What are Layer 2 Blockchain Solutions?
|— Scalability is a defining issue for the future of cryptocurrencies.|
— Many early blockchains like the Ethereum and Bitcoin networks were not designed to handle the volume of traffic they now support.
— Layer 2 blockchains are subsidiary blockchains built on top of those underlying networks that enable faster, cheaper transactions.
— This opens the door for new blockchain applications, and increase the efficiency of the system as a whole.
Bigger, faster, better – are we talking about the latest blockbuster? No! We’re talking about humble old blockchain and its quest to keep up with the ever-increasing amount of activity on its network. Today, let’s take a look at layer 2 blockchains – and how they’re enabling existing blockchains to scale.
Blockchain has driven an incredible raft of innovation, all based on just one simple premise: The ability to move value around autonomously. But despite its evident utility, blockchain is facing some real-world limitations. Unfortunately, that’s down to one big problem: it’s not designed to scale.
Transactions on older networks such as Ethereum or Bitcoin are notoriously slow and expensive for users, problems that accelerate as more people use those networks. This makes them impossible to use on a mainstream basis. So how can the utility of blockchain be brought to bear on a larger scale?
Well, improving a blockchain’s scalability also impacts its security and decentralization. As such, layer 2 blockchains employ different methods in order to scale their parent networks. But before we dive into the details, let’s learn the basics:
What Is A Layer 2 Blockchain?
A layer 2 blockchain is a network that aims to scale its parent network by handling part of the blockchain’s capabilities with a secondary chain. There are a few different layer 2 scaling solutions and each of them have their advantages and disadvantages. But what is the point of a layer 2 blockchain anyway?
What Is a Layer 2 Blockchain For?
The Problem With Layer 1 Blockchains
The two most obvious examples of a Layer 1 network are Bitcoin and Ethereum. These blockchains are base networks – they handle every aspect of every blockchain transaction on-chain and without assistance from any other network.
But this makes transactions on those blockchains extremely heavy and slow. Every single new blockchain transaction must be validated by the network. Then, before a new block is added to the chain, it must be checked against the entire history of the network. There are no shortcuts in layer 1 blockchains.
Scalability is the ability of a system to handle increased load or traffic. In the context of blockchains, it is the ability to process more transactions per second (TPS) in order to meet the growing demands of users, something that layer 1 networks really struggle with.
A good analogy would be to imagine adding bricks to a pile – only, instead of adding each new brick to the top of the pile, you’re adding it to the bottom. To add a new brick, you have to pick up all of the existing bricks. Plus, that pile is constantly growing and becoming heavier, and there is also more demand than ever for new bricks to be added. So each new add becomes a heavier, slower job. On one hand, the sheer computational power required to complete this process is what keeps the network – and your crypto – secure. But on the other hand, it renders the system totally impractical for day-to-day use.
Essentially, that’s exactly how blockchains work, and how they can become slow and congested.
Why Does It Matter?
To give you some idea of how limiting this system can be, let’s look quickly at Bitcoin.
The Bitcoin blockchain can process a maximum of 7 transactions per second, which might seem pretty fast. But by comparison, the Visa network can process an enormous 24,000 transactions per second – this is why it is able to function as a global payments system. Looking at these two networks side by side, it is clear that Bitcoin (and similar layer 1 blockchains like Ethereum and Binance Smart Chain) is simply not capable of being used universally – it doesn’t have the capacity.
This is where Layer 2 solutions are pushing things forward.
How Layer 2s Scale Blockchains
Layer 2 blockchains are so-called because they sit as a second layer on top of a base mainnet.
Layer 2 have one main purpose: to allow the network to process more transactions per second. Accordingly, they move transactions off of the heavy mainnet. Different layer 2 solutions achieve this in slightly different ways, but the objective is always the same: streamlining the amount of information that needs to be validated by cumbersome underlying blockchain.
There are a multitude of layer 2 blockchain solutions and each of them have their advantages and disadvantages.
Types of Layer 2 Blockchain
There are several types of layer 2 blockchains, but some of the most popular are; sicdechains and rollups. These differ slightly in their execution, and it impacts how the entire network works.
Sidechains are independent blockchains that have their own consensus mechanisms and then connect to their parent chains via a two-way bridge. This blockchain bridge allows the transfer of assets between the two. In short, the layer 2 network can execute transactions cheaper and faster, but they also have a connection to the parent chain. This allows the user to bridge their assets back and forth and benefit from the transaction speed a separate chain can offer. While that’s a simplification, make sure you check out our article on what a sidechain is to find out the details.
Blockchain rollups are another type of layer 2 solution that involves pushing multiple crypto transactions together in one block. This means they are processed in a single transaction, which reduces fees for the user, but also saves data space on the blockchain, which can otherwise cause network congestion. There are two main types; Optimistic and ZK Rollups. Both rollup types consolidate transactions, but some methods are more decentralized than others. Optimism is a great example of a chain that uses optimistic rollups to scale Ethereum.
Popular Layer 2 Blockchains
Bitcoin Lightning Network
Bitcoin Lightning Network uses “channels” to create a peer-to-peer payment route between just two actors. To explain, these channels exist separately from Bitcoin’s mainnet and their primary purpose is to allow for extremely fast transactions between two parties. So how does this work?
Basically, if you’re transacting with the same entity repeatedly, you can simply open a channel containing X amount of Bitcoin and transact freely with that recipient. It’s sort of like topping up a store card: you can continue transacting until your crypto is spent.
They key point is: All of this happens off-chain. Once you close the channel, the Lightning network communicates this to the Bitcoin mainnet and adds the transaction to the chain in one go.
How does that look IRL? Say you go to the same supermarket every day, and want to pay your groceries in Bitcoin. You’d simply open a “channel” with that supermarket using some Bitcoin. From there you can make instant payments to the supermarket as you would with a debit card. Then, when you close the channel, the supermarket’s system would process all of your transactions together.
And that’s exactly how the Lightning network works. The bottom line? Using this system allows the throughput of Bitcoin transactions to increase from around 7 per second to roughly 1 million per second.
Polygon is a popular layer 2 blockchain built upon Ethereum. More specifically, Polygon is actually a sidechain of the Ethereum network. In short, it allows for faster and cheaper transactions than its parent blockchain. Polygon is popular with lots of DeFi projects and NFTs as it reduces the cost of deploying smart contracts significantly. Since the Ethereum gas fees can skyrocket when the network is busy, the polygon network offers users a good alternative for those wanting to execute small transactions quickly.
Today, even big brands such as Starbucks use the polygon network for their web3 ventures.
Why Are Layer 2 Blockchains So Important?
Lower Cost and More Efficient for Users
For users, these blockchains are dramatically faster and cheaper to use. Keeping the nuts and bolts of low-value transactions off-chain means users can trasfer assets quickly and with minimal network costs.
Broader Blockchain Utility
By facilitating transfers of value that are fast and efficient, layer 2 solutions open up broader possibilities for blockchain application. A great example of its possible impact includes El Salvador, where Bitcoin is legal tender. To illustrate, this would not have been possible without the speed and efficiency of the Lightning Network.
Relieves the Mainnet
Layer 2 solutions don’t just benefit their users, but also the crypto ecosystem as a whole. With large segments of the network activity handled off-chain, congested mainnets are relieved of much of their traffic. This means a faster, more efficient system for transactions on the parent network. Plus, users pay lower transaction fees than they would on the parent chain too.
Layer 2: Paving The Journey To Mass Adoption
The limits of Layer 2 solutions are still being established, but the broad picture is clear. Layer 2 blockchains offer a practical way to manage smaller crypto value transactions, without compromising a parent chain’s underlying security. Simply, they use creative approaches to handling transaction data, which saves the user time and money. But Layer 2 blockchains are just one example of the web3 innovation taking place.
With developers constantly seeking solutions to the big issue of scalability, broader application for blockchain technology seems inevitable. So make sure you understand the different blockchains so you can stay ahead of the curve. You may even save yourself some transaction fees in the process.
Knowledge is power.
Want to know more about Layer 2 blockchains and what they’re bringing to the crypto experience? Check out our School of Block episode right here!