What is Layer 2 Blockchain Solution And Why Are They Important?

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Layer 2 Blockchain solutions

Blockchains have taken the technology domain by storm and the world is accepting their application through adoption. Recently South Korea announced plans to introduce blockchain-based digital IDs, and South Africa included crypto assets into the financial asset class. With the increasing adoption, the pressure on the existing blockchain to perform is also increasing, which means they need to scale up. This is where the concept of blockchain scalability comes in. This article discusses blockchain scalability and why layer 2 blockchains are important. Let’s get started:

What is Blockchain Scalability

Blockchain, as you know, is a public ledger of transactions that has no centralized authority. It allows interaction between participants and offers an immense number of applications in finance, business, security, record-keeping, asset tokenization, and so on.

Blockchain was designed initially to use for financial applications but later grew into other fields. This raised the demand for its applications in all the other sectors. Therefore, popular blockchains such as Ethereum were under tremendous pressure to support these many applications simultaneously. 

For instance, bitcoin processes 7 transactions per second, compared to Visa which can process over 1700 transactions per second. When combined with integrating new technologies, blockchains needed an upgrade or scaling to incorporate these added functionalities to facilitate these many transactions and records.

Layer 1 of a blockchain is the base layer or layer 1 or mainnet. Blockchain scalability is the process of scaling a blockchain’s capabilities by building more layers on top of it.

What is Layer 2 Solution?

Layer 2 blockchain or subnet blockchain refers to the separate blockchains that are created on top of layer 1 blockchains to scale data and reduce bottlenecks. Imagine a congested city with an increasing population. Due to the limited space availability, the city authorities have no option but to add more levels above existing apartments to accommodate an increasing number of residents. Layer 2 is similar to this. To accommodate increasing traffic and data, separate blockchains are created on top of existing mainnets.

Examples of Layer 2 Solutions

There are different types of layer 2 solutions emerging in recent years such as rollups. 

Rollups are layer 2 solutions that can implement hundreds of transactions outside layer 1, compress the data, and then post them back to layer 1 for review and validation. Through this process, security stays intact, the gas fee reduces, and the overall performance of layer 1 also rises. There are 2 types of rollups-Optimistic and zero knowledge rollups

Optimistic rollups 

Optimistic rollups stand parallel to Ethereum blockchain and send the data back to layer 1 after processing. Users have to pay comparatively low gas fees. Examples of optimistic rollups include Boba, Arbitrum, and Optimism.

Zero-knowledge rollups

Zero-knowledge rollups create cryptographic proof to validate and authenticate transactions. These are more efficient and do not need entire transaction data, making it easy to validate blocks and to transact ether. Examples of ZK rollups include zkSync, Loopring, and dYdX.

Layer 1 Vs Layer 2

The major difference between layer 1 and layer 2 lies in their focus on the blockchain. While layer 1 focuses on the architecture, layer 2 helps third parties to build on the main blockchain.

Further, layer 1 blockchains provide great solutions to large-scale protocols to make upgrades. On the other hand, layer 2 allows blockchains to scale fast and efficiently. Note that this may come at the cost of security due to the involvement of third parties.

Future of Layer 2 Blockchains

Layer 2 scaling solutions ride on the security and architectural stability provided by layer 1 blockchains such as Ethereum. By doing so, they increase the traffic and allow much greater transaction speeds. Hence, with the upgrade of layer 2 technology and with appropriate security measures, layer 1 blockchains like Ethereum will naturally have more use cases.

In other words, layer 1 adoption will increase with the advent of a diverse range of decentralized applications. This is promising for every domain in the future.

Why are they important?

Layer 2 blockchain solutions are important because they open new opportunities for scaling the applications on blockchains. They keep the integrity of the mainnet, and allow decentralization and transparency. On top of that, they reduce the carbon footprint by reducing energy usage.

Layer 2 will be vital to the growth of blockchains as a whole due to the possibility to scale their application in new and diverse directions.

Conclusion

As mentioned above, layer 2 is vital to build diverse use cases and expanding applications of blockchains. New technologies and applications are being built as we speak, and the possibilities are endless. Layer 2 solutions are crucial to the growth of blockchain technology in the future.

Frequently Asked Questions

1. What Are The Best Ethereum Layer 2 Solutions?

Overall, the Ethereum blockchain is used as layer 1 by numerous layer 2 blockchains with multiple applications for the customer. Here are some of the most prominent subnet blockchain solutions:

Optimism
This is a scalable layer 2 solution created by Ethereum developers. It can be seen as an extension to the existing mainnet and has an architecture similar to EVM to help scale dApps on the Ethereum blockchain.

Arbitrum
Arbitrum is a layer 2 scaling solution that intends to raise transaction speeds and reduce fees on the Ethereum blockchain. It lets Ethereum smart contracts scale by communicating messages between smart contracts on layer 1 and on the Arbitrum layer.

Boba Network
A fork from Optimism solution, Boba is an optimistic rollup that strengthens the capabilities of smart contracts and raises transaction throughput.

2. What is the Bitcoin layer 2 solution?

The lightning network is a layer 2 solution of the Bitcoin blockchain. It allows transactions between parties not present on the blockchain network; in other words, off-chain transactions. This layer 2 allows a two-part transaction where parties can give or receive payments from each other.

3. What are the layer 2 coins?

Layer 1 or mainnet blockchains such as Ethereum and blockchain focus on maintaining high security and decentralization levels. However, this sometimes means a compromise in transaction speed and performance. So, by moving transactions to a layer built over layer 1, the layer 2 solutions can gain more block space, increase transaction speed and allow more users to participate. Further, this reduces the fees, extending its applications to more users. And many layer 2 projects have their own native crypto tokens which are called layer 2 coins. Examples are MATIC (polygon), SNX (Synthetix)

4. What is a layer 3 Crypto?

Layer 3 blockchains are also called “application layers”. The main aim of this layer is to offer a base for dApps to allow other apps to function. At this stage, the protocol would be split into application and execution sub-layers. It aims to bring cross-chain capabilities to blockchain networks and bring true interoperability to blockchains.