Layer 2 Blockchain Explained: What Is Layer 2 In Crypto?

When it comes to cryptocurrencies, scalability is crucial for blockchain networks to perform well. Scalability means how well a network can handle multiple transactions without slowing down or becoming expensive. When Bitcoin started the blockchain revolution, the goal was to come up with a secure and transparent way to do transactions without a central authority. But as the crypto world saw an influx of users, problems arose. The original blockchains, known as Layer 1, couldn’t keep up with the demand. Transactions became slow and costly. This is where Layer 2 solutions come in. In this article, we’ll explore what Layer 2 is in crypto and why it matters. Let’s take a look:

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What is A Layer 2 Network?

In simple terms, a Layer 2 network is like an extra layer built on top of a blockchain. This layer helps the main blockchain handle more transactions efficiently. It’s called “Layer 2” because it’s an additional layer on top of the original blockchain, which is known as Layer 1. Layer 2 networks can be used with any blockchain to improve its functionality. They do this by taking some of the work off the main blockchain and processing it separately. This makes the main blockchain less busy and faster. For example, Ethereum is a Layer 1 blockchain, and the Polygon (MATIC) Network is a Layer 2 solution designed to make transactions quicker.

Why Layer 2 Networks Are Needed?

Blockchain technology has encountered challenges in keeping up with its increasing adoption. These challenges, like high fees and slow transaction times, have made it tough for blockchains to scale effectively while maintaining security and decentralization. The “blockchain scalability trilemma” suggests that blockchains can only excel in two out of three aspects at once. Layer 2 networks offer a solution to this dilemma by offloading some tasks from the main blockchain. These tasks include transaction processing (execution), data storage, and consensus. By doing so, Layer 2 networks enhance scalability, resulting in faster transactions, reduced storage needs, and quicker agreement among network participants.

Types of Layer 2 Scaling Solutions

Layer 2 scaling solutions come in different forms. It could be designed solely as a payment channel to improve transaction speed, or it could come in the form of an entirely separate network. The main types of Layer 2 scaling solutions include:

Payment Channels

A payment channel is like a private link between two people, existing off the main channel of the blockchain. To start this channel, both parties lock some tokens in a digital vault on the main blockchain. Think of it as putting money in escrow. Once locked, the channel opens, and both can send tokens to each other. But this process has a catch, as they can only spend what’s inside their locked vaults. Every time tokens move, both sides share their current balances. It’s a bit like banks passing IOUs back and forth, knowing they have enough money in reserve to back them up.

Closing the channel is quite simple: tell the main blockchain the final balances. No need for everyone on the highway to agree. Using a payment channel is speedy because it doesn’t need everyone’s approval, and it is cheaper, too! You only pay fees when you lock and unlock your funds. You can even use a multisig-wallet for extra security. Both parties hold part of the keys, so it takes both to spend the funds. Payment channels can be set up for one-time payments or left open for ongoing transactions. When you’re ready, just settle up with the main blockchain.

State Channels

State channels offer a broader range of possibilities compared to payment channels. They act as a virtual playground where users can engage in various activities beyond simple token transfers.

For instance, imagine two friends playing a strategy game like chess. In the state channel, the game’s rules are coded into the system (the “game logic”), and the current board position is continuously updated (the “state logic”). As the game progresses, the channel keeps track of each move and determines the final outcome. Based on the game’s conclusion, the tokens locked in the smart contract are distributed accordingly.

Similar to payment channels, state channels only incur fees for opening and closing. Transactions within the channel are swift and cost-free. This flexibility allows for the development of play-to-earn games and other decentralized applications (dApps) that extend beyond financial transactions to flourish on Layer 2 networks.

Rollups

Rollups are crucial for transferring between Layer 2 (L2) networks and the Ethereum mainnet. There are two main types: Optimistic Rollups and Zero-Knowledge (ZK) Rollups.

Optimistic Rollups: These rollups work by submitting transaction data to the Ethereum network and relying on a dispute resolution system to detect any fraudulent transactions. Those responsible for submitting transaction batches to the Ethereum network must post a bond of ETH, which can be slashed if fraudulent activity is detected.

ZK Rollups: On the other hand, ZK Rollups utilize Zero-Knowledge Proofs (ZKPs), a cryptographic technique that allows one party to prove knowledge of specific information to another party without revealing the information itself. ZK Rollups bundle thousands of Layer 2 transactions into one and then transmit and validate them on the Ethereum network without revealing transaction details to Ethereum nodes.

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ZK-Rollups leverage ZK-SNARKs to enhance Ethereum’s scalability by only requiring Ethereum nodes to verify proof of computation for batches of transactions instead of verifying each transaction individually on the Ethereum mainnet. However, Ethereum L2 ZK-Rollups still require some information about each transaction to be submitted to the Ethereum network for verification, which limits scalability to some extent.

It’s important to note that while Layer 2 solutions like Rollups offer scalability for decentralized applications (dApps), they are not independent blockchains and rely on the Ethereum network for final transaction settlement, making them less secure compared to Layer 1.

Sidechains

Unlike payment or state channels, sidechains are independent blockchains with their own set of validator nodes. They typically have fewer nodes than the main Ethereum network (L1), allowing them to achieve consensus faster.

Developers may prefer sidechains over channels if they need greater flexibility and control over their infrastructure. For instance, they might want to launch a token or decentralized app (dApp) while benefiting from the lower costs and faster speeds of not deploying smart contracts directly on the mainchain.

Sidechains use their own consensus mechanism, giving developers the freedom to optimize for scalability, security, or decentralization. They can also choose to make their networks private and require permission or public and permissionless.

Although sidechains are not obligated to submit data to the mainchain, many opt to do so to take advantage of the larger, more decentralized network’s security features.

Which Cryptocurrencies Use Layer 2

Layer 2 solutions have recently gained popularity due to their ability to provide high returns and low prices. Here are some popular Layer 2 frameworks:

Bitcoin Lightning Network:

The Lightning Network is a well-known Layer 2 solution for Bitcoin. It enables lightning-fast transactions on the Bitcoin blockchain, with transaction times measured in milliseconds, compared to Bitcoin’s average transaction time of about 10 minutes. Similar to other Layer 2 frameworks, it processes transaction bundles off-chain before bringing the information back to the main chain. The Lightning Network offers benefits such as reduced fees, scalability, and cross-blockchain swapping.

Polygon:

Polygon is a Layer 2 solution for Ethereum that uses various technologies to enhance Ethereum’s scalability. It aims to address usability and scalability issues on the Ethereum network by leveraging the Plasma framework and a decentralized network of proof-of-stake validators. Thanks to its reliance on proof-of-stake validators, Polygon has become one of the fastest scaling solutions, attracting attention with its performance and pricing strategy.

Arbitrum:

Arbitrum, another Ethereum-based Layer 2 solution, has quickly gained popularity. It verifies transactions on Ethereum’s main chain, resulting in slightly higher gas fees compared to Polygon but still significantly lower than those on the Ethereum network. Arbitrum stands out with its own Arbitrum Virtual Machine, boosting scalability and transaction speed for smart contracts, particularly in the realm of decentralized finance (DeFi) applications. However, it is worth noting that Arbitrum’s security is tied to Ethereum, which may affect the withdrawal process for investors seeking timely access to crypto assets.

Check Out: Blockchain Layers Explained

Conclusion:

To summarize, Layer 2 networks provide practical solutions for enhancing blockchain scalability. Cryptocurrencies can achieve faster transactions and reduced fees through frameworks such as the Lightning Network and Polygon. These advancements are significant steps forward in making blockchain technology more efficient and accessible across different industries. While Layer 1 solutions continue to provide decentralization and solid security, Layer 2 can help them keep up with the speed.

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