Ethereum’s Scalability Issues and the Underlying Layers

What is the scalability problem?

Ethereum's network processes more than other services, but the processing speed is about 15 to 30 TPS. This is very low compared to traditional payment systems such as credit cards (several thousand TPS), and it manifests itself as network delays and rising gas fees.

What is Layer 2 (lower layer)?

An effort to solve the scalability problem by linking an "auxiliary network layer" independent of Ethereum's main chain (Layer 1), executing transactions outside the main chain, and recording only the results in Layer 1.

A mechanism for conducting transactions between users outside the main chain

To solve Ethereum's scalability problems, the Raiden Network was created early on using a technology called state channels. Transactions such as payments are not carried out on Layer 1*1, but are batch processed on Layer 2 and only the resulting data is recorded on Layer 1.

In the Raiden Network, channels can only be opened between users. Off-chain*2 transactions are only approved if both parties participating in the channel agree and digitally sign them, making it relatively difficult for fraudulent transactions to occur, and transactions are fast because only two parties participate in the channel.

Gas fees※3 are charged only when opening and closing a channel, and are not charged when using Layer 2, so costs can be significantly reduced. In addition, detailed transaction content is not recorded on-chain, making it excellent from the perspective of privacy protection. Since the tasks performed are simple, tens of thousands of transactions can be made in one second, which has greatly contributed to solving scalability issues.

Because of its low cost, it is currently often used for small remittances and dApps that charge a fixed amount. However, there are many challenges. Because the other party must also be a Leiden Network user to use it, and the opening procedure is complicated, it is being pushed aside by the developing technology "rollup" and other more advanced Layer 2 solutions.

With rollup, transactions are updated off-chain in the same way, but after a certain period of time has passed or a certain number of transactions have accumulated, the data is transferred to the main chain in one go. This has succeeded in further compressing communication.