the dollar.
Top Layer-2 Solutions
Polygon
Polygon is one of the most popular layer-2 chains and has a rapidly growing ecosystem. The project consists of the Polygon blockchain (Layer 2) with the POL token, a zero-knowledge EVM, and a few sidechains.
According to its blockchain explorer, Polygon processes around 3 million transactions per day, which yields the project a revenue of around 30,000 POL every day.
Arbitrum
Arbitrum One, or simply the Arbitrum, is one of the top Layer 2 blockchains, processing an average of 1.5 million transactions per day. The blockchain’s official explorer does not list its gas revenue, but as per the transaction data, it can be estimated at around 10,000-15,000 ARB.
The native token of this blockchain is ARB.
A closer look shows that it takes a lot more effort to develop a Layer 2 chain like Arbitrum.
Optimism
Optimism uses a unique approach to create blocks. It uses the Optimistic Rollup, which stores all the rolled-up transactions inside the Ethereum blockchain and can be accessed at any time in the future.
The blockchain processes around 0.75 million daily transactions and gets a fee revenue of around $5000 USD (estimated) per day.
Though highly scalable, the blockchain usually has around 25 transactions per second of network activity.
Do you know the two main types of rollups that help these Layer 2 chains charge lower fees?
Base
Base is a blockchain developed by Coinbase, one of the largest crypto exchanges in the world. It processes around 5 million daily transactions, yielding about $200 million in annual revenue.
Being a blockchain with a large corporate backing, Base enjoys high promotional activity despite being a very new blockchain (launched on Aug 9, 2023).
Coinbase has also been developing its own Bitcoin-pegged token called cbBTC for the base blockchain.
Blast
Blast is yet another Layer 2 chain with an average of 350k daily transactions. The blockchain usually processes 5-10 transactions per second, making it one of the lesser-used L2 chains.
Conclusion
Though the Layer 2 blockchains charge a lot less fee as compared to Ethereum, their high transaction volume yields them a fairly decent revenue. This helps them most of them run profitably despite charging a few cents for each transaction.
Despite being based on Ethereum, you cannot pay ETH for gas fees on these chains.
