Blockchain has become the tool of choice for almost every industry and business seeking radical change. This smart technology can bring multiple benefits, including reliable interactions, maximum security, immutable records, and a high level of decentralisation. It is no surprise, then, that global spending on blockchain solutions is expected to reach $19 billion by 2024.
However, every technology has some shortcomings and pitfalls – which is the case with blockchain, whose disadvantages include problems with transaction speed and scalability. Blockchain developers are working hard to create novel and advanced solutions to improve the technology’s capabilities and help it run at full speed. An example is Layer 2 (L2), which is considered by rights to be the most profound and efficient means of solving the backbone problem and vastly improving its performance.
In this article, we will discuss what Layer 2 blockchain technology is and Layer 2 platforms
What is Layer 2 Blockchain Technology
Layer 2 is a secondary protocol built on top of existing blockchain networks. It focuses on solving urgent problems that the main chain may encounter, such as low transaction throughput and poor scalability.
Layer 2 can take some of the load of the main chain by sending some data to different processing channels. It then reports the processed data to the central blockchain protocol to finalise the results. As a result, the underlying blockchain is less congested and more scalable, allowing for faster computation and deployment.
Additionally, most existing Layer 2 platforms are designed to leave the backbone protocol untouched. Users don’t waste time on miner verification or pay high transaction costs when conducting microtransactions. Layer 2 platforms are often referred to as native blockchain catalysts that retain the decentralisation benefits of Layer 1.
How Does Layer 2 Blockchain Technology Work?
Layer 2 platforms and protocols process data in a way that offloads the load normally borne by the base layer (the root chain). By offloading transactions from the main chain to a Layer 2 platform, the blockchain network can handle higher transaction throughput.
Difference Between Layer 2 and Layer 1 Technologies
Blockchain networks like Bitcoin and Ethereum face inherent scaling limitations.
Ethereum processes around 15-20 transactions per second, while Paypal and Visa process hundreds and thousands of transactions per second, respectively.
When a transaction takes place, a global consensus must be reached in a decentralised network. All nodes in the network keep complete copies of transactions to verify transactions on the network. It is designed to solve the double-spending problem without relying on a middleman.
A blockchain network can serve as layer 1 (i.e. base layer) of a decentralised network ecosystem. The ultimate goal is to “re-decentralize” the infrastructure, protocols, applications, and layers of the World Wide Web.
The solution is stratified. Layer 1 acts as a security layer, anchoring data transactions in an immutable, cryptographically secure manner without a central authority. Lightning Labs’ Elizabeth Starks calls blockchain “the base layer of the decentralised internet.”
Layer 2 allows you to drastically reduce data processing on the blockchain by performing off-chain computations. When disputes arise, the base chain is still the final judge (this is crypto-economics, after all).
The main benefit of Layer 2 is that it minimises the amount of data storage on the base layer. By taking the transaction out of the base layer while still being bound to it, processing resources are freed up for other things while also gaining the benefits of security and decentralisation.
Types of Layer 2 Solutions
- Nested blockchains: A complete second chain that acts as another layer to the existing network while helping to process a range of transactions from users.
- State Channels: Essentially a two-way channel for communication between two users, it internally summarises their shared transaction history and is only available to blocked participants. Once the channel is closed, the transaction history is uploaded to the Layer 1 chain, meaning only one transaction is sent to the main blockchain, helping to reduce the cost and time required to confirm transactions.
- Sidechain: As the name suggests, sidechains work alongside the main blockchain but use their consensus mechanism to confirm transactions. Sidechains are bridged to Layer 1 platforms and can be used between trusted parties to facilitate repeated transactions.
- Plasma and Optimistic Rollups: Both solutions work by moving transactions from the main Layer 1 blockchain to another form of the sidechain, where trusted parties are empowered to ensure that the information stored on the network is authentic. The main difference is that plasma rollups apply to a single token or asset, while optimistic rollups use smart contracts.
- Zero-knowledge Rollups:
- ZK Rollups solves one of the main shortcomings of its Plasma and Optimistic counterparts by removing the need for monitoring and using zero-knowledge proofs to store and publish information on the main chain.
Layer 2 Blockchain Platform
- Bitcoin Lightning Network: The Bitcoin Lightning Network is one of Bitcoin’s most well-known Layer 2 solutions. Like other Layer 2 solutions, it processes transactions outside the main chain before returning the information. The Lightning Network also brings smart contracts to Bitcoin, a major improvement over the network.
- The Bitcoin Lightning Network promises the following benefits: instant payments, scalability, low costs, and cross-blockchain swaps.
- Starkware is a provider of Ethereum Layer 2 scaling solutions. It has three products: StarkNet, StarkEx and Cairo.
- StarkNet is a permissionless decentralised ZK rollup layer 2 solution for the Ethereum blockchain. Developers can now deploy their smart contracts on the StarkNet testnet without permission. The main advantage is that dApps can achieve unlimited scaling while benefiting from Ethereum’s composability and security.
- StarkEx is a Layer 2 scalability engine that has been validated and deployed to the mainnet since June 2020. It has been deployed in various use cases; notable customers include DeversiFi, Immutable and dYdX. The main advantages of StarkEx are the trusted scalability with ZK-STARK technology, the ability to design self-hosted dApps and a robust and secure scaling solution for a wide range of applications.
- Cairo is the Turing-complete language from Starkware behind StarkNet and StarkEx. It allows extending dApps with STARKs. More details about Cairo can be found here.
- Optimism: Optimistic Ethereum is an optimistic aggregation chain compatible with the Ethereum Virtual Machine (EVM). The main benefit of deploying on Optimism is that it is fast, easy and secure. Users can use the Optimistic Ethereum Gateway to push assets in and out of the network, and projects wishing to deploy can submit a form to be whitelisted by Optimistic. Projects that meet the entry criteria will be approved within 2 weeks. In July 2021, Uniswap V3 announced the alpha release on Optimistic Ethereum mainnet.
- Arbitrum: Arbitrum is a Layer 2 solution designed to increase the speed and scalability of Ethereum smart contracts while adding additional privacy features. Layer 2 platforms allow developers to run unmodified EVM contracts and transactions at Layer 2 without compromising Layer 1 security.
- Arbitrum is positioning itself as the ideal scaling solution for DeFi applications, capable of scaling any Ethereum contract with an Arbitrum rollup.
- Polygon: Polygon, formerly known as Matic Network, is a Layer 2 blockchain scaling solution designed to help Ethereum gain broader traction. The platform provides developers with the tools and elements they need to deliver highly scalable dApps with top-notch performance, great user experience and a high level of security.
- Polygon relies on its proof-of-Stake consensus mechanism called Commit Chain and the More Viable Plasma Solution (MoreVP). Currently, commit chains that can handle multiple transactions are mainly used. Polygon is believed to have the potential to scale with thousands of chains to increase overall throughput.
- Immutable X: Immutable X is the first Layer 2 scaling solution purpose-built for Ethereum-powered non-fungible tokens (NFTs). It offers users near-instant transaction confirmation, the ability to process around 9,000 transactions per second, and no gas fees: the platform’s primary goal is to enable more efficient and trouble-free NFT mining and trading. Immutable X leverages ZK-Rollup to enable off-chain transaction processing, increasing transaction speed and reducing gas costs.
- Instead of competing with Ethereum, this layer two solution leverages the performance and security of the main chain. Immutable X allows developers to create advanced NFT projects without impacting Ethereum’s liquidity and overall performance.
- Echo: Echo is an advanced Layer 2 network that easily integrates with existing blockchains and offers excellent network interoperability and advanced scripting capabilities for crypto assets. It provides a new level of peer-to-peer communication, supports high-speed asset transfers, and enables developers to orchestrate powerful and easy-to-use applications by connecting to leading protocols’ ZK rollup bridges.