A Look at Cryptocurrency Second Layer Protocols
A person doesn’t need to venture very long down the crypto rabbit hole before they run into second-layer protocols. Today, these networks are a critical part of the blockchain industry. They provide blockchains with more scalability, functionality, and usability. There are a variety of different types of second layer protocols in use currently. Understanding how they work and their purpose is sure to help you to become a better crypto user.
What Problems Do Second Layer Protocols Fix?
There is a variety of issues that second layer protocols help to solve. For one, they provide blockchain networks with more scalability. Scalability concerns have been an issue since the early days of Bitcoin. These issues took center stage in 2016 when crypto had a break-out year that saw the world’s first crypto skyrocket to +$20,000.
The sudden uptick in users on the Bitcoin blockchain led to massive congestion. There was a point during the crisis when the cost of sending Bitcoin was more than the amount you wished to send. Additionally, the transaction delays were crippling the network’s day-to-day capabilities.
No vendors wanted to accept Bitcoin when they would have to wait a day to receive the funds and the value of these funds would vary. There were many instances where vendors would lose money as by the time they received their crypto it had dropped in value sharply. In other instances, they gained. The issue was that there were so many new users on the Bitcoin blockchain that it was practically unresponsive.
Major Debates Arise
These issues led to a hard-fought debate as to how best to fix the scenario. The Bitcoin community ended up split with two major options. The first was to adjust the block size to provide more transactions in each interval. The other side of the argument was against changing the 1MB block size within Bitcoin’s core coding. They argued that this was only a temporary fix that would lead to countless code alterations in the future whenever the issue arises.
The problem with increasing Bitcoin’s block size is that each increase would restrict the number of people who had access to hardware that could support network participation. The desire of these Bitcoiners was to seek out a better alternative than changing the network’s main characteristics. Eventually, the debate led to two major outcomes. First, it led to a hard fork within the community and the creation of Bitcoin Cash. Second, it helped spark the creation of the Lightning Network.
The Lightning Network is possibly the best example of a second layer protocol. This network was purpose-built to help alleviate Bitcoin’s network congestion. The protocol operates in a unique manner that leverages personal payment channels. Users can open one of these channels by funding it.
Once a channel is open other users can make payments through it up to the amount it’s funded. The transactions remain off-chain until the channel closes. This technical structure reduces the amount of data on Bitcoin’s mainnet considerably. It also provides the network with lightning-fast transactions times.
In comparison, a normal Bitcoin transaction can take over 10 minutes to complete without network congestion. A Lightning Network transaction completes in seconds. This added scalability is ideal for developers seeking to use Bitcoin in their Dapps and games. As such, Lightning Network-powered play-to-earn gaming is on the rise. You can now earn Satoshis traversing digital landscapes and battling it out with opponents.
The Lightning Network provides Bitcoiners with the ability to conduct micro-transactions. Prior to the introduction of Lightning, it was too expensive to send someone a couple of Satoshis. For gamers and other applications that utilize very tiny amounts of Bitcoin for value transfer transactions, this capability opened the door for Bitcoiners to benefit greatly.
The Lightning Network also provides Bitcoin with a smart contract processing layer. Developers have begun to venture into Bitcoin-powered smart contracts leveraging the Lightning Network as the intermediary. These developments could mean that this year could see the introduction of Bitcoin NFTs and DeFi services.
Statechains are another option that continues to gain momentum in the Bitcoin community. This off-chain protocol was introduced during the Tokyo blockchain conference in 2019. Unlike Lightning or Liquid, Statechains operate at the UTXO level. This technical structure provides statechains with more flexibility in terms of features and services. For example, you can provide mixing services when using statechains to improve privacy.
Statechains are chain agnostic. As such, they can manage multiple UTXOs from varying networks. They are also fully non-custodial so your crypto remains in your wallet until you conduct a transaction. Best of all, statechains have virtual limitless scalability as the network only needs to focus on the coins used in the transaction rather than the entire network’s history.
The Liquid Network is a Lightning Network competitor that services the Bitcoin mainnet as well. The Liquid Network concept emerged in 2014 during a discussion about scalability concerns. Notably, Liquid provides scalability to Bitcoin in a completely different manner than the Lightning Network.
Liquid operates using a two-way peg to Bitcoin’s mainnet. In a way, it sacrifices a little decentralization to improve scalability. The network introduces some cool features to the market. For example, it provides users with a new public key for each transaction which helps improve privacy. It also enables peg-in transactions.
The Liquid Network gives Bitcoin better performance and costs only a fraction of regular transactions. It also supports atomic swaps. An atomic swap is a technology used to transfer digital assets between blockchains. Unlike a trade where you swap your assets using an intermediary, an atomic swap enables direct chain-to-chain transfers. The advantages include faster trades and cheaper fees.
Second Layer Protocols Changed the Game
Today, second layer protocols continue to play an ever-increasing role in the market. They are even multi-Layer blockchains that include second layer protocols as part of their core ecosystem. These networks and the ones listed above are perfect examples of how developer creativity solves some of blockchains’ biggest issues using second layer protocols.