Smart contracts are an integral part of blockchain technology that enable the creation of decentralized applications (Dapps). Dapps have the potential to disrupt traditional industries by offering more secure, transparent, and cost-effective solutions. Ethereum is currently the leading blockchain platform that supports smart contract development, and the Ethereum Virtual Machine (EVM) is the engine that runs smart contracts on the Ethereum network.
However, the Ethereum network is currently facing scalability issues that limit the number of transactions it can process. To solve this problem, Ethereum 2.0 is introducing a new layer 2 (L2) solution that will enhance the scalability, security, and efficiency of the Ethereum network. This article will explore how L2 smart contracts will help attain mainstream crypto adoption.
Understanding the Differences Between Blockchain Layer 1 and Layer 2 Networks
Blockchain technology has evolved with the introduction of Layer 2 scaling solutions, which are built on top of Layer 1 blockchain networks. While both Layer 1 and Layer 2 networks have similar underlying technology, there are fundamental differences between the two.
Purpose
One of the primary differences between Layer 1 and Layer 2 blockchain networks is their purpose. Layer 1 blockchains are designed to operate independently as self-existing base blockchains, providing all the necessary layers for data availability, consensus, and execution. On the other hand, Layer 2 scaling solutions are designed to enhance the capabilities of Layer 1 blockchains and not to operate as standalone networks. Therefore, they rely on Layer 1 blockchain networks to function effectively.
Scalability Methods
Another significant difference between Layer 1 and Layer 2 blockchain networks is the approach they take to achieve scalability. Layer 1 blockchain networks employ methods such as changing the consensus mechanism, forking the chain, and sharding to enhance scalability. These methods are often complex and can require significant changes to the underlying blockchain network.
In contrast, Layer 2 scaling solutions rely on off-chain scaling methods such as state channels, nested blockchains, rollups, and sidechains. These solutions allow for faster and more efficient transactions by moving them off the main blockchain network while still maintaining the security and integrity of the underlying blockchain network.
While both Layer 1 and Layer 2 blockchain networks share similarities in terms of underlying technology, their purposes and scalability methods differ significantly. Layer 1 blockchain networks are designed to operate independently, while Layer 2 scaling solutions are built to enhance the capabilities of Layer 1 blockchain networks. Additionally, Layer 1 blockchain networks utilize more complex methods to achieve scalability, while Layer 2 scaling solutions rely on off-chain scaling methods to enhance transaction speed and efficiency.
Smart Contracts explained and how they function
Smart contracts are computer programs that run on a blockchain when certain predetermined conditions are met. They follow simple “if/when…then” statements that are written into the code. These statements can be used to automate the execution of an agreement, such as the transfer of funds, registration of a vehicle, or issuance of a ticket, without any intermediary involvement or loss of time. A network of computers executes the actions when the predetermined conditions have been met and verified.
Smart contracts can have as many stipulations as needed to ensure that all parties are satisfied with the outcome of the transaction. To establish the terms, participants must agree on the rules that govern the transactions, including how transactions and their data are represented on the blockchain. They must also explore all possible exceptions and define a framework for resolving disputes.
Developers can program smart contracts using programming languages such as Solidity, but increasingly, organizations that use blockchain for business provide templates, web interfaces, and other online tools to simplify structuring smart contracts.
Once a smart contract is executed, the blockchain is updated, and the transaction cannot be changed. Only parties who have been granted permission can see the results, ensuring the privacy and security of the transaction. Smart contracts can also be used to automate a workflow, triggering the next action when conditions are met.
Smart contracts are self-executing contracts with the terms of the agreement written into code. They automate the execution of an agreement, ensuring immediate certainty of the outcome without intermediaries. Smart contracts are programmed using “if/when…then…” statements and can have as many stipulations as needed. They run on a blockchain and cannot be changed once executed, ensuring the privacy and security of the transaction.
Layer 2 Solutions
Layer 2 (L2) solutions are protocols built on top of existing blockchain networks that aim to improve scalability, security, and efficiency. They work by reducing the burden on the main blockchain network by offloading some of the transactions to a secondary layer. This secondary layer can be a sidechain, a state channel, or a rollup.
Sidechains are independent blockchain networks that can communicate with the main blockchain network. They enable the execution of transactions off the main blockchain network, thereby reducing congestion and increasing throughput.
State channels, on the other hand, are off-chain networks that allow parties to transact with each other without having to wait for confirmation from the main blockchain network. They are ideal for microtransactions and can significantly reduce transaction fees. Rollups are another form of L2 solutions that batch multiple transactions into a single transaction, thereby reducing gas fees and increasing throughput.
L2 solutions have several advantages over the main blockchain network. They enable faster transaction processing, lower transaction fees, and improved scalability. They also enhance security by reducing the attack surface on the main blockchain network. L2 solutions have the potential to enable mainstream adoption of blockchain technology by providing a more user-friendly and cost-effective platform for Dapp development.
L2 Smart Contracts
L2 smart contracts are smart contracts that run on layer 2 solutions. They provide the same functionality as smart contracts on the main blockchain network but with improved scalability, security, and efficiency. L2 smart contracts enable the execution of complex transactions and the creation of decentralized applications on layer 2 solutions. They are an essential component of the Ethereum 2.0 upgrade, which aims to improve the scalability and security of the Ethereum network.
L2 smart contracts have several advantages over smart contracts on the main blockchain network. They enable faster transaction processing, lower transaction fees, and improved scalability. They also provide greater flexibility in terms of contract design and execution. L2 smart contracts are designed to work seamlessly with existing smart contracts on the main blockchain network, thereby enhancing interoperability between different blockchain networks.
L2 smart contracts also enable the creation of novel use cases that were previously not possible on the main blockchain network. For example, they can enable the creation of microtransaction-based games, where players can transact with each other in real-time without having to wait for confirmation from the main blockchain network. L2 smart contracts can also enable the creation of more complex financial instruments, such as options and futures, that require faster transaction processing and lower transaction fees.
L2 Smart Contract Use Cases
L2 smart contracts have several potential use cases that can enable mainstream adoption of blockchain technology. Some of these use cases are discussed below:
Decentralized Finance (DeFi)
Decentralized finance (DeFi) is one of the fastest-growing sectors in the blockchain industry. DeFi protocols aim to provide decentralized alternatives to traditional financial services such as lending, borrowing, and trading. However, the high gas fees and slow transaction processing times on the main blockchain network limit the growth of DeFi.
L2 smart contracts can enable the creation of more scalable and cost-effective DeFi applications. For example, L2 solutions such as Optimism and Arbitrum can significantly reduce transaction fees and increase transaction throughput, making DeFi accessible to a broader audience.
Gaming
Gaming is another sector that can benefit from L2 smart contracts. L2 solutions can enable the creation of real-time gaming experiences that require fast and low-cost transactions. For example, L2 solutions such as Matic and Polygon enable the creation of gaming Dapps with fast and cheap transactions. These L2 solutions can enable mainstream adoption of blockchain gaming by providing a seamless and cost-effective user experience.
Supply Chain Management
Supply chain management is another sector that can benefit from L2 smart contracts. L2 solutions can enable the creation of more efficient and transparent supply chain management systems. For example, L2 solutions such as zk-rollups can enable the creation of supply chain management systems that require minimal trust between parties. This can significantly reduce the risk of fraud and increase the efficiency of supply chain management processes.
Identity Management
Identity management is another area that can benefit from L2 smart contracts. L2 solutions can enable the creation of more secure and decentralized identity management systems. For example, L2 solutions can enable the creation of identity management systems that are fast, secure, and cost-effective. These L2 solutions can enable mainstream adoption of blockchain-based identity management systems by providing a user-friendly and scalable platform.
Update on Serenity and its Relevance to Mass Adoption
Serenity, also known as Ethereum 2.0, is the next major upgrade to the Ethereum network. It aims to solve some of the scalability and security issues that have been plaguing the network, making it more suitable for mainstream adoption.
One of the key features of Serenity is the implementation of sharding, which is a method of partitioning the Ethereum blockchain into smaller shards. Each shard will be able to process transactions independently, allowing for more transactions to be processed simultaneously and increasing the overall capacity of the network.
The implementation of sharding will have a significant impact on the adoption of cryptocurrencies and blockchain technology. It will increase the speed and efficiency of transactions, making it more convenient for users to use cryptocurrencies for everyday transactions. It will also reduce transaction fees, making it more affordable for users to interact with dApps and other blockchain-based services.
In addition to sharding, Serenity will also introduce other features that will improve the security and functionality of the Ethereum network. One of these features is the implementation of the Proof of Stake (PoS) consensus mechanism, which replaces the Proof of Work (PoW) mechanism. PoS is a more energy-efficient and secure method of achieving consensus on the network, as it requires validators to stake a certain amount of cryptocurrency to participate in the network.
Another feature of Serenity is the implementation of L2 scaling solutions, including L2 smart contracts. These solutions will be built on top of the Ethereum network, allowing for faster and more efficient transactions. L2 smart contracts will simplify the process of creating and executing smart contracts, making it easier for users to interact with DApps and other blockchain-based services. This will be crucial for mainstream adoption, as it will allow users who are not familiar with blockchain technology to use cryptocurrencies and other blockchain-based services.
Conclusion
The adoption of cryptocurrencies and blockchain technology has the potential to revolutionize the way we conduct transactions and interact with digital services. However, there are still challenges to overcome before cryptocurrencies can become mainstream. L2 smart contracts, built on top of Layer 2 scaling solutions, can help overcome these challenges by simplifying the process of creating and executing smart contracts, reducing transaction fees, increasing transaction speed, and improving scalability and security.
Serenity, the next major upgrade to the Ethereum network, is playing a significant role in the adoption of cryptocurrencies and blockchain technology. It introduced sharding, PoS consensus mechanism, and L2 scaling solutions, which made the network more efficient, secure, and accessible to mainstream users. With the implementation of Serenity and the growing use of L2 smart contracts, we can expect to see increased adoption of cryptocurrencies and blockchain-based services in the years to come.
