The scaling of blockchains has been a pressing issue that has hampered their mass adoption. Luckily, Layer 2 solutions are here to bring about improvements in the technology’s performance and help tackle some of its other challenges.
Blockchain has become a go-to tool for almost all industries and businesses that want to see fundamental transformation. This smart technology can bring multiple benefits, including reliable interactions, top security, immutable record-keeping, and a high level of decentralization. Therefore, it comes as no surprise that global spending on blockchain solutions is expected to reach $19 billion by 2024.
However every technology has some imperfections and pitfalls – and such is the case for blockchain, where the downsides include transaction speed and scalability issues. Is there any way out? There certainly is! Blockchain developers are hard at work creating novel and advanced solutions that will increase the technology’s capabilities and help it operate at full throttle. An example is Layer 2 (L2) which is by rights regarded as the most profound and efficient means of addressing the main chain’s issue and considerably boosting its performance.
In this article, we will delve into the key aspects of Layer 2 solutions and their major benefits as well as the most outstanding examples of Layer 2 engines. Let’s go!
What is Layer 2 and how does it differ from Layer 1?
Before we start looking into Layer 2 solutions, it is essential to provide a definition of Layer 1 and differentiate between the two notions and their specifics.
Layer 1 solutions are the core constituents of the network that convey the architecture of the main blockchain. They serve as pillars for other projects, allowing them to develop more advanced apps that could not be created otherwise. Bitcoin, Ethereum, Solana, Binance Smart Chain, Litecoin, and Polkadot are just some of the existing examples of Layer 1 solutions.
Layer 2 is a secondary protocol built on top of the existing blockchain network. It is focused on tackling the pressing issues that the main chain may experience, such as low transaction throughput and poor scalability.
Layer 2 has the ability to shoulder some of the burdens of the main chain by sending some data to different processing channels. It then reports the processed data back to the core blockchain protocol to finalize the results. Consequently, the underlying blockchain is less congested and much more scalable, which provides faster computation and delivery.
On top of this, a vast majority of existing Layer 2 platforms have been developed so that they allow the main chain protocol to remain unaffected. This means that when carrying out microtransactions, users don’t have to waste their time on miner verification or pay high transaction costs. Layer 2 platforms are commonly referred to as native blockchain catalyzers, capable of retaining the decentralization benefits of Layer 1.
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What are the advantages of Layer 2 solutions and who can benefit from them?
One of the most substantial benefits of Layer 2 solutions is that the underlying blockchain does not have to change its structure (code) since L2 will simply act as an extra layer. This, in turn, guarantees the improved security and protection of the main chain while ensuring greater throughput.
Another aspect worth highlighting is that Layer 2 platforms can contribute to better data privacy. Normally, the existing Layer 1 solutions (Ethereum, Solana, Flow, etc.) are fully public, meaning that all transactions conducted on those chains are transparent. Being in the know about what’s taking place on the network is good but some businesses would prefer to keep their sensitive client data private. In cases like this, Layer 2 comes as a real savior as it operates as an off-chain, private-by-default solution.
Layer 2 solutions can be of particular interest to enterprises and assist them in addressing pressing challenges like data locality, which has been a sore point with public blockchains. By leveraging L2 servers, enterprises can store information in a particular location accessible to a particular entity.
Notably, Layer 2 contributes to the development of highly scalable and usable ledger systems that can be applied in different industries and even go into competition with centralized systems.
Looking into the limitations of Layer 2 solutions
Despite their significant benefits, Layer 2 solutions have certain drawbacks.
First off, L2 can hamper the liquidity of the underlying chain. It comes as no surprise that the significance of liquidity cannot be overestimated since it helps build a viable and prosperous market. Ethereum, for instance, needs a liquid market to provide decent support to all its goods and tokens. However, once an additional layer is added, the liquidity of the blockchain is likely to suffer.
Apart from this, the platform’s users might run into unnecessary onboarding problems. Once an extra layer has been added, the L1 chain itself, along with its dApps, will need to make additional accounts. As a result, if funds are sent to several L2 protocols, the user might find it difficult to keep track of them all.
As you can see, the Layer 2 advantages do come at a cost. Nevertheless, Layer 2 is very helpful if the primary goal is to alleviate the transaction throughput burden of the main blockchain.
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What types of Layer 2 solutions are out there?
We can identify four types/approaches of Layer 2 solutions: zero-knowledge rollups, optimistic rollups, state channels, and sidechains. Now we will take a closer look at each of them.
Zero-knowledge rollups (ZK-rollups)
Zero-knowledge rollups, or ZK-rollups for short, are smart contracts capable of scaling the Ethereum network by processing thousands of transactions per second. By combining both on and off-chain processes, ZK-rollups are able not only to validate transactions much faster (compared to L1) but also contribute to lower gas fees. In addition, with ZK-rollups, all verifiers can be in the know about and operate with the same information without it being publicly revealed.
An integral aspect empowering zero-knowledge rollups to validate transactions more quickly and efficiently than L1 blockchains is Merkle Trees. These are an important mathematical structure enabling blockchains to guarantee that literally no one will fake on-chain record data where ZK-rollups are used.
Optimistic rollups are a type of Layer 2 construction that runs on top of Ethereum’s underlying layer. Compared to zero-knowledge rollups that make use of validity proofs, optimistic rollups are reliant on fraud proofs. This means that aggregators publish minimal information on the Layer 1 platform and assume (optimistically) that the provided data is correct. If the transaction being carried out is valid, the main blockchain is not required to do anything. In case someone does notice a fraudulent transaction, the optimistic rollup will perform a fraud proof and run the transaction’s computation with the help of the available state data.
One of the greatest pros of optimistic rollups is that they are EVM-compatible. This means that DeFi apps can deploy their protocols on rollups without having to change the initial underlying code. Yet, optimistic rollups have a downside: they tend to experience longer wait times and are more prone to attacks compared to ZK-rollups.
Proposed by Joseph Poon and Vitalik Buterin, Plasma is a Layer 2 framework for creating scalable apps that are based on a convergence of smart contracts and cryptographic verification. The Plasma solution allows for fast and relatively inexpensive transactions by transferring them from the main blockchain to a side chain. These chains are responsible for sending reports back to the main chain and interacting with it to deal with any emerging disputes.
State channels generally refer to Layer 2 constructions that possess highly robust privacy properties. Any update occurring on the channel needs to be digitally approved and signed by all network users. All actions are broadcast to the channel participants, while only opening and closing transactions are available to everyone.
State channels can facilitate smooth two-way communication between the underlying blockchain and off-chain transactional channels. They also considerably enhance overall transaction capacity and speed. Admittedly, state channels do not need to receive validation from L1 nodes – instead they make use of a multi-signature or smart contract mechanism.
Sidechains are completely separate blockchains, possessing their own consensus mechanisms (Proof-of-Stake, Byzantine fault of tolerance, etc.) and connected to the main net via two-way bridges. They are viewed as “small” blockchains that work independently from the main chain while running in parallel with it to add functionality and boost efficiency.
One of the most prominent peculiarities of sidechains is that they are able to work the same way as the main chains since they are predominantly predicated on the Ethereum Virtual Machine. This consequently empowers developers to run dApps on sidechains by simply deploying their code to those sidechains and installing Web3 API for interacting with the chain. On top of this, sidechains can also provide support for smart contracts and even run their own tokens.
Some experts claim that sidechains differ from Layer 2 solutions and belong to a separate category. The difference lies in their security mechanisms: Layer 2 solutions are normally reliant on the security of the main chain while sidechains possess their own security properties.
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Overview of top Ethereum Layer 2 solutions
As of now, quite a few sophisticated Layer 2 solutions have been developed. They have made inroads into the blockchain space, profoundly transforming the industry. Check some of them out below!
Developed by Offchain Labs, Arbitrum is a Layer 2 solution for Ethereum. It has been designed with the core purpose of enabling developers to run Ethereum transactions and Ethereum Virtual Machine contracts on a second layer without changing their code while making the most of Layer 2 functionality.
The Arbitrum platform employs transaction rollups to record transactions submitted to the Ethereum chain and perform them on an L2, while relying on Ethereum to guarantee the correctness of results. In this way, the Ethereum main chain sheds some storage and computational load and can focus more on working with L2-powered dApps.
Essentially, Arbitrum helps address the current issues with Ethereum smart contracts, namely inadequate efficiency coupled with relatively high execution costs, which have resulted in a negative user experience.
As for its native token, Arbitrum does not have one and, as of now, has not expressed interest in launching it.
Echo is an advanced Layer 2 network that easily integrates with existing blockchains to provide great network interoperability and advanced scripting features for crypto assets. It offers a new level of peer communication, enables high-speed asset transfers, and empowers developers to orchestrate high-performing and user-friendly dApps with the ZK rollup bridge connecting to leading protocols.
The Echo platform has been developed with the purpose of delivering top performance and more sophisticated use cases. It seeks to accomplish these objectives with the help of SVP bridges that provide for liquidity transfers and bring assets from other chains and rollup bridges with incentivized state uploads that assist in scaling non-monetary transactions for future Ethereum dApps.
On top of this, Echo establishes a convenient environment for smart contract development, integrating both the x64 and Ethereum Virtual Machines. The two functionalities together enable complex data structures, algorithms, and calculations, utilizing any programming language and 3rd party library required for implementation.
Another prominent feature worth highlighting is that the Echo blockchain comes with Ethereum and Bitcoin sidechains. This innovative functionality allows developers to create top-performing DeFi solutions on the high-liquidity protocol and introduce customary contracts into the Bitcoin chain.
Noteworthy is that Echo possesses its own native token, called ECHO, which grants its holders the right to take part in the protocol governance and is used as a type of gas fee currency.
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Previously known as Matic Network, Polygon is a Layer 2 blockchain scaling solution that has been developed to help Ethereum gain wider traction. The platform supplies developers with the tools and elements needed to deliver highly scalable dApps that feature top-notch performance, a great user experience, and a high level of security.
Polygon relies on its own Proof-of-Stake consensus mechanism called Commit Chains and More Viable Plasma solution (or simply MoreVP). Currently, it predominantly utilizes Commit Chains that are capable of handling multiple transactions. It is believed that Polygon has the potential to operate with thousands of chains scaling together to boost total throughput.
The Polygon team is always on the lookout for new features that will make their solution even more robust. For example, at the end of 2021 Polygon launched a new ZK-rollup solution called Miden which relies on zero-knowledge STARKs, a type of cryptographic proof technology able to validate data or computations without actually exposing them to a third party. On top of this, in January 2022, the project’s co-founder stated that Polygon has achieved new speed and scalability milestones with its Plonky2 technology, which could be a breakthrough for Ethereum throughput.
Polygon also has a native token called MATIC that can be used across the entire Polygon ecosystem. MATIC holders can participate in network governance and contribute to the platform’s security.
Launched in 2018, StarkWare is a crypto project leveraging ZK-rollups (ZK-STARKs) to scale the Ethereum network.
Scalable and transparent, STARKs are cryptographic proofs introduced by Eli-Ben Sasson. They make use of lightweight cryptographic hash functions, which contribute to their high speed and post-quantum security.
For greater scalability capacity, StarkWare offers an app-specific scaling solution called StarkEx, based on STARKs. StarkEx is being used to power multiple top platforms such as decentralized exchanges dYdX and DeversiFi.
In November 2021, the StarkWare team launched StarkNet – their long-awaited Layer 2 network. The solution has been described as a “permissionless decentralized rollup operating as an L2.” StarkNet is also said to provide dApps with unlimited scale for computation without undermining the composability and security of the underlying Ethereum. Its key feature is that it promises to reduce Ethereum’s gas fees by approximately 100 times.
Immutable X is the first-ever Layer 2 scaling solution developed specifically for Ethereum-powered non-fungible tokens (NFTs). It grants its users almost instant trade confirmation, the ability to process around 9,000 transactions per second, and zero gas fees. The platform’s primary goal is to contribute to more effective and trouble-free minting and trading of NFTs. Immutable X leverages a ZK-rollup that enables transactions to be processed off-chain, boosting transaction speed and reducing gas fees.
Instead of competing with Ethereum, this Layer 2 solution leverages the power and security of the main chain. With Immutable X, developers can create advanced NFT projects without compromising on the liquidity and general performance of Ethereum.
One of the most attractive features of Immutable X is that it’s absolutely free to use – no matter whether you are a consumer or a developer. Bear in mind, though, that outside apps can charge their own fees.
Recently, Immutable X partnered up with Mintable, the next-gen NFT minting platform and marketplace. The new Layer 2 NFT solution will help tackle gas and scaling limitations for NFT traders on the Mintable marketplace and pave the way for mainstream adoption.
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Layer 2 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 still 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 Eth 2.0 to run in parallel with Layer 2 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.
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