Layer 2 Protocols: Importance, Examples and Its Future
Layer 2 protocols are the new frontier for blockchain technology. They provide a platform for developers to build their own applications on top of the existing blockchain infrastructure.
Bitcoin and Ethereum are the two most popular layer-1 cryptocurrencies. They use blockchain technology to maintain a decentralised ledger of transactions. However, in order to increase the speed of transactions, Bitcoin and Ethereum began to explore the use of layer 2 protocols.
Hence, Layer 2 protocols are an extension of the Layer 1 network protocol and they are implemented on top of a Layer 1 network. They help to solve some of the current issues with blockchain technology such as scalability and privacy.
The Layer 2 protocols are a new way of scaling blockchain networks. They are not a replacement for the original blockchain protocol but rather an addition to it.
Common Layer 2 Protocols
State Channels: This includes Lightning Network, which allows for transactions to be processed off-chain and then broadcasted to the blockchain periodically. It is being adopted by a number of cryptos like Bitcoin and Litecoin. State channels are also employed by Celer, Ethereum’s Raiden Network, and Liquid Network.
Nested Blockchains: The structure of nested blockchains basically involves a main chain alongside a few secondary chains. The effective design of nested blockchains ensures that a chain can easily operate in tandem with the other chain. In this case, the main chain works on assigning tasks while taking control over the parameters. The secondary chains work on performing different transactions of the main chain and reporting for feedback and approvals.
Examples include Ethereum’s OMG Plasma Network,
Rollups: Rollups cut down on blockchain transaction costs by “rolling up” batches of transactions into a single one. Rollups execute transactions outside of the primary Ethereum blockchain and transmit the transaction data back to the main Ethereum network.
Sidechains: Sidechains are EVM-compatible blockchains connected to Ethereum via bridges. They have their own consensus protocol and block parameters.
Plasma: Plasma is a framework where side chains are connected to the main Ethereum blockchain via a root contract that records the current state and specifies the rules for the child chains. These side chains are tethered to the main Ethereum blockchain.
The Importance of Layer 2 Protocols
Layer 2 protocols are useful for scaling the blockchain. They can be used to process transactions and data in parallel, which reduces the latency of the system. Scalability is a major issue that has been limiting the adoption of blockchain and cryptocurrencies, but Layer-2 protocols can solve this problem.
Layer 2 protocols are not a replacement for Layer 1 protocols — they just provide an additional layer on top of it. This way, it is possible to use Layer 1 for handling complex transactions, while Layer 2 focuses on simple transactions.
They are needed for the success of blockchain technology. They are used to ensure that transactions happen in a timely manner and to make sure that the network is scalable.
Layer 2 protocols are not a new concept. The first layer protocol, Bitcoin, has been around for 10 years and it is still in use today. Layer 2 protocols have been created for other cryptocurrencies as well so that they can be used more efficiently.
The most important thing about Layer 2 protocols is that they don’t require an entirely new network. Instead, they build on top of existing networks and make them faster, more scalable, and more secure.
The Problems Layer 2 Solves
Layer 2 protocols are a relatively new way of scaling blockchain networks. Layer 2 protocols are often necessary for scalability because they allow for more transactions per second (TPS). They enable the off-chain transfer of data and information which can then be processed on-chain.
This is done through an innovative process called “state channels”. These state channels enable transactions to happen between two parties without having to broadcast them to the entire network, which would be necessary in traditional blockchains with no Layer 2 protocol in place.
The transactions that happen within these state channels are processed by smart contracts and recorded on-chain once they have been confirmed by both parties.
Layer 2 protocols are a second layer that runs on top of a blockchain network and provides additional functionality such as instant payments or privacy features.
The Future of Layer 2 Protocol
Layer-2 adoption could spur the next crypto turning point as they are still building and making progressive changes to the formation of the traditional Layer-1 blockchains.
This is because Layer-2 protocols will allow for faster, cheaper and more scalable transactions while still relying on the blockchain. They are the next big thing in the blockchain industry and have been gaining popularity and more attention.
We are witnessing the next crypto turning point. This is because of the adoption of Layer-2 protocols, which can solve the scalability problem by offloading some transactions to an off-chain layer. This makes it possible for a blockchain network to process more transactions without increasing the number of nodes or blocks on the chain.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.