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Decrypting the Vast World of Ethereum – Layer 1, Layer 2 and Beyond

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Introduction

Decentralized finance (DeFi) is selling like hotcakes in the crypto world. It has so many advantages over centralized financial systems that it could result in a paradigm shift of customers moving to DeFi.

Ever since Ethereum, one of the biggest crypto coin developers, started producing decentralized applications, people saw its advantages. Gradually, this blooming digital money platform has made its way into the decentralized network.

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Ethereum ecosystem

The Ethereum blockchain runs on miners that process Ethereum transactions, and it produces blocks against a fee.

During its inception, transactions were low. However, today they have skyrocketed. Though a large number of transactions are taking place together, they are now coupled with insufficient disk space in layer 1, which leads to congestion and jamming of networks.

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Moreover, the transaction processing speed of Ethereum is currently at 15 transactions per second. This can prevent applications from working at total bandwidth.

Another major issue in the Ethereum ecosystem is the high gas price amid neck-to-neck competition and millions of transactions.

It led to an increase in the cost of trading on decentralized exchanges. This price surge in transaction fees made several people stop trading on Ethereum.

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A change was inevitably needed to make completing transactions economically viable again.

Decentralized networks – the trilemma problem

Traders are faced with the blockchain trilemma, having to settle for only two of the three: security, decentralization, and scalability. All these challenges culminated in the introduction and popularity of L2, or layer-2 DeFi networks for cryptocurrencies.

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For example, Bitcoin chooses security and decentralization for its customers and ends up compromising on scalability. The problem lies in the fact that you cannot expect to have all three in your system without L2 in DeFi networks.

How are L2 solutions coming to the rescue?

Upgrading Ethereum layer 1 (L1) with Ethereum layer 2 makes all the difference. The presence of a second DeFi layer frees up the L1 in the following ways:

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  • Takes transactions off the chain
  • Offloads the transaction to L2
  • Enables interaction of transaction
  • Records the remainder of the whole transactions back to L1

This provides the following benefits:

  • Higher transaction processing capacity
  • Lower gas
  • Faster confirmation time
  • ZK-rollups: implementation by Loopring, Starkware, Matter Labs zkSync, Aztec 2.0
  • Validium: implementation by Starkware, Matter Labs zkPorter
  • Plasma: implementation by OMG Network, Matic Network, Gazelle, Leap DAO
  • State channels: implementation by Connext, Raiden, Perun

Rise of layer 2

Ethereum layer 2 is an additional layer on the existing layer 1 running on the previous network. It resolves the most crucial problem which users face with just L1: scalability. There had been several rounds of chatter about transaction fees, congestion, processing time, etc. The introduction of L2 solutions resolves these issues.

The following are the L2 propositions for Ethereum:

  • Simpler and less expensive fees
  • High processing output
  • Quicker confirmation

L2 solutions in Ethereum won a lot of mainstream users. An estimation reveals that around 4,000 transactions can be processed in L2 in a second. Most L2 solutions revolve around servers or nodes – validator, operator, sequencer, block producer, etc. In a blockchain, the developers implement these solutions for businesses, users, or a third party.

Main L2 scaling solutions

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Payment channels

A payment channel or state channel is a bilateral communication between users, helping them to interact in a blockchain. Lightning Network and Raiden are the commonly used state channels used to execute several microtransactions within a timeframe, broadcast data, decrease transaction fees reasonably and subsequently reduce the on-chain stress.

Sidechains

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This is another L2 scaling solution, acting as an alternative to transferring tokens to the sidechain to complete the transactions. This technique is implemented at scale in the Matic Network. This helps to enhance efficiency and reduce congestion – all without interfering with the protocol of the main chain.

ZK-rollup

Again, one of the rising scaling solutions is being implemented with ZK proofs. These are used to record and confirm ownership of a piece of detailed information without revealing the actual data. It is pretty similar to Plasma. However, it bundles hundreds of transactions and processes them more efficiently.

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Plasma

Plasma is like a collection of child chains, which are similar to side chains but lack the capacity to do complex operations to increase security and keep the funds safe. Instead, it is a non-P2P, proof-of-authority network that employs a single-tiered construction, which means that it or its child chains don’t serve as a parent of any chain.

Is Polygon the savior?

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Polygon, a rising star in India and among the world’s top crypto tokens, is another scaling and interoperable framework for blockchain.

It transforms the old Ethereum network into a full-fledged, multi-chain system without any advantages of Ethereum, such as security and the ever-growing ecosystem. The most significant advantage of Polygon is that it is built to scale and has many potential use cases, such as interoperability to link the Ethereum network to other Ethereum-compliant networks.

In its initial success, Polygon has already hit a high of 7.4 million transactions in a day, higher than giants such as Ethereum.

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Polygon also allows developers to tailor specific characteristics of their blockchain networks, which helps them fine-tune certain restrictions and limitations.

L1 vs. L2: What’s the ultimate difference?

In the decentralized world, a layer-1 network refers to a blockchain such as Bitcoin, Ethereum, etc. At the same time, a layer-2 protocol is a third-party integration added on top of a layer-1 blockchain to make it more efficient and scalable.

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Even though the L1 solutions were made to decentralize P2P transactions, they ultimately failed to solve the trilemma problem, and here’s where the L2 solutions come into the picture.

The main difference between these two is that L1 solutions are more secure and prefer to keep the network decentralized.

On the other hand, L2 remains focused on confirmation time, transaction speed, and lower gas fees by handling all the burdens of the main blockchain. Since it is a third-party integration, it comes with a slight trade-off in terms of L1 security and decentralization.

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Final words

While it may seem as if these two solutions were competing against each other, the opposite is true. L1 and L2 are two sides of the same coin, designed to co-exist and improve the blockchain networks.

L2 helps to remove barriers of L1 and enable it to reach its full potential and show its real raw power. There are many L2 solutions; each one comes with its pros and cons.

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On the other hand, Ethereum 2.0 is also underway, which only means that once it is up and running, the days of L2 solutions may come to an end as ETH 2.0 solves most of the hurdles of L1.

Till that day comes, we can only speculate.

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Ethereum

Ethereum Price Prediction: ETH bears contemplate a drop to $2450

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  • ETH price is building up downside pressure while clinging to the 200-SMA support.
  • RSI remains flat below the midline, keeping the sellers cheerful.
  • A drop towards $2450 remains in the offing if the 200-SMA caves in.

Ethereum, the no.2 widely traded digital asset, remains under pressure for the second straight day, consolidating Friday’s steep losses.

ETH price snapped its two-day rebound from monthly lows of $2651, as it got sold-off into the latest Chinese crackdown.

The People’s Bank of China (PBOC) on Friday declared all cryptocurrency transactions as illegal, imposing a ban, which saw over $400 million worth of tokens liquidated within 24 hours. Ethereum lost as much as $420 at one point before recovering to $2930.61 at the close.

At the press time, ETH/USD is trading almost unchanged on the day around $2900, having bounced off from daily lows at $2800.

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Ethereum price defending 200-SMA but for how long?

Ethereum’s 12-hour chart shows that the price is wavering in a narrow range, remaining in close vicinity of the daily troughs, as ETH price is not out of the woods yet.

Having witnessed good two-way volatility recently, ETH price maintains its range play, with the bearish 21-Simple Moving Average (SMA) at $3185 capping the upside.

Meanwhile, the 200-SMA at $2734 continues to offer support to ETH bulls. However, with the Relative Strength Index (RSI) still holding below the midline and bear cross in play, the path of least resistance appears to the downside.  

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Note that the 21-SMA breached the 100-SMA from above, confirming a bear cross on the said time frame on Thursday.

Once the 200-SMA gives way, a test of the horizontal trendline support at $2450 cannot be ruled out. The $2400 round number would be next on the sellers’ radars.

ETH/USD: 12-hour chart

On the upside, immediate resistance is placed at the 21-SMA, above which the horizontal 100-SMA at $3305 will be put to test.

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ETH buyers will seek fresh entries above the latter, paving the way towards the downward-pointing 50-SMA at $3418.

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ETH Locked in DeFi on Historic Highs: Details

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Total number of Ethers utilized in various decentralized finance protocols spiked over 7.3 million

After a massive plunge in TVL, a decentralized finance ecosystem has recovered to observe some breathtaking metrics.

7,830,000 Ethers locked in DeFi

The net number of Ethers locked in various decentralized finance protocols spiked 12% in the past ten days. On Sept. 15, 2021, this indicator bottomed at a two-month low of about 6.95 million Ethers.

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More than 7.8M Ethers are locked in DeFi segment
Image by DeFi Pulse

As displayed by mainstream decentralized finances segment tracker DeFi Pulse, the total quantity of Ethers in all indexed protocols nets 7.8 million Ethers.

Aave Finance (AAVE), Compound Finance (COMP), Instadapp, Uniswap (UNI), Curve Finance (CRV) are the most popular protocols in terms of TVL.

The five leading DeFis are responsible for almost 6.9 million Ethers, or 85% of net TVL, tracked by DeFi Pulse.

Yearn.Finance (YFI), Rari Capital (RGT) are on fire

In the last 24 hours, two DeFi protocols, Yearn.Finance (YFI) and Rari Capital (RGT), registered double-digit gains.

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At the same time, the Ethereum 2.0 deposit contract targets almost the same numbers. As of Sept. 25, 2021, it has amassed 7.77 million Ethers.

Amid the current Ethereum (ETH) price dip, this massive amount of value is equal to $22.7 billion. To provide context, this sum can be compared to the market capitalization of Telenor, Credit Suisse, Suzuki and Warner Music Group.

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Ethereum Network Activity is Stagnant while ETH Price Hovers Below $3k Level!

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Ethereum price fell amid a broad selloff in the cryptocurrency market, fueled by fears of a brewing property bubble collapse in China. 

There’s a lot of fear and uncertainty in the crypto market right now. With news that China has officially declared all cryptocurrency transactions illegal, the Ethereum price, like the rest of the market, is under attack.

Ethereum Price Analysis:

The Major altcoin has lost 5.76% in the last 24 hours. Although it is now seeking to construct a firm support base at $3000. ETH Price had a tumultuous start, rising to an intraday high of $3,114 in the early morning before reversing course. 

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To reach the first big resistance level at $3,149, Ethereum would have to break past the $2,942 pivot. Support from the larger market, on the other hand, would be required for Ethereum to reclaim the $3,100 barrier. Unless there is a sustained crypto rally, the first significant resistance level and Friday’s high of $3,160.48 will likely act as a ceiling on the upside.

Network Activity is Stagnant

According to Santiment, most speculators are shifting away from Ethereum (ETH) in pursuit of better options with larger returns on investment. 

Exchanges are seeing an influx of Ethereum, implying that people are selling their holdings in response to the recent marketwide crypto slump. 

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Santiment claims that network growth has been static for several months before the price of ETH fell.

This is attributed to growth in other Layer-1 initiatives like Avalanche (AVAX), Fantom (FTM), and Cosmos (ATOM), as well as decreased speculation in the non-fungible token (NFT) market.

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