Computer systems known as “smart contracts” operate automatically as parties to an agreement adhere to its terms. Smart contracts aim to revolutionize business by eliminating the necessity to interpret contractual performance thanks to blockchain technology.
We first need to learn about blockchain to comprehend smart contracts. Blockchain is a distributed database and shared ledger that is duplicated in numerous locations known as “nodes”. It can save and share data securely, even amongst parties who typically treat each other cautiously, and is impossible to tamper with.
How Blockchain Works
A distributed ledger is created by transferring and storing every data block on the replicated blockchains. Users confirm the information blocks, which are linked together by cryptographic stamps made from the information from the previous block and the stamp from the block that comes right before it (a “chain of blocks”). Once a transaction has been verified, it cannot be changed or deleted without the users being informed and the cryptographic hash of every block is changed. That ensures their confidentiality and reliability.
A revolutionary method of exchanging assets without middlemen, blockchain is a decentralized and shared database. Cryptography is also used to make sure that data cannot be changed.
How Smart Contracts Work
Smart contracts can operate automatically thanks to the security of the blockchain, doing away with the need for supervisory oversight. All that is required is a computer program set up to identify an occasion that prompts execution (i.e. if X happens, run Y).
Each party is required to comprehend and concur with the programmed rules because they cannot be changed after the smart contract is put into effect. Afterward, each agreed-upon action or clause is recorded in the blockchain.
Aside from the blockchain network, traditional financial ecosystems can also use smart contracts. An “oracle” is a designated external source of information that contracting parties can add to the blockchain to update important data, confirm agreement fulfillment, and initiate the necessary activities.
Traditional commercial transactions may be transformed with the aid of smart contracts. Imagine a company that makes frozen foods wants to sell its goods to a chain of grocery stores. They are conducting business for the first time, yet they are not in the same nation. To ensure that they both fulfill their obligations, they utilize a smart contract. It is surely one of the most exciting opportunities when it comes to a blockchain document management system in general.
The transport business, which uses a smart contract to record the delivery in the blockchain, might serve as the oracle. The payment order will automatically issue once the products are delivered. An Internet of Things (IoT)-enabled gadget could keep an eye on the container’s temperature and alert users if the cold chain was broken, invoking the penalty clause.
What Is Layer 2 Protocol
The term “Layer 2” refers to a collection of different protocols created to make it easier to create smart contracts on the Ethereum main chain, also known as Layer 1. As a result, Layer 2 solutions work on top of the fundamental Ethereum blockchain, whereas Layer 1 apps and smart contracts interact directly with the main chain.
What exactly makes scaling protocols necessary for Ethereum? Although Ethereum is a renowned secure option, its security has a price. The platform, which uses the Proof of Work (PoW) consensus mechanism, has inefficiencies like delayed transactions and expensive gas costs. Each node in the network must handle a transaction when it occurs on the platform, which ultimately creates a scalability bottleneck.
By shifting transactions from the main chain to Layer 2 and publishing transaction data back to Layer 1, Ethereum Layer 2 scaling solutions help free up the platform. By doing this, the Ethereum blockchain can guarantee improved scalability, a greater capacity for processing transactions, and cheaper gas costs. The transaction data is protected by the same Layer 1 security procedures while being placed on Layer 1.
Layer 2 Solutions
With the help of this Layer 1 and Layer 2 combo, you may enhance throughput and scale your system while maintaining the security and decentralization of the Ethereum network. To know who wins the battle Arbitrum vs Optimism vs Polygon and is the best Layer 2 solution, you will need to dive deeper to understand each of them better.
As a Layer 2 platform, Arbitrum describes itself as working to enhance Ethereum smart contracts by simplifying their transactions, increasing their scalability, and enhancing their privacy features.
Developers can use it to execute unaltered EVM contracts and Ethereum transactions on a second layer, utilizing Ethereum to guarantee accuracy and gain from its superior security. AoX, widely known as the xDai network, just adopted Arbitrum.
The system has established itself as the dominant player among Layer 2 scaling options for Ethereum. Arbitrum contributed 50,88% of the total value locked at Layer 2 as of June 2022.
A Layer 2 scaling mechanism for Ethereum apps called Optimism seeks to lower transaction costs and open up access to all users. Designed on the tenets of simplicity, pragmatism, and sustainability, optimism is compatible with EVM.
Optimistic Rollups differ from sidechains in that they work with the main chain and employ Ethereum-based smart contracts. The possibility to inherit both Ethereum’s security features and its robust consensus method is their biggest gain as a result of this.
The fact that Optimistic Rollups make use of the current Ethereum tooling is another benefit. As a result, developers don’t need to go through a drawn-out onboarding process and can get right to work creating products utilizing Optimistic Rollups.
Layer 2 scaling technology called Polygon, formerly known as Matic Network, allows for the connection and construction of networks that are compatible with Ethereum.
Since Polygon is technically a sidechain, it’s critical to distinguish it from other Layer 2 solutions like Arbitrum and Optimism. The difference is that although side chains employ their consensus techniques, Layer 2 solutions are fully secured by the Ethereum platform. Therefore, sidechains are autonomous, EVM-compatible solutions that operate independently of the mainnet.
The Proof of Stake (PoS) consensus process, on which Polygon is based, has several advantages over Proof of Work (PoW), including faster transactions and reduced gas costs. In addition, Polygon uses the Layer 2 scaling technologies Plasma, ZK-rollups, and Optimistic Rollups, which enable the platform to validate transactions almost instantly.
Understanding these protocols is not easy, especially if you don’t have years of experience in the blockchain industry and know smart contracts inside and out. To make the most of smart contracts, your business should consider hiring PixelPlex blockchain company, which has worked on admirable projects and created a name for itself in this field.