Layer 2: One Step Closer to the Mass Adoption of Blockchain
Layer 1: The Base Network of Blockchain
The blockchain ecosystem is expanding at never-before-seen speeds for any technology. There were just a few dozen cryptocurrencies almost a decade ago, but there are now a plethora of cryptocurrencies and blockchain networks. However, the scalability of blockchain networks is critical to their growth and utilization. This is where layer 1 (L1) blockchain solutions are required. So, what exactly do L1 blockchain solutions entail? In this post, we will go through the fundamentals of L1 in the blockchain realm, present layer 2 (L2) solutions, and how they work.
What Is Layer 1?
We must first consider blockchain scalability to comprehend L1 solutions. Despite offering users several advantages such as decentralization, high levels of security, and permanent record-keeping, blockchain technology has a few flaws. As its use grows more widespread, a slew of difficulties emerges. One of them is scalability, which relates to the system’s transaction throughput rate, and is measured in transactions per second (TPS). It is used to refer to a system’s capacity to deliver a quality experience to every user, regardless of how many users it has at any given moment. The need for blockchain layers has increased in conjunction with the growing use of cryptocurrencies. Such layers are required to ensure stronger network security and speed, as well as better record keeping and TPS. Consequently, L1 and L2 solutions are used to solve these problems.
The goal of L1 solutions is to enhance the fundamental protocol so that scalability may be achieved. While Bitcoin, Ethereum, and Litecoin are L1 blockchains, Lighting Network is a L2 solution designed to increase the Bitcoin network’s transaction speed. Contrary to L2, L1 solutions alter the rules of the blockchain protocol to boost transaction speed and capacity, allowing additional users and data to be accommodated. A L1 scaling solution, for example, might be used to speed up block confirmation or increase the amount of data in a block.
Types of Layer 1 Solutions
The 2 most common L1 solutions include the following:
- Consensus Protocol Changes, because some consensus protocols are more efficient than others, projects like Ethereum are transitioning from Proof of Work to Proof of Stake. The latter ensures higher speeds and is more energy-efficient than the former as it does not require minors to solve complex cryptographic algorithms and thus uses substantial computing power. Instead of Proof of Stake system processes and validates the new blocks of data based on the participant’s stake.
- Sharding is one of the most popular L1 scalability methods and it is a mechanism that has been adapted from a distributed database. Through sharding, transaction sets are broken down into smaller pieces, known as shards, which are processed by the network in parallel. Since the workload is spread across the peer-to-peer network better, blocks are completed faster. Ethereum 2.0, Tezos, and Zilliqa are exploring the use of shards.
L1 solutions change how a blockchain’s fundamental protocol performs in terms of data processing, making it better. One of its benefits is that they do not require the addition of anything to the current infrastructure. Sharding and changes to the blockchain’s consensus process are two examples of such solutions. Nevertheless, not everything can be solved on L1.
Layer 2 Networks
Due to technological limitations, certain upgrades to the principal blockchain network are difficult or impossible to implement. Ethereum, for example, is migrating to Proof of Stake (PoS), but it has taken years. Some use cases just cannot work with L1 due to scalability issues. A blockchain game could not use the Bitcoin network because of the high transaction delays. Nonetheless, the game may wish to maintain L1’s security and decentralization. The best option is to employ a L2 solution which build on top of the base network. L2 apps rely on L1 to execute transactions and are built on top of it. Take, for example, Bitcoin and the Lightning Network. The L1 network is Bitcoin, whereas the L2 network is the Lightning Network. When there is a lot of demand on the Bitcoin network, transactions might take hours to process. Users can transmit Bitcoin payments off the main chain rapidly, with the entire balance being sent back to the main chain later. This essentially consolidates all transactions into a single record, saving time and resources.
What is Layer 2?
First, we must explain what L2 scaling solutions are trying to solve. Essentially these major blockchains can only do 7 transactions a second or 15 transactions a second which is very small and slow compared to Visa which can do like 100,000 transactions a second. To compete with these centralized methods, we need to find a way to process more transactions per second. There are two ways to scale, we can either scale the base layer (L1) or outsource some of the work to a new layer. Here is why we cannot scale the base layer, the blockchain trilemma, there are 3 big important areas when it comes to blockchain: decentralization, security, and scalability. Without going too in-depth, developers have not found a way to maximize all three, if they try to improve one, the other two start to lose their benefits. Because of this, developers must be creative to find out how to scale a blockchain. Another solution remain possible which is called layer 2.
L2 is a secondary protocol built on top of the existing blockchain network (L1). It is focused on tackling the pressing issues that the main chain may experience, such as low transaction throughput and poor scalability. L2 can relieve some of the main chain’s load by delivering data to various processing channels. It then sends the processed data back to the blockchain protocol’s core to complete the operation. As a result, the underlying blockchain is far less crowded and scalable, allowing for speedier computation and delivery. On top of this, the great majority of existing L2 platforms have been designed in such a way that the main chain protocol is unaffected. Native blockchain catalyzers, also known as L2 platforms, are capable of keeping the decentralized benefits of L1.
Advantages of Layer-2 Solutions
One of the most substantial benefits of L2 solutions is that the underlying blockchain does not have to change its structure (code) since it will simply act as an extra layer. Another aspect worth highlighting is that L2 platforms can contribute to better data privacy. Normally, the existing L1 solutions (Ethereum, Solana, Avalanche, etc.) are fully public, meaning that all transactions conducted on those chains are transparent. Being aware of what is going on on the network is beneficial, but some firms want to keep their critical customer information secret. In situations like this, L2 may be a true lifesaver because it is an off-chain, private-by-default solution.
Types of Layer 2 Solutions
A good analogy is to compare L1 and L2 solutions to a highway (L1) and motorcycles, cars, and trucks (L2 solutions), each of these L2 scaling solutions has a place in scaling a blockchain. It is not so much about which one is the best, but which one is the best for the situation that you are working with. Let’s go over some L2 scaling solutions.
Rollups
Rollups provide scaling by bundling or rolling up sidechain transactions to a single transaction and generating a cryptographic proof also known as a SNARK (succinct non-interactive argument of knowledge), only this proof is submitted to the base layer. With rollups, all transactions state and execution are handled off the main chain. The main chain only stores transaction data. There are two types of rollups: ZK rollups and Optimistic rollups. On one hand, ZK rollups although faster and more efficient than optimistic rollups, do not provide an easy way for the existing smart contracts to migrate to L2. On the other hand, Optimistic rollups run an EVM-compatible virtual machine called OVM (Optimistic Virtual Machine) which allows for executing the same smart contracts as can be executed on Ethereum, but they are slower and less efficient. This is important as it makes it easier for the existing smart contracts to maintain their composability, which is extremely relevant in DeFi where all major smart contracts were already battle-tested. One of the main projects working on the optimistic rollups is Optimism. When it comes to ZK rollups, Loopring and DeversiFi are good examples of decentralized exchanges built on L2. On top of that, we have zkSync enabling scalable crypto payments.
Sidechains
Sidechains are secondary blockchains that run parallel to the side of the main chain and use the resources they have to offload the work. They can steal or borrow information from the main blockchain and then use their virtual machine to execute smart contracts or validate transactions, following this, they send the data that they have back to the main blockchain for security reasons. A sidechain cannot operate without its parent chain, but a parent chain does not need a sidechain. In the case of Ethereum, the Polygon network is a sidechain.
Channels
Channels are a way to lock up your funds and then trade a virtual version of your funds on a network that is much faster. For instance, when it comes to Visa whenever we swipe our credit card or debit card, we are not sending true dollar bills from us to the vendor, instead, we are sending a virtual number representation of how many dollars we owe to that vendor. Since everyone agrees that the virtual dollar is equal to a real dollar, there are no issues. In a channel system, we simply use code to make sure that you can only send what you have locked up. The lightning network is an example of a L2 scaling solution using channels for the bitcoin blockchain. Essentially you lock up some of your bitcoins with someone else and then you can send your virtual bitcoins back and forth until you decide to settle and push one transaction to the blockchain, instead of a whole bunch of them that you would have done otherwise. Similarly, to the way a lightning bolt works you can pay anyone that is connected to the person that you locked up your initial coins with through the network. A downside of channels is that they can only be used for transactions, not smart contracts or virtual machine code, they are application-specific.
Plasma
Plasma may be the most confusing L2 solution. In short, plasma uses child chains sometimes also called plasma chains which have their child chains that they can then broadcast important operations through the main chain. Think about it like how the United States is divided into the federal system and the local system, there might be federal news that is super important such as when the president signs an executive order or there might be local news such as when your cousin wins valedictorian well both of these are important pieces of information that should be recorded. However, one of these might warrant a $10,000 photoshoot and 50 new articles about it. Thinking about child chains like this in the plasma idea is probably the best way to understand how this L2 scaling solution works.
Looking into the limitations of Layer 2 solutions
Despite their many advantages, L2 solutions have certain disadvantages. To begin with, L2 might impede the underlying chain’s liquidity. It should come as no surprise that the importance of liquidity cannot be overstated because it aids in the development of a viable and flourishing market. To offer adequate support for all of its commodities and tokens, Ethereum, for example, need a liquid market. However, once another layer is introduced, the blockchain’s liquidity is likely to decrease. Aside from that, users of the site may face needless onboarding issues. The L1 chain, as well as its dApps, will need to create new accounts whenever an extra layer is implemented. As a result, if money is delivered to many L2 protocols, it may be difficult for the user to keep track of them all. As you can see, the benefits of L2 come at a price. Nonetheless, L2 is particularly useful if the primary purpose is to relieve the main blockchain’s transaction throughput strain.
Conclusion
Currently, the L2 solution offers the best possibility for blockchain to displace old centralized systems. Blockchain technology may achieve rapid acceptance due to higher processing capacity, fewer transaction fees, and a richer user experience. L2 solutions have demonstrated great potential and have exerted a positive impact on the blockchain ecosystem. Though L2 might lose momentum with the launch of the Ethereum 2.0 upgrade, they will remain on the Ethereum scaling agenda to help the blockchain move into the lead. Essentially, the Ethereum community of developers has been striving to establish Ethereum 2.0 to run in parallel with L2 solutions — and not replace them. It is therefore safe to say that L2 will continue to play a pivotal role in addressing scalability and transaction throughput issues without the need for changes on the main chains.
References
⁃ Know Everything About Layer 1 Blockchain — March 23, 2022 — Georgia Weston — (https://101blockchains.com/layer-1-blockchain/)
⁃ What Is Layer 1 in Blockchain? — February 22, 2022 — Binance Academy — (https://academy.binance.com/en/articles/what-is-layer-1-in-blockchain)
⁃ Layer 1 v. Layer 2 — Hedera — (https://hedera.com/learning/distributed-ledger-technologies/layer-1-vs-layer-2)
⁃ What Are Layer 2 Blockchain Scaling Solutions and What Benefits Do They Offer? — January 11, 2022 — Kira Belova — (https://pixelplex.io/blog/what-is-layer-2/)
⁃ What Is a ‘Layer 2 Blockchain,’ and What Does It Mean? — December 29, 2021 — Luu Hoang — (https://bestarion.com/what-is-a-layer-2-blockchain-and-what-does-it-mean/)
⁃ Blockchain Layer 1 vs Layer 2: What you need to know — April 14, 2022 — LCX Team — (https://www.lcx.com/blockchain-layer-1-vs-layer-2-what-you-need-to-know/)
⁃ Layer-1 Blockchain — CoinMarketCap Glossary -(https://coinmarketcap.com/alexandria/glossary/layer-1-blockchain)
⁃ Layer-1 and Layer-2 Blockchain Scaling Solutions — March 29, 2022 — CryptoPedia Staff — (https://www.gemini.com/cryptopedia/blockchain-layer-2-network-layer-1-network)
⁃ Ethereum For Everyone, Layer 2 — (https://ethereum.org/en/layer-2/)
⁃ Layer 2 (ou seconde couche), qu’est-ce que c’est? — April 19, 2022 — Quentin Lahurit — (https://coinacademy.fr/academie-blockchain/layer-2-seconde-couche-quest-c-e-que-cest/)
⁃ What is a Layer 2 Protocol in Crypto? — April 7, 2022 — RJ Fulton — (https://www.howtogeek.com/794948/what-is-a-layer-2-protocol-in-crypto/)
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