Blockchain Layer-2 Scaling Solutions Guide

A beginner's guide to blockchain layer-2 scaling solutions

June 24, 2022 2:40 PM

 Blockchain Layer-2 Scaling Solutions

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.

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