Blockchains like Bitcoin and Ethereum are very popular, but they still have a lot of problems. There are high transaction costs and a lot of people using the network at the same time. Bitcoin can handle 7 transactions per second (TPS), while Ethereum can handle 15 TPS. When compared to other payment services, such as Visa, which has a TPS of 45,000, these are very slow. To deal with this difference in speeds, developers have turned to layer 2 solutions.
So, these networks need to have a higher throughput before they can be widely used and adopted. To solve this problem, developers have come up with a unique way to use other blockchains to make the “main” chains less busy. These are called “Layer 2” (or “L2”) blockchains.
What are Layer 2 Blockchains?
Layer 2 is a second framework or protocol that is built on top of a blockchain system that is already in place. The main goal of these protocols is to help the major cryptocurrency networks with their problems with transaction speed and scaling.
Layer 2 blockchain makes the mainchain less busy by helping with processing transaction data in addition to the main chain. They process data about transactions “off the chain” and send it back to the main chain to be stored. This makes sure that TPS speeds are faster and transaction fees are lower. It also allows the layer 1 blockchain to work well even though more and more people are using it all the time.
Layer 2 blockchains, on the other hand, divide up the work by managing different parts of a transaction “off-chain,” or away from the main blockchain. This makes it easier for blockchains like Bitcoin and Ethereum to handle the thousands of transactions that happen every second.
Why do we need Layer 2 Blockchain?
Layer 2 solutions are important because they allow scaling and more throughput while still keeping the integrity of the Ethereum blockchain. This allows for complete decentralization, transparency, and security while also reducing the carbon footprint (less gas, means less energy used, which equates to less carbon.)
Even though the Ethereum blockchain is the most popular and, arguably the safest blockchain, doesn’t mean it’s perfect. People know that transactions on the Ethereum Mainnet happen slowly (15 per second) and cost a lot of gas. On top of the Ethereum blockchain, Layer 2s are built to keep transactions safe, fast, and scalable.
How does layer 2 blockchain work?
A layer 2 blockchain sends bundles of transactions to Ethereum regularly to make sure it has the same security and decentralization guarantees as Ethereum. The layer 1 protocol doesn’t need to be changed at all (Ethereum).
This lets layer 1 handle security, data availability, and decentralization, while layer 2 handles scaling. Layer 2s take care of transactions so that layer 1 doesn’t have to and send proofs that are ready back to layer 1. By taking this transaction load off of layer 1, the base layer becomes less crowded and everything becomes easier to scale.
What are the Components of Layer 2 Blockchain?
There are three main ways that layer 2 can work:
Optimistic Rollups:
Along with the main blockchain, these rollups process transaction data and send it back to the main layer. Fraud proofs can be used to argue against any dishonest behavior. In this case, the transaction will be redone with the available information.
This can make it take longer for the data to be added back to layer 1, but users can still finish their transactions faster than with layer 1.
Sidechains:
Sidechains are also a common topic of conversation when talking about layer 2 blockchain networks and protocols. As the name suggests, it is a secondary blockchain that is linked to the main chain through a two-way peg. Imagine a forest where the trees are the secondary chain and the forest is the main chain.
The main goal of sidechains is to handle a large number of transactions at once. A sidechain could help the main chain validate different blockchain network transactions. So, the primary chain has enough time to deal with security problems.
zkRollups:
A zero-knowledge rollup (zkRollup) is a type of Layer 2 scaling solution on Ethereum that guarantees a much higher throughput and much lower costs without sacrificing security.
It does this by putting together a lot of different transactions into one big one and moving it off-chain. There, a cryptographic proof of validity is made and sent back to the main blockchain.
Because Ethereum checks these proofs and stores enough information to figure out which off-chain account owns what, zkRollups have the same security as Ethereum, but they can run much faster.
What are the Advantages of Layer 2 Blockchains?
Compatibility:
The best thing about layer 2s is that it doesn’t change how the L1 blockchain works. This means that most L1 blockchains can grow to an L2 without changing their protocol.
Improved Scalability:
The next big value advantage of layer 2 protocols is that they can be used to improve scalability. Layer 2 protocols are made to make sure that there is more throughput, which makes it easier to scale. Higher throughputs can make it easier to scale blockchain applications and give users better experiences.
Speed:
Layer 2s also makes a network bigger so it can handle more transactions. This can make it possible for blockchains like Ethereum and Bitcoin to handle thousands of transactions per second, up from 20 and 7, respectively, at their base.
Lower Transaction Fees:
Layer 2 blockchain also finds a way to fix a major problem with the way blockchain systems work right now. Miners are in charge of making sure that transactions in a blockchain network are valid. To do this, they use the blockchain’s cryptographic algorithms.
What are the Disadvantages of Layer 2 Blockchain?
Liquidity:
Layer 2 blockchain can make it harder for the underlying chain to move money. It shouldn’t be a surprise that liquidity is important because it helps build a market that is strong and successful.
Dependency on Layer 1:
Layer 2s can only work as part of the main L1 network. They can’t work on their own. So, if you invest in a layer 2 blockchain, the success of your investment will depend on the network underneath it.
Limited Functions:
Only parts of transactions that go through L2s can be processed. Since they can’t work on their own, they also only have a few features. So, they can only be used in certain situations.
What are some Top Layer 2 Blockchain Projects?
POLYGON (MATIC):
Polygon is without a doubt one of the most well-known L2 chains. Based on the size of its market capitalization, it is the largest Layer 2 solution that helps Ethereum scale and develops its infrastructure. The best thing about using Polygon is that it has been well-tested and built, and many projects are already using it.
It became very popular because it was easy to use and transactions took almost no time. In theory, each Polygon sidechain can do 216 transactions per block. Some reports say that a single sidechain on an internal testnet was able to handle up to 7,000 TPS. This is a big difference from the speed of Ethereum, which is about 14 tps.
Arbitrum One:
Arbitrum is a layer 2 project that has gotten a lot of attention in the DeFi community, especially since it just started in May 2021. Arbitrum was started by the former Chief Technology Officer of the US White House, Ed Felton. It is one of the DeFi platforms that is growing the fastest, and if it keeps growing at this rate, it may even pass Polygon.
But, unlike Polygon, Arbitrum doesn’t have its token, so there is no way to stake it. Instead, transactions are checked by Ethereum’s main chain. Because of this feature, Arbitrum’s gas fees are slightly higher than Polygon’s, but they are still lower than Ethereum’s.
Lightning Network:
The layer 2 scaler for Bitcoin transactions is the lightning network. It uses smart contracts to combine transactions so that you don’t have to worry about individual payments or the time it takes for each block to confirm. It is said that the network can handle millions of transactions per second at a very low cost.
ZKSWAP (ZKS):
This is another very unique layer 2 scaling solution built on top of the Ethereum blockchain. This is a type of decentralized exchange (DEX) called an automated market maker (AMM). It is run by zkRollup technology. It was made by L2Lab and runs on Ethereum’s main net.
It lets all tokens move to layer 2 and makes sure that everything stays the same by constantly making zero-knowledge proofs. It lets exchanges do swaps with no gas fees and no limits on how big they can get.
Conclusion: Future of Layer 2 blockchains.
Layer 2 blockchains are a simple and effective way for older blockchains to deal with the problem of scaling. In the case of Bitcoin, L2 blockchains seem to be important to its growth. But the planned changes to Ethereum make it less clear that L2s are needed.
Blockchain Layer 2 solutions are a key part of making the underlying blockchain’s scalability, privacy, and other features better, making it more efficient and less expensive for users.
Because of this, this space grows and changes so quickly. Layer 2 blockchains will become more important as blockchain is used more and more to help businesses in a wide range of industries solve problems.
Layer 2 solutions have shown that they have a lot of potential and are good for the blockchain ecosystem. Even though L2 might lose steam when the Ethereum 2.0 upgrade goes live, it will still be on the Ethereum scaling plan to help the blockchain take the lead.
Layer 2 blockchain scaling solutions will be a key part of promoting a multichain world, and this will put the onus on developers to make sure that growth continues without compromising the core blockchain principles of security, decentralization, and scalability.
The whole crypto industry will have to work together, keep coming up with new ideas, and work together to bring L2 scaling solutions and DApps to market that will help the world move to a decentralized economy.