Practical Limitations of Ethereum’s Layer-2

Abstract

Most permissionless blockchains inherently suffer from throughput limitations. Layer-2 systems, such as side-chains or Rollups, have been proposed as a possible strategy to overcome this limitation. Layer-2 systems interact with the main-chain in two ways. First, users can move funds from/to the main-chain to/from the layer-2. Second, layer-2 systems periodically synchronize with the main-chain to keep some form of log of their activity on the main-chain - this log is key for security. Due to this interaction with the main-chain, which is necessary and recurrent, layer-2 systems impose some load on the main-chain. The impact of such load on the main-chain has been, so far, poorly understood. In addition to that, layer-2 approaches typically sacrifice decentralization and security in favor of higher throughput. This paper presents an experimental study that analyzes the current state of Ethereum layer-2 projects. Our goal is to assess the load they impose on Ethereum and to understand their scalability potential in the long-run. Our analysis shows that the impact of any given layer-2 on the main-chain is the result of both technical aspects (how state is logged on the main-chain) and user behavior (how often users decide to transfer funds between the layer-2 and the main-chain). Based on our observations, we infer that without efficient mechanisms that allow users to transfer funds in a secure and fast manner directly from one layer-2 project to another, current layer-2 systems will not be able to scale Ethereum effectively, regardless of their technical solutions. Furthermore, from our results, we conclude that the layer-2 systems that offer similar security guarantees as Ethereum have limited scalability potential, while approaches that offer better performance, sacrifice security and lead to an increase in centralization which runs against the end-goals of permissionless blockchains.