Blockchain technology has had an incredible impact on how we carry out transactions and transfers of value. However, as its popularity continues to grow, scalability has become a crucial issue that needs to be addressed.
To tackle this problem, dedicated researchers and innovative developers have come up with a groundbreaking solution known as Layer 2 blockchains. This remarkable development provides an effective remedy for the problem at hand, ensuring greater efficiency and scalability in the blockchain ecosystem.
In this article, CoinMinutes will help you understand Layer 2 blockchains in just a few minutes.
What Is Layer 2?
Layer 2 refers to an off-chain network, system, or technology constructed atop a blockchain (often called a layer-1 network) to expand the functionalities of the base layer. These networks can enhance blockchains by enabling increased transaction throughput and other improvements.
Imagine a restaurant kitchen scenario – if a single individual had to handle each order from start to finish before confirming and delivering it, the process would be painstakingly slow, and only a few orders could be managed per hour.
In contrast, layer 2 solutions are akin to specialized preparation stations – one for cleaning and cutting food, another for cooking, and a separate one for assembling dishes – each proficiently performing their designated task. When the moment arrives, a final person can match the completed dish to the order, confirm it, and then send it to its destination (the customer).
Why Do We Need Layer 2 Solutions?
Ethereum‘s remarkable success is evident through its substantial value accumulation and unparalleled network effect. However, this very accomplishment contributes to the surge in transaction fees and network congestion on the Ethereum platform, particularly during peak periods.
Even the pioneering cryptocurrency Bitcoin can only manage an average of 7 transactions per second. Similar congestion issues also happen in alternative chains such as BNB Chain, Polygon, and Avalanche when demand peaks. These challenges underscore the urgency of devising solutions that enhance network scalability, and layer 2 emerging as a prominent remedy.
Layer 2 solutions serve to:
- Amplify transaction processing capacity, thereby alleviating network congestion and enriching the user experience.
- Consolidate multiple transactions into a single processing unit, leading to reduced transaction fees and enhanced user accessibility.
- Eliminate the misconception that scalability necessitates compromising security or decentralization, as layer 2 is constructed atop the existing network.
- Construct a dedicated network optimized for the platform’s purpose and capable of operating seamlessly at an expanded scale.
Types of Layer 2 Blockchain Scaling Solutions
There exist various types of Layer 2 blockchain scaling solutions, which include:
Instead of individually processing transactions, bundles of transactions can be consolidated or “rolled up” into a single transaction, significantly augmenting the volume of transactions processed concurrently. These transactions are delegated to be recorded off-chain, bundled together, and subsequently incorporated into the main chain for processing as a unified entity.
- Side Chains:
Side chains represent autonomous blockchain networks with their distinct set of validators, enabling parallel processing of transactions. While this substantially amplifies the transaction-processing capacity of a blockchain, it necessitates trust in the integrity of both the side chain network and the bridge network linking it to the primary blockchain.
- State Channels:
State channels, akin to side chains, involve recording transactions off-chain. However, in state channels, these transactions are aggregated off-chain in bulk, and the channel’s state is declared as complete. Subsequently, the transactions are collectively recorded on the main blockchain network by broadcasting a finalized “state” to the primary network. This paradigm is exemplified by the architecture of Bitcoin’s Lightning Network.
How Does Layer 2 Work
Layer 2 protocols establish an additional framework dedicated to conducting transactions independently from Layer 1. This separation allows a significant portion of the tasks that would typically occur on the primary chain to be shifted to this secondary layer. In the context of layer 2, transactions are initially processed by applications, and subsequently, transaction data is transmitted to layer 1, where it is securely recorded in the blockchain ledger along with historical data.
Much like other platforms, whether open or restricted, accessibility to layer 2 solutions varies. Some can be used by a range of applications, while others only cater to the whims of a specific project. Within this context, several fundamental components employed by layer 2 solutions include rollups and sidechains.
How Does Layer 2 Solve Layer 1 Problems?
Common problems of Layer 1
Layer 1 serves as the foundational layer upon which Dapps are constructed, necessitating the application of blockchain’s security and decentralization principles. Because of that, scalability is a huge issue, especially with the Ethereum blockchain.
This limitation arises from the fact that every transaction within the blockchain mandates validation from active nodes. The transaction obtains approval once a validating node permits it. Yet, when a substantial influx of users engages with the platform and the validating node count remains restricted, it culminates in network congestion and a subsequent surge in transaction fees.
Remarkably, the scaling predicament isn’t unique to Ethereum’s Layer 1 blockchain, which sustains a processing speed of approximately 25 transactions per second. Even Bitcoin, a trailblazing cryptocurrency, manages only around 7 transactions per second. Other chains like BNB Chain, Avalanche, and others encounter comparable congestion issues due to sudden surges in transaction volume and subsequent network congestion, inevitably leading to escalated fees.
How Layer 2 Brings Solution to Layer 1
Firstly, Layer 2 significantly enhances transaction processing capacity. While Layer 1 networks, like Ethereum, struggle with limited transaction throughput, Layer 2 implementations can process a much higher volume of transactions in a shorter time frame. This is achieved through mechanisms such as rollups, where multiple transactions are bundled together and verified off-chain before being posted to the main Layer 1 chain. As a result, congestion is alleviated, and users experience faster and more efficient transactions.
Secondly, Layer 2 solutions mitigate network congestion. The offloading of transaction validation to Layer 2 reduces the burden on Layer 1 nodes, resulting in smoother network performance even during peak usage periods. This decrease in congestion not only improves the user experience but also curtails the escalation of transaction fees, making transactions more affordable for users.
Furthermore, Layer 2 optimizes user accessibility. By bundling multiple transactions into a single unit, transaction fees are minimized, making transactions more cost-effective. This cost reduction encourages wider participation and engagement with decentralized applications, promoting adoption across a broader user base.
Importantly, Layer 2 achieves these enhancements without compromising the core tenets of security and decentralization. While Layer 1 is responsible for maintaining the security of the underlying blockchain, Layer 2 solutions inherit this security and layer on additional safeguards. This integration maintains a robust security posture while offering increased scalability.
Why are there so many Layer 2?
An array of layer 2 channels has been established to forestall undue reliance or the plausible failure of a singular network component. Notwithstanding our comprehensive examination of primary layer 2 protocols, namely Optimistic rollups, ZK rollups, and sidechains, the ecosystem is subject to continuous evolution. Consequently, certain applications, exemplified by Plasma and State Channels, may undergo abandonment, underscoring the dynamic nature inherent in the ecosystem.
Examples of Common Layer 2
Overall, as layer 2s harmonize and work with the entire Ethereum ecosystem, the various options, which anyone can build, offer a greater, more balanced range of options for end users. What one layer 2 blockchain lacks can be balanced with advantages of another and vice versa. The following is a summary of the more commonly used layer 2s:
Optimism represents a scalable Layer 2 solution tailored for Ethereum, designed to facilitate a reduction in transaction fees and an enhancement of transaction speeds, thereby optimizing the overall user experience. The foundation of Optimism rests upon the utilization of Optimistic Rollups technology.
Arbitrum is another Optimistic rollup that mirrors the dynamics of Ethereum mainnet but with cheaper transaction fees.
Forked initially from Optimism, Boba is an Optimistic rollup that aims to reduce fees, improve transaction throughput and strengthen the capacity of smart contracts.
Real-world Applications of Layer 2
Micropayments and Everyday Transactions
Layer 2 scaling solutions can enable the processing of micropayments at a much lower cost than on-chain solutions. This attribute renders them particularly valuable for applications involving content monetization and pay-per-use services.
Decentralized Finance (DeFi)
Layer 2 scalability solutions possess the capability to substantially amplify the transaction throughput of DeFi applications, rendering them more attainable and cost-effective for users. Furthermore, these Layer 2 scalability solutions can potentially elevate the confidentiality and safeguarding of DeFi transactions.
Non-Fungible Tokens (NFTs)
Layer 2 scaling solutions can facilitate the generation and exchange of NFTs at significantly reduced expenses and notably swifter transaction durations compared to on-chain alternatives. This capability has the potential to open up novel applications for NFTs, particularly within realms like gaming and digital collectibles.
Future Outlook and Development
As the blockchain sector undergoes ongoing transformation, L2 solutions are poised to assume a pivotal position in shaping the trajectory of this dynamic technology. The fusion of L2 protocols with conventional blockchain networks holds the promise of unveiling novel applications and use cases, thereby expediting the journey toward widespread adoption.
Layer 2 scaling solutions present a promising avenue for Ethereum to notably enhance its transaction processing capabilities and augment overall scalability. Within this article, we delved into Layer 2 and provided a comprehensive guide to its workings.
Although Layer 2 scaling solutions come with certain challenges and associated risks, tackling these issues is imperative to ensure the enduring prosperity and widespread acceptance of Layer 2 blockchain technology.