Scaling Blockchains: Layer-2 Solutions, Sharding, and Sidechains Explained

tl;dr

• Blockchain scalability is essential for handling growing transaction volumes and ensuring speed, cost-efficiency, and security.
  
  
• CryptoKitties in 2017 highlighted scalability issues, causing network congestion and high fees on Ethereum.
  
  
• By 2024, scaling solutions include rollups, sidechains, and Layer 1 optimizations, each with unique trade-offs.
  
  
• Sharding and L1 optimizations are poised to become the preferred solutions, potentially reducing the relevance of rollups and sidechains.

Why Blockchain Scalability Matters

Blockchain scalability is critical to the future of cryptocurrencies and dApps. As more users and use cases emerge, blockchains must handle increasing volumes of transactions without compromising speed, cost, or security. Scalability directly impacts user experience and determines whether blockchain technology can fulfill its promise as a foundation for global, decentralized systems.

A notable example of scalability challenges occurred in 2017 with the launch of CryptoKitties, a popular NFT game. The surge in transactions overwhelmed Ethereum's network, causing days-long delays and exorbitant fees. This event highlighted the limitations of first-generation blockchains, particularly in handling sudden spikes in demand.

By 2024, several solutions have been developed to address these issues. Scaling options like Layer 2 or L2 solutions (e.g., rollups and sidechains) enhance transaction throughput while leveraging the security of existing blockchains. Meanwhile, newer Layer 1 blockchains, designed with scalability in mind, often trade decentralization for higher performance.

In this article we will explore these approaches in depth, examining their trade-offs and implications for the future of blockchain technology.

What are Layer-2 Solutions?

Layer 2 solutions, often called rollups, are scaling mechanisms designed to enhance blockchain capacity while reducing fees. They function as high-capacity, low-cost extensions of Layer 1 (L1) blockchains like Ethereum. Rollups rely on the L1 chain for security and consensus, using its native gas token for transactions.

Rollups fall into two main categories: zero-knowledge (zk-rollups) and optimistic rollups. Both types bundle user transactions into compressed "zip files" and periodically post them to the L1 chain. This approach dramatically increases throughput without compromising the security of the underlying blockchain.

The key difference between optimistic rollups and zk-rollups is their approaches to transaction validation.

How do Optimistic Rollups Work?

Optimistic Rollups validate transactions by assuming they are correct unless challenged. Users can submit fraud proofs during a set challenge period if they detect invalid transactions. This mechanism ensures accuracy while reducing computation on-chain, enabling faster and more efficient processing without compromising the blockchain's integrity.

Base is a good example of a popular optimistic rollup.

How do Zk-Rollups Work?

zk Rollups validate transactions using zero-knowledge proofs, which cryptographically verify correctness before posting to the main chain. This eliminates the need for a challenge period, ensuring immediate finality and enhanced security. Additionally, zk Rollups provide improved semi-anonymity and robust validation, though they tend to incur slightly higher costs.

A notable example of a zk-rollup is Manta Network.

What are Sidechains?

Sidechains are a scaling solution that combines elements of both Layer 1 chains and rollups. Like rollups, they bundle user transactions into compressed "zip files" and periodically post them to the main L1 chain for record-keeping. However, unlike rollups, sidechains operate independently with their own consensus mechanism and native gas token, which differs from the L1 chain they interact with.

This independence allows sidechains to provide high throughput and lower fees while maintaining compatibility with the main chain. For example, Polygon functions as a sidechain to Ethereum, offering faster and cheaper transactions while leveraging Ethereum’s ecosystem.

What are State Channels

State channels are a second-layer scaling solution that enhances the efficiency and scalability of blockchain networks by enabling off-chain transactions. State channels bear plenty of resemblance to Bitcoin’s lightning network. Participants can conduct numerous private transactions off-chain, with only the initial setup and final settlement recorded on the blockchain.

Projects like the Perun Network demonstrate the potential of state channels for secure, off-chain interactions, offering robust cryptographic guarantees and cost efficiency.

How do State Channels Work?

To initiate a state channel, participants lock assets in a smart contract, typically requiring multi-sig authorization. Transactions within the channel are updated through signed messages that overwrite previous states, ensuring only the latest state is valid. When the channel closes, the final agreed state is submitted to the blockchain for a secure, immutable record.

What is Sharding?

Sharding is a blockchain scaling solution aimed at increasing transaction capacity while preserving decentralization. In Ethereum, sharding divides the network into smaller, independent segments called "shards." Each shard functions as a mini-blockchain, independently processing its transactions and smart contracts. By distributing the workload, sharding enhances the network's efficiency and scalability.

How Does Sharding Work?

Sharding enhances blockchain scalability by dividing the network into smaller, independent shards, each capable of processing transactions and smart contracts simultaneously. Here's how it works:

Transaction Processing

Each shard operates as a mini-blockchain, handling its unique set of transactions in parallel with other shards. This parallelization significantly increases the network's throughput by reducing bottlenecks. Nodes only validate transactions within their assigned shard, alleviating the computational load and boosting efficiency.

Node Responsibilities

In a sharded network, nodes are no longer required to store and process data for the entire blockchain. Instead, they maintain information specific to their shard. This lowers the resource requirements for nodes, enabling broader participation and reducing the risk of centralization.

Validator Roles

Validators, who stake ETH, play a crucial role in maintaining shard integrity. They confirm blocks for their assigned shards and periodically submit their findings to the Beacon Chain, the central coordination layer for the Ethereum network. A committee on the Beacon Chain reviews and finalizes these votes to ensure consensus across all shards.

Comparing Scaling Solutions

Scaling solutions in blockchain, including sharding, rollups, and sidechains, each has unique advantages and trade-offs. Rollups (zk-rollups and optimistic rollups) offer low fees and high throughput but rely on the L1 blockchain for security. Sidechains provide flexibility with independent consensus mechanisms but sacrifice some of the decentralization and security of the main chain. The constant bridging required with roll-ups and sidechains poses a challenge to users and mass adoption.

From my nearly eight years in the blockchain space, I believe sharding and L1 optimizations hold the most promise for end users. Sharding’s ability to parallelize transaction processing while maintaining decentralization and security positions it as a transformative upgrade. Once sharding is implemented, it could make other scaling solutions, such as rollups and sidechains, fall out of fashion.