Digging into Layer 2 Solutions

Learn about the tech striving to solve crypto’s scaling issues.

ShapeShift
Oct 17 · 6 min read

Blockchain geeks and crypto enthusiasts alike often use the terms layer 2 and lightning network interchangeably when referring to blockchain scalability solutions. The truth is that these terms are not interchangeable.

Beyond Bitcoin: Scaling with Layer 2

  • Scaling payment volume and speed
  • Scaling the creation and execution of smart contracts
  • Performing off-chain computations

Bitcoin’s Lightning Network upgrade is specific to scaling payments, but it‘s only one of the projects dedicated to solving this problem. To further understand layer 2 solutions, you need to look beyond Bitcoin to the different blockchains that are using this technology.

Why is scaling a problem?

Credit cards like Visa and Mastercard can handle up to 47,000 transactions per second at any given time. In fact, it’s estimated that during China’s infamous global Singles’ Day shopping event, these credit card companies can process closer to 100,000 transactions per second.

In comparison, Bitcoin performs approximately 4.6 transactions per second. The reason for this large discrepancy is that Visa and MasterCard are part of the centralized banking system, which has been around for more than 100 years. Decentralized technologies must always face what is known as the ‘impossible triangle’.

The impossible triangle refers to the three principles that give a blockchain its utility:

  1. Security
  2. Scalability
  3. Decentralization

At the present moment, there isn’t a single cryptocurrency on a completely public blockchain that masters all three of the above. Ripple currently handles 1,500 transactions per second. The EOS blockchain has a throughput of nearly 4,000 transactions per second. It’s safe to say to this point, the triangle is still proving impossible to master. This is why layer 2 approaches are becoming more commonly known as a scaling solution.

The Lightning Network

The Lightning Network is necessary because the average bitcoin transaction is worth around $50, with a fee of about $20. That makes keeping small transactions ‘on-chain’ impractical. Making transactions off-chain reduces the load on the blockchain. The lightning network also makes it so that a multi-signature address must be used; meaning no two parties can manipulate each other in completing a transaction. The downside is that the lightning network can’t be used off-line. It also can’t be used for large amounts, and it allows nodes to potentially become large payment hubs that hold large sums of value.

>>> Read more on Bitcoin’s Lightning Network <<<

Payment Channels

  • Allows part of the blockchain’s state to be locked using multi-signature addresses or smart contracts
  • Allows participants to then update the state of that part of the chain
  • Submits the updated state back to the blockchain

This state channel approach is most easily understood in a monetary exchange; the exchange could be anything. It could be used to track any other kind of change to a blockchain’s state, whether the transaction is related to money, intellectual property, government identification, etc.

Ethereum Scaling Solutions

Casper

Plasma

Sharding

Sidechain and Off-Chain Transactions

Sidechain

Off-Chain

Zero-Knowledge Proofs

On the STARKS side, Israel’s STARKWARE is building an innovative solution that can batch thousands of off-chain transactions without the need for a trusted setup. Also, keep an eye on Matter Labs and their SNARK-based “roll-ups.”


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ShapeShift Stories: Sharing cryptocurrency education, news, and inspiration.

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ShapeShift Stories: Sharing cryptocurrency education, news, and inspiration.

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