An efficient blockchain ecosystem should be secure, decentralized, and scalable. However, in reality, networks like Ethereum and Bitcoin lag during payment transactions. This lag leads to limitations in network scalability.
Blockchain transactions take place across the decentralized network. Here, the base layer, known as Layer 1, works as the security layer of the network. This layer has technical limitations that impact the processing of several transactions per second.
This issue is certainly harmful to the long-term growth of such cryptocurrencies. To solve this problem of scalability, Layer 2 solutions can increase the much-needed throughput of blockchain systems.
If you are interested in using the crypto network, these details will prove beneficial.
Why Does the Blockchain Ecosystem Need Layer 2 Solutions?
A blockchain network consists of multiple layers. Layer 1 is the base or root layer. Above this layer, the following extensions prove vital:
- Payment channels
- Decentralized Applications
To reduce the load on Layer 1, these solutions create a secondary framework. Hence, these solutions are also known as off-chain.
Layer 2 solutions can separate the operations on the blockchain ecosystem. In other words, Layer 2 solutions:
- Offer high throughput
- Can perform off-chain computation
- Increase speed of blockchains
With an additional layer in the network, the root layer can serve the function of providing security. On the other hand, blockchain transactions can take place independently in layer 2.
Working Of Layer 2 Solutions
The primary function of layer 2 solutions is to reduce the additional burden of transactions from layer 1.
Layer 2 solutions do not cause any structural changes in the network. This layer inherits the security from the base layer.
Consequently, the data stored on layer 1 gets distributed. Layer 2 works by cutting down data processing from the blockchain network.
The transactions, importantly, are still anchored to the base layer. Hence, in case of any disputes, Layer 1 will take the final call.
Types Of Layer 2 Solutions
Predominantly, layer 2 solutions are classified as:
- Optimistic Rollups
- Zero-Knowledge (ZK) Rollups
These types have subtle differences that make them suitable for different cryptocurrencies.
These rollups or extensions run on layer 1 of Ethereum. They gain security from Ethereum’s main chain.
Optimistic rollups are slow in transaction speeds compared to zero knowledge rollups. They rely on external validation to check Merkle roots.
Overall, optimistic rollups support several smart contracts to run efficiently on the Ethereum network.
Zero-Knowledge (ZK) Rollups
These rollups contain off-chain data storage for computing purposes. These layer 2 solutions can perform a considerable amount of 2000 transactions per second.
They are faster than optimistic rollups as they request data from smart contracts less frequently. ZK rollups enable all transaction states to stay on layer 2.
Like optimistic rollups, they inherit security from Ethereum’s main chain. ZK rollups can be integrated into:
- Aztec 2.0
Blockchain scalability using layer 2 solutions are prominently implemented in:
- Ethereum Plasma
- Bitcoin Lightning Network
The Ethereum Plasma is a tree structure of an unlimited number of child chains by using:
- Merkle trees
- Smart contracts
These child chains can be customized according to the network requirement. They are independent of the main chain and allow scalability as needed.
The child chains in a Plasma network have their roots to Ethereum’s main chain. Importantly, each child chain has a distinct validation mechanism.
Benefits Of Plasma Chain
- High throughput
- Low capital requirement
- Improvement in scalability
- High flexibility
Limitations Of Plasma Chain
- Limited to basic transactions
- Lengthy chain withdrawals
Merkle Tree and Smart Contract
A Merkle tree structures a massive amount of data in a blockchain to make it easier for processing. In the case of cryptocurrency, this tree reduces resource demand by structuring and organizing transaction data.
A smart contract is a program that creates trustless protocols. They eliminate the requirement of intermediaries during any blockchain transactions.
Bitcoin Lightning Network
This layer 2 solution enables an improvement in payment transactions on the Bitcoin network.
Bitcoin lightning network has separate nodes but stays connected with the main chain. Users need to create special transactions to utilize the lightning network.
One of the best layer 2 solutions, the lightning network, transfers transaction bundles from the root layer to the off-chain. Importantly, this solution can reduce Bitcoin transaction time drastically.
Benefits Of Bitcoin Lightning Network
- Cross blockchain swapping
- High scalability
- Quick payment speed
- Fast processing pace
Limitations Of Bitcoin Lightning Network
- Limited usability
- Increased risk of censorship
- Needs some technical knowledge for operating
Ethereum Layer 2 Scaling Solution Providers
Currently, several layer 2 solution providers use different rollups to enhance Ethereum’s network.
Some prominent names of these providers are:
- Offchain Labs
Decentralized app development is one of the biggest benefits to developers from the above scaling solutions. Importantly, some of the above providers have products that improve the scalability of the Ethereum network.
What Are Sidechains?
Unlike rollups, this scaling solution combines layer 1 and layer 2 elements. Sidechains do not anchor to layer 1 for security purposes. They have unique security characteristics.
Polygon is a well-known layer 2 solutions based on sidechains. It doesn’t need to interact with layer 1 or the main chain. This solution uses plasma nodes for a deposit bridge.
Arbitrum and Celer are other well-known hybrid layer 2 solutions. Moreover, sidechains run parallel to the main chain. They are decentralized and depend on distinct consensus mechanisms.
With a rise in the user base of cryptocurrencies, it is vital to improving their transaction speeds. Layer 2 solutions enable blockchain developers to develop an improved and scalable network.
The Bitcoin lightning network has shown promising results as an efficient and low-cost layer 2 solutions. Due to an increase in scaling solution providers, users can expect better-operating speeds and security. Most of the layer 2 scaling solutions are still under development. However, their utility isn’t constrained at all.
A fluent implementation of layer 2 solutions can reduce load and congestion on blockchain networks. Hence, the rising demands of cryptocurrency need this additional layer as a catalyst for a better user experience.