The main focus of the blockchain technology concept was to establish a secure, decentralized
database system that could allow transparent transactions.
This led to the creation of a native currency that could be used to pay for network transactions.
It also led to the rise of prominent cryptocurrencies such as BTC. The core concern of slow
transaction rates and the inherent lack of scale afforded layer-1 blockchains became apparent as
the blockchain ecosystem expanded at an incredible pace.
Layer-1 blockchains, such as Bitcoin and Ethereum, are the
foundation protocols that can be used with layer-2 protocols. It can also be called an L1 or
mainnet blockchain, principal chain, or mainnet.
The biggest problem with scaling a blockchain network is layer-1 blockchains' use of the proof of
work (PoW) consensus process. This requires a lot of computing resources to create each block of
transaction data.
In addition, the number of transactions a layer-1 blockchain can process is directly proportional
to the execution time. This results in higher transaction costs or gas prices on such networks.
Layer-1 blockchains process transactions and verify them on
their blockchain. Any changes to the protocol could cause disruptions in the operation of the
consensus mechanism.
Ethereum , another
layer-1 blockchain, intends to change from its PoW consensus system to a proof of stake
(PoS), to address the scalability problem. This reduces the processing time and energy
consumption of the blockchain, but it still relies on layer-1 scaling methods such as
shading to eventually expand to 100,000 transactions per second.
Shading is the more
popular of the two layer-one scaling options. It involves breaking down transactions into
separate data sets and then parallelizing them with a horizontally divided processing
method.
But, granting validation authority to the largest stakeholders in a PoS architecture results in a
form of centralization that must be addressed, especially for financial applications.
What is the Blockchain Layer 2 scaling solution?
Blockchain technology has provided significant benefits since the 2009 inception of Bitcoin.
Among the most talked-about advantages are decentralization, transparency, record-keeping,
security, and privacy. Blockchain technology has created a vibrant cryptocurrency ecosystem.
It is continually pushing the boundaries in use cases that span finance, currencies,
identity, governance, and security.
Many blockchain networks have struggled with scaling despite this rapid growth. Scalability
issues occur when the number of transactions pending exceeds the capacity of the blockchain
at any given moment. Transactions are slow or never happen, and you have to pay higher fees.
A blockchain can accommodate infinite transactions per second (TPS), which is commonly known
as throughput. In an ideal world, every blockchain would be able to handle these
transactions at an infinite number of transactions per second. However, the Bitcoin main
chain can only handle 3-7 TPS. VisaNet, Visa's central electronic payment network, can
process approximately 20,000 transactions per second.
The TPS difference is due to the decentralization that Bitcoin and other blockchains strive
to achieve.
You will need to spend a lot of time and resources to replace an existing centralized system.
Instead of one database, a global network is used to accept, distribute, and validate each
transaction in a decentralized system.
Layer 2 scaling solutions aim to increase throughput
and maintain decentralization. types of Layer-2 solutions built on the Layer 1 blockchain.
- Speed up transactions.
- Increase transaction throughput (number of transactions per second)
- Lower transaction costs.
Although there are always tradeoffs, layer 2 scaling solutions may be able to move the
blockchain community closer to achieving its common goal of making cryptocurrencies and
other blockchain-based systems available to everyone in an accessible, secure, convenient,
and efficient way.
What is Layer 2 and why is it important?
Layer 2 refers to a network or technology that runs on top of a blockchain protocol to make
it more efficient and scalable.
Blockchains, such as Ethereum, has grown in popularity due to their programming (smart
contracts) and resistance to censorship. This allows a wide variety of businesses and use
cases, and Ethereum, however, can only process 7 to 11, compared to more than 20,000
transactions per minute on the Visa network.
Users compete to complete transactions as fast as possible as the blockchain becomes
overloaded. This creates a bidding war in every block for space, which causes transaction
prices to soar. In 2021, it will cost more than $80 to send tokens to other addresses on the
Ethereum network.
What is a layer-2 network of blockchain networks?
Despite their limitations in terms of speed and blockchain scalability, layer-1 blockchains have become increasingly popular,
and there has been a lot of liquidity.
These L2 blockchain solutions, also known as blockchain
layer-2 or L2 blockchain solutions, allow for thousands of low-value transactions that can
be validated on parallel blockchains before they are moved to the main blockchain in a
manner to ensure that they are permanently recorded.
Layer-2 solutions were created to describe a specific collection of Ethereum scaling
solutions. They were intended to meet a demand exceeding the blockchain's 1+ million
transactions per day limit.
These secondary blockchains have expanded their use cases to provide a better end-user
experience. They offer a greater transaction rate per second, lower gas prices, and the
assurance that all transactions are permanently recorded on the main network.
L2 Blockchain solutions successfully transfer the transactional load onto the parallel
network. This de-congesting of the mainnet ensures that the method maintains important
features such as decentralization, security, and data availability.
This fixes the scaling issue that plagued layer-1 blockchains like Bitcoin and Ethereum. It
also guarantees that a wide range of decentralized apps (DApps), can be accessed with
rigorous decentralized security requirements.
Layer-2 Scaling Solutions Using Ethereum Rollups
Rollups are layer-2 scaling methods that inherit Ethereum's security. They "roll-up," or
bundle multiple transactions into one mainnet transaction. The layer-1 blockchain stores the
final transaction data. This divides them into two different categories.
The Optimistic Rollups are the first. These blockchains run alongside Ethereum's main chain
and do not require expensive computations. They can conduct fault research in the case of an
invalid transaction, as long as all uploaded transactions are legitimate.
This is the second form of zero-knowledge rollups. They use validity proofs for transactions
off-chain. After compressing hundreds of transactions, they upload cryptographic validity
proofs onto the Ethereum mainnet.
The main difference between these two types is that verifying a block using zero-knowledge
rollups is significantly faster since they only require the validity proof and not complete
transaction data as with Optimistic rollups.
Similar to the layer-2 crypto network Polygon (pictured above), Zk-rollups permit near-zero
latency for cryptocurrency money transfers between layer-2 and layer-1 chains. This makes
them more suitable for financial transaction use cases.
Optimistic rollups, on the other hand, provide greater security and decentralization because
transaction data is stored on the layer-1 blockchain. They are also better suited to
applications that have less on-chain activity. They are also fully compatible with Solidity
and the Ethereum Virtual Machine (EVM), allowing them to do anything possible on an
optimistic rollup on the Ethereum blockchain.
Other popular L2 scaling methods are being dismantled.
Sidechains can be considered alternative blockchains. They function independently and have
their own consensus processes. However, they also run in parallel with the Ethereum main net
via a two-way bridge.
Sidechains offer developers the same experience and
allow them to launch DApps on the sidechains. Sidechains, however, don't have the same level
of security as layer-2 blockchains. They use a different consensus method and incorporate a
lower degree of decentralization into their protocol.
Another type of bi-directional blockchain is the State channel. This allows crypto money to
be placed in smart contracts on the layer-1 blockchain. The latter is then issued with
signed tickets. The Lightning Network is a popular example. It enables users to transact
quickly off the blockchain before recording the final data on the Bitcoin main net on both
the Ethereum and Bitcoin main nets. The Ether Network, another state channel, connects to
the Ethereum blockchain and allows users to execute smart contracts through it.
Plasma chains can be linked to Ethereum's mainnet. They use fraud-proof similar to Optimistic
Rollups to verify transactions in the event of a dispute. These are great for transactions
that are fast and require low gas prices.
Withdrawals to these blockchains take several days to process arbitration claims and incur an
additional capital cost when liquidity is required for fungible assets.
Like plasma chains, nested blockchains feature many linked secondary chains that run on top
of the layer-1 block. Nested blockchains are parent-child connections. They allocate work to
the children or subsidiary chains and rely on the underlying network to set the settings for
the entire network.
In that they are not susceptible to cyber-attacks and don't experience delays when
withdrawing funds from these blockchains, Valium is similar to zero-knowledge rollups.
However, they require a lot of processing power and are not economical for low-throughput
uses.
A Guide to Blockchain Layers 1 and 2
Although layer-1 scaling solutions like consensus protocol updates or shading are aimed at
making blockchains like Bitcoin and Ethereum more scalable than before, many teams continue
to work on bringing user-friendly solutions onto the market.
Both approaches attempt to solve the "scalability trilemma," which Vitalik Buterin, the
founder of Ethereum, coined to describe a problem in distributed ledger-based networks where
every node that validates transactions can not achieve security, decentralization, and
scalability simultaneously.
Although the verdict is still out on the effectiveness of these solutions, layer-2 solutions
already enable transaction speeds and prices that can be used to scale the blockchain
solutions development ecosystem and realize the full potential of this game-changing
technology.
Many DApps already
use these technologies to provide previously unimaginable experiences in gaming,
Decentralized banking (DeFi), the Metaverse, and other areas. They also revolutionize
established areas such as finance, corporate governance, and auditing.
The
benefits of these blockchains verify transactions, but they also have their limitations.
It is important to consider the use cases and the potential for fraud by validators on
layer-2 blockchains. This being said, layer-2 scaling solutions continue to be developed
and will continue to attract a lot of praise and criticism.
The benefits and drawbacks of Bitcoin Layer 2 scaling solutions:
Pros
Faster Transactions: Bitcoin's transaction rate is approximately seven transactions per
second (TPS). Bitcoin also keeps track of transactions in blocks of ten minutes. Your
transaction will be successfully recorded on-chain after six blocks have been added. This
takes nearly an hour. Lightning transactions are almost instantaneous.
Enhanced Privacy: Lightning transactions are only recorded on public blockchains after the
payment channel is closed. The amount is then distributed to both parties. Transactions that
occur within the channel are not visible to the public, whereas on-chain payments are.
Transaction Costs Are Reduced The Lightning Network allows transactions to take place for as
little as 0.00000001 Bitcoin ($0.0). The transaction costs have been reduced to just one
satoshi by the Lightning Network (1 SAT = 1100,000,000 BTC).
Cons
Offline Transactions: An offline transaction on the Lightning Network has its own set of
issues. The channel can be closed by the other party while you are away. They also have the
option to make pocket payments. This is called "fraudulent channel closing."
Online Vulnerability All parties to the transaction must sign online with their private keys.
If the computer that stores the private keys is compromised, the entire wallet could be
compromised.
Malicious Attacks: Congestion due to a malicious attack is another risk. If payment channels
are clogged due to a malicious hack, attack, or other reason, participants may not be able
to get their money back on time.
L2 blockchains' future
Blockchain technology will continue to grow in real-world use. As such, there will be a
greater emphasis on scalability and rapid transaction speeds. The L1 blockchains like
Ethereum will offer significant improvements, such as modifications to consensus processes
and the introduction of shading mechanisms. This will increase its influence on L2
blockchains that are connected to it.
Inadvertently, L2 blockchains will be able to deliver much faster transaction speeds and
lower costs to previously unheard-of levels. These advantages, along with the rapid growth
of L2 blockchains, will drive the development and expansion of new applications, especially
in the Defi domain.
Users will also be able to benefit from increased blockchain interoperability by building
more bridges between the L2 platforms. This will open up new opportunities in areas such as
digital asset trading and digital asset trading.
Multichain futures are based on L2 scaling solutions.
Developers must ensure that growth does not compromise security, decentralization, and
scalability.
The whole crypto industry will need to work together to bring L2 scaling solutions to the
market and DApps to aid the world's shift to decentralized economies.
