Layer 2 blockchain network refers to the secondary protocol or network that is designed and built on top of an existing layer 1 network with an objective to improve the transaction data processing efficiency of the latter and make it more scalable.
In this guide, we have outlined the main drivers of the scalability issues and popular layer 2 solutions developed to tackle them. Let’s get started.
Introducing Layer 2 Blockchain Solutions
Before taking a direct dive into the layer 2 solutions, it is important to first have an understanding of what layer 1 is. To put it in the most simple terms, layer 1 is the base layer of the blockchain network responsible for validating and finalize transactions, as seen with Ethereum.
When layer 1 networks are designed, the emphasis is put to achieve decentralization, security,data availability and scalability. However, due to no central authority in the action, the layer 1 networks are put into an obligatory situation to have “security” and “decentralization” at the top of the list.
This priority in the design compromises the scalability element and slides it to the bottom of the list. The inability to balance decentralization, security, and scalability on the same scale is the flaw of the blockchain technology, a phenomenon known as blockchain trilemma.
For this purpose, layer 2 solutions have been introduced that take care of the “scalability” element.
Blockchain’s Scalability Problem
The rising popularity of layer 1 networks like Ethereum has invited more users to the decentralized ecosystem but has paved the way for scalability-related problems to emerge.
With more users boarding the ship, the Ethereum network has reached its current capacity of observing 1.5 million transactions a day, not to forget that the TPS (transaction per second) capability is limited to a meagre 15 TPS only.
The amount of requests made to the smart contracts and dapps on the Ethereum network exceeds the current technical capabilities leading to network congestion and a situation where the transaction fees have skyrocketed, affecting the overall user experience.
With high transaction fees, an average user becomes incredibly limited in interacting with any decentralized exchange or other dapps. Since the core mission of DeFi is to bank the unbank and make finance permissionless, the plan has gone a little off course.
The Ethereum network is undoubtedly decentralized and secure but has failed to accommodate the “scalability” component, owing to a larger onboarding of the users but most importantly- blockchain trilemma.
Types of Layer 2 Scaling Solutions
There are different types of layer 2 solutions in the existence and you must be probably wondering why? This is essential for two reasons:
Not to have any overdependnecy on a single solution
Prevention from the potential collapse of a single part of the network
Irrespective of the type of the layer 2 solution, all of them pursue the common objective to scale the layer 1 network by enabling high transaction speed and transaction throughput (higher transactions per second), enhanced transaction throughout, and lower transaction fees.
With the help of the layer 2 solution, the layer 1 blockchain networks may outsource thousands of low-value transactions to be settled in adjacent blockchains, and the transaction data availability information is transferred to the main layer to be recorded immutably.
Here are some different types of layer 2 solutions you can check it out.
Rollups
A part of Ethereum’s scalability initiatives, rollups allows bundling or rolling, up a number of on chain transactions into a single transaction data. They execute transactions outside of layer 1 and transfer the data back as one transfer. As the transaction data is codified into the main network, they benefit from the robust security of the base blockchain network.
Zero-knowledge rollups: does processing off-chain, and submit the data as a single transaction with proof of validity to the main blockchain.
Optimistic rollups: process data via fraud-proof protocol, where every transaction is assumed valid by default but can be challenged if it is suspected to be ingenuine.
This way, rollups may help increase the transfer speed and keep the costs low.
Plasma
The plasma frameworks enable the creation of an endless stack of “child” chains, essentially the copy of the main chain. These chains are anchored to the base layer and execute transactions off-chain via their own block validation processes, and subsequently offload the traffic and congestion from their parent chains. They connect through a base contract recording the current state of the network and laying out the rules for child chains.
State Channels
A state channel facilitates a conversation with the base layer and a transactional chain to improve transaction capacity and speed. Through state payment channels, two participants can lock up their funds, and trade with a virtual version of their funds on an off-chain network that is much faster. After an x amount of transactions, parties can enter the settled transaction into the main channel. Bitcoin’s Lightning Network is one of the biggest examples of state payment channels.
Can Layer 2 Solutions Solve Scalability?
Layer 2 solutions have been successful in scaling the layer 1 networks by pushing the speed and transaction throughput beyond the existing potential. All of this while keeping the safety and decentralization characteristics of the layer 1.
However, there are some security risks and trust assumptions that need attention because this technology innovation is still in its nascency. Despite inheriting the security of the layer 1 network, the layer 2 solutions can be labeled safe only if fraud proof is enabled, which is not at the time of writing this guide.
Nevertheless, with so much innovations and diversity in the layer 2 solutions, it is expected that along with solving the scalability issues, the concerns related to security shall be taken care of as well.
