Layer One Scaling
As mentioned above, Layer One refers to the actual blockchain, so scaling means modifying the underlying protocol, which could take the form of increasing block size or changing the architecture. The proposed solution for scaling the Ethereum network is a change to the consensus layer, referred to as “Ethereum 2.0” until the end of 2021 before its renaming. This update refers to a set of interconnected changes such changing to Proof-of-Stake (PoS) and sharding. Proof of Stake is a consensus algorithm (a way for the network to reach an agreement) in which a user’s financial resources (their stake) is locked up and ensures correct behaviour. Sharding refers to the process of splitting data into smaller pieces and processing them in parallel on different computers on the network. This can dramatically increase the throughput of the Ethereum network, allowing for about 10,000 transactions per second. Proof of Stake is planned to be implemented in Q2 2022, and sharding between 2022 and 2023.
Layer Two scaling
As for scaling on top of the existing Ethereum blockchain, the most prominent examples of solutions are state channels and rollups.
State channels allow participants to make several transactions off-chain, while only two on-chain transactions are needed (one each to open and close the channel). This type of scaling is ideal if parties know in advance that they will be making a lot of transactions among themselves in the future. This could be the case in a customer-client relationship, or when playing two-person games like chess. As this method decreases the amount of necessary transactions to just two, regardless of how many transactions happen between the two parties, this significantly reduces the transaction cost.
There are already live state channel use cases, for example Perun.
Rollups aim to decongest the network through the batching of transactions. Transactions are compressed and processed off-chain, taking most of the computational load off the network. The results of the computations posted back to the Ethereum Layer One through a transaction. This improves the speed and reduces cost due to the ‘lighter’ transactions. Rollups are considered the most promising scaling solution for the Ethereum blockchain because they allow for scaling of both data and throughput without compromising on security and decentralization. In combination with sharding, data scalability will be achieved as well.
This is not just theory: some rollups are already available for you to try out, for example Arbitrum and Loopring.
Side chain scaling
Side chains are separate blockchains that are compatible with Ethereum. In this scaling approach, developers build on the side of Layer One. There are multiple side chains in existence today, two examples being Polygon and Binance Smart Chain. Due to the fact that these are separate chains employing the Proof of Stake consensus model, they are not constrained by the Ethereum transaction limit, meaning that they can process up to 7000 transactions per second in the case of Polygon, and 58 for Binance Smart Chain.
There is work being put into all three methods, with side-chains and Layer Two scaling solutions already live. It is important to note that different solutions can co-exist and complement each other.