When it comes to crypto, there’s a lot of new information to learn and digest all the time. This is because crypto and the blockchain aren’t perfect, and in order to become suitable for mass adoption (which is the ultimate goal), this 21st-century technology needs to constantly be upgraded and adapted to the current and future needs of end users.
Though there are many benefits of crypto and blockchain, one of the biggest problems that the industry is currently facing has a lot to do with transaction speeds and overall blockchain network scalability. And that’s where the Layer 2 Blockchain technology comes in.
While it might sound complicated, this is an umbrella term for various solutions and upgrades built on top of the current blockchain to improve transaction speed and scalability, which the Bitcoin network and the Ethereum network for example are currently facing.
With that being said, this isn’t everything about Layer 2 Blockchain. This is an upgrade that could solve a lot of the major issues that were not addressed on the original blockchain. To give you a better and more insightful overview of what Layer 2 Blockchain is, how it works, the scaling solutions it presents, and its benefits, in this article, we’ll talk all about it.
Read on to learn more.
What Are Layer 2 Blockchains?
In most basic terms, layer-2 blockchains refer to networks or technologies, which will be operating on top of the original blockchain ecosystem protocol. This is done with the goal of improving the blockchain’s scalability and efficiency issues that were not adequately addressed in the original blockchain.
With that being said, while layer 2 blockchains work on top of the original blockchain, they are also completely independent.
Benefits of Layer 2 Blockchains
Layer 2 blockchains are designed to help tackle some of the major issues that cryptocurrency networks face with the underlying protocol of the original blockchain. These issues must be resolved in order to mass adoption to take place, or else, there might be too much friction and delay, which will ultimately defeat the pfurpose of using crypto as a form of payment channels.
Since these solutions are built on top of the base blockchain, they still maintain the integrity of the currency, upholding the main principles of crypto such as decentralization and transparency. Below, we have listed some of the key benefits that layer 2 blockchains can offer the community:
Enhanced Utility
To start, layer 2 blockchains will allow for more utility. The reason the potential of crypto is limited at the moment is because of the slow transaction speeds. The blockchain cannot process the number of transactions per second needed for the mass adoption of the cryptocurrencies to take place.
To understand this, let’s go back to how crypto works. Every transaction made with cryptocurrencies gets stored on the blockchain, an immutable ledger. It takes a fair amount of work to add blocks or transactions to the chain to ensure immutability and security, but this means that not as many transactions can happen per second.
With layer 2 solutions, more people can transact with crypto at the same, allowing for faster processing speed and more utility overall. The ultimate goal of crypto is for everyone to use it as their main form of payment, and layer 2 blockchains might be just what we’ve needed to allow this to happen.
Lower Transaction Fees
Most layer 2 blockchains offload multiple off chain transactions and transfer them as a single block on the main blockchain. This means smaller transaction fees when using the currency as well as less-clogged blockchain networks.
And while these layer 2 blockchains will boost transaction speeds, they will still maintain the security and immutability of the original blockchain. It’s a win-win development for everybody.
How Do Layer 2s Work?
Understanding the blockchain alone is hard for a lot of people. And by adding a second layer or a secondary blockchain to the equation, it may seem impossible to figure out how this technology works. But when you break it down, it’s actually quite easy to understand.
One of the ways you can look at layer 2s is an extension of the blockchain. Remember, the blockchain exists to process multiple transactions and save them on an immutable ledger. This is what maintains the security of the entire cryptocurrency community and which most crypto coins are built upon.
The thing is that the blockchain can only handle a certain amount of transactions at a time. While the blockchain work pretty fast, it still can’t process thousands of transactions every second, which is where layer 2s come in - to resolve this issue.
Many layer 2 blockchains work alongside the base blockchain as an extension. What the second layer does is process different transactions and store them in a singular block on the chain. This allows for more transactions to be added to the secure and immutable chain.
In the beginning, we didn’t need layer 2 blockchains as not many people used crypto. However, as more people gain interest and use cryptocurrencies each day, the main blockchain needs support, which is what layer 2s are there to offer.
Layer 2 Blockchain Scaling Solutions
There are numerous ways that layer 2s support the main blockchain. Below, we’ll discuss the major layer 2 blockchain scaling solutions that are currently in place to support the blockchain.
Rollups
Rollups are arguably the most popular scaling solution for the blockchain. This type of layer 2 blockchain will process and group different transactions together and add them back to the main chain as a single block. This not only saves time but can also reduce fees, which is another major complaint amongst crypto users.
That said, there are two main types of rollups that you need to understand when it comes to layer 2 blockchains. These include:
- Optimistic Rollups
Optimistic rollups run alongside the main blockchain, transferring different transactions and data blocks to the chain. Many users transact on the optimistic rollups due to the low gas fees and lower transactional burden, allowing them to save money in the process. Anything that’s possible on the original blockchain will be possible on the optimistic rollup.
- Zero-knowledge (ZK) Rollups
Aside from optimistic rollups, there are also zero knowledge rollups, which use cryptographic proof to validate transactions. These are known as validity proof that confirm different transactions on the chain, ultimately preventing a fraudulent transaction from taking place . While these are efficient, zero knowledge rollups are generally best for apps that don’t have too much on-chain activity.
Sidechains
There are numerous crypto sidechain products out there, designed to run in tandem with the primary chain. These solutions link to the mainnet through bridges. However, these aren’t secured by the base layer, which means they don’t technically qualify as layer 2 blockchains. Additionally, there are certain security risks with this solution that are yet to be properly addressed. For instance, Axie Infinity is built on the Ronin Network — a sidechain of Ethereum.
Validiums
These solutions work similarly to ZK rollups, using validity proofs. However, the difference is that they don’t transfer the transaction data back to the base layer, which means that multiple validiums can run alongside the main blockchain, improving scalability.
That said, these are incredibly fast solutions. Many Valdium projects can process up to 10,000 transactions per second, which is way more than the current blockchain. However, there are some issues with Validum solutions that are still in the process of being worked out.
For example, these blockchains don’t work well with many smart contracts. This is because there are so many languages and variables that it needs to learn before being able to process the contracts. So, this technology has a lot of potential, but it needs a fair amount of development still.
Plasma
Simply put, plasma chains are a completely separate blockchain anchored to the Ethereum mainnet. So, it can run completely independently but is still connected to the main blockchain or the layer 1 chain.
Sometimes, these chains are called “child” chains. This is because they are essentially copies of the main chain but on a slightly smaller scale. These chains function in a similar way to optimistic rollups and use fraud proofs to verify blockchain transactions.
State Channels
Another example of a layer 2 blockchain is a state channel. With these chains, you deposit funds into a smart contract through the main chain before the layer 2 chain produces signed tickets, which can speed up the process of handling smart contracts on the blockchain. This allows for quick and easy off-chain transactions which are then transferred and stored on the main blockchain.
Conclusion
While cryptocurrencies have a ton of potential, we are still in the development phase of this recently-found technology where several fundamental issues are currently being resolved in order for mass adoption to be possible.
The biggest issue with the main blockchain is the speed of transactions and scalability. And thanks to layer 2 blockchains, we’ll not only resolve these issues but will also result in lower transaction fees, which have been a huge issue for many crypto users.
