Network congestion is an inevitable byproduct of L1 blockchains’ limited transaction capacity, resulting in high gas fees and extended transaction processing. The average Ethereum fee was $0.8095 per transaction as of September 28, 2024, up from $0.6609 a year ago. L2 solutions like optimistic and zk-rollups bundle transactions on L1 blockchains. They help process more transactions in parallel, reducing costs and raising throughput.

Decentralized data indexing is a viable solution to the issue of retrieving and organizing blockchain data. The decentralized, sequential format in which L1 blockchains store data is complex to query, especially when searching for earlier transactions, smart contract events, or other specific data.

The L2 boom and the rise of decentralized indexing

L2 technologies’ role in making decentralized systems scalable, fast, and affordable is crucial. An example is Coti’s recent L2 testnet launch. Coti’s technology aims to enable scalable and confidential transactions and deliver secure, affordable MPC, potentially unlocking applications in quantum-resistant privacy, confidential DeFi, and data sovereignty. Its new EVM-compatible L2 network will potentially make affordable privacy solutions for Web3 a fact.

Decentralized indexing protocols like The Graph create and manage subgraphs (indexes) that organize blockchain data in a format that’s easier to query. This makes retrieving on-chain data faster and more efficient, and it’s easier for developers to build dApps that need to query blockchain data.

The Graph Network served almost 2 billion queries in July 2024, an all-time monthly high corresponding to 11x year-on-year growth. The total number of subgraphs soared to over 9,000, an increase of 361% from the previous quarter. The Graph’s switch to a decentralized network accounts for the recent growth. Users can access verifiable, permissionless data, rendering centralized gatekeepers obsolete.

The Graph Network’s data accessibilities now incorporate more than 60 blockchains, and developers building on them can use the network for competitive syncing times and lower costs. The Graph introduced and standardized subgraphs, improving the process of indexing and accessing blockchain data.

How L2 and decentralized indexing enhance cross-chain functionality

L2 blockchains and decentralized data indexing help build a better-connected blockchain ecosystem by enhancing cross-chain functionality. Coti’s testnet launch and The Graph’s transition to a decentralized network streamline data access and reduce transaction fees, potentially enabling mass adoption. They maintain blockchain technology’s decentralized ethos by ensuring trustless operation at scale and eliminating the need for centralized data providers or intermediaries.

Without L2 solutions, blockchains like Ethereum could not handle the mounting volume of transactions that would accompany mainstream adoption. L2 blockchains scale throughput by orders of magnitude, supporting real-time transactions without congesting the main chain. They handle transactions off-chain and only transfer the final state back to the main chain, dramatically lowering transaction costs.

Decentralized data indexing provides instant access to transaction histories, user balances, smart contract interactions, and other blockchain data, improving dApp performance. More efficient indexing will enable decentralized autonomous organizations to operate more smoothly and at scale by easily tracking and querying treasury movements. This will make it easier to monitor fund allocations and spending.

More efficient indexing allows DAOs to store and retrieve comprehensive records of past decisions, votes, and proposals. DAOs can leverage analytics to evaluate proposals, monitor token distribution, or assess community sentiment. Ultimately, millions of users will benefit from these improvements.

With the transition from single to multi-chain, decentralized indexing will support cross-chain data aggregation, giving stakeholders seamless access to data from numerous blockchains.

Implications for the future of blockchain development

With L2 blockchains providing scalability and decentralized indexing improving data accessibility, developers can build new applications without performance or data retrieval bottlenecks. This would be promising for decentralized social networks and other applications. As L2s grow and improve, they could render NFT trading, microtransactions, and DeFi applications more cost-efficient and accessible for average users.

L2s and decentralized data infrastructures promote sustainable ecosystem growth by addressing scalability, cost, and accessibility challenges. Lower fees could encourage more people to participate in the ecosystem. The total value of crypto activity worldwide increased substantially between the fourth quarter of 2023 and the first quarter of 2024. Specifically, the global index score rose from 0.125 to over 0.75 in this period. At the same time, the average Bitcoin transaction fee dropped to $0.73 at the end of July 2024, the lowest since exactly a year earlier, when it briefly dipped to $0.64.

Efficient scalability means blockchains should be able to accommodate billions of users without breaking, while decentralized data solutions ensure the infrastructure remains resilient.

Synchronizing security models will undergo changes in the next stage of blockchain evolution. L2 solutions offload transactions from L1 blockchains, but the final settlement and security still rely on L1s. The latest developments suggest that L2 solutions would inherit L1’s security guarantees but not at the expense of performance.

Users currently struggle with the friction created by bridging assets and manually interacting between L1 and L2. Scalable L2 blockchains offer faster finality compared to L1, helping bridge assets more easily and quickly. Ideally, the next blockchain iteration will see improved interoperability between L1 and L2 networks.