These are solutions designed to simplify the scaling of a given network/ecosystem by processing transactions outside the core network. At the same time, they maintain the highest security and decentralization measures as the main network. The solutions proposed by network 2 increase the speed of transactions and, for example in the case of Ethereum, reduce gas fees.
The proposed Layer 2 solutions are significant. They allow for increased scalability and throughput, while maintaining the full integrity of the blockchain. They provide full decentralization, security and transparency.
It probably won’t surprise you if we say that the ecosystem that most often uses Layer 2 solutions is Ethereum. Bitcoin also has such a solution, and it is the Lightening Network.
The layer acts as an additional ‘layer’ to the already existing blockchain. The first Layer 2 was actually born on the Bitcoin and Litecoin blockchains with the Lightening Network and then on Ethereum via the Raiden Network, the equivalent of the Lightening Network for ETH.
Layer 2 acts as an overlay on top of an already existing and established blockchain that encounters new problems to which the main blockchain (Layer 1) cannot respond effectively enough.
For example, in the case of Bitcoin: transactions are slow, with an average block creation time estimated at 10 minutes per block and the ‘likely’ finality of a transaction being around 20 minutes (2 blocks) to 60 minutes (6 blocks), in addition, the average transaction cost can exceed $1 to $5 per transaction, making Bitcoin unsuitable for micropayments.
In the case of Ethereum: the problem is quite similar with a block time of 13 seconds, but the finality of the transaction in general ~ 2 to 7 minutes, i.e. 10 to 35 blocks, depending on the security, the transaction should be considered ultimately valid. Furthermore, Ethereum transactions cost several or even tens of dollars in case of network congestion.
It can be said to be overpriced and slow. This is the price of having a secure and decentralized network.
The most important layer two solutions in the history of Blockchain
Two prime examples of older Layer 2 solutions are Lightning Network and Ethereum Plasma.
Although they have their own operating mechanisms and peculiarities, both seek to increase the bandwidth of blockchain systems.
On the Bitcoin blockchain, Lightning Network relies on ‘state channels‘. These are channels that perform operations outside the Bitcoin blockchain to relieve the network of excessive demand and increase transaction processing time on the network to then resolve transactions and register them on the blockchain.
On the Ethereum blockchain, Plasma consists of secondary blockchains attached to Ethereum (such as the OMG Network or Polygon). This kind of phenomenon now allows Ethereum to be the most diverse ‘Layer 1’ blockchain, as its blockchain projects are diverse and varied.
“Layer 2 ‘plasmas’ can serve several purposes:
∙ Reducing the bandwidth of Ethereum traffic
∙ Bridging to other blockchains
∙ Creating new processes
∙ Diversifying the Ethereum ecosystem
∙ Securing the Ethereum blockchain
Layer 2 can also be referred to as ‘off-chain scalability solutions’.
One of the main advantages of using off-blockchain solutions is that the main blockchain does not have to undergo any structural changes, as a second layer (layer 2) is added as an additional layer.
Layer 2 solutions therefore have the potential to achieve high throughput of operations without sacrificing the security of the main blockchain network.
If every change made by Layer 2 was automatically integrated into the main blockchain, this would cause an inevitable security problem.
If there is a security problem at Layer 2, ecosystem users can avoid it until a solution is found. Which could not be considered for a hybrid Layer 1 – Layer 2 approach.
Dividing the ecosystem into several layers also allows, in the case of Ethereum, to provide several aspects of the blockchain without burdening the network.
Ethereum takes care of the security of the network, while most of Layer 2 makes Ethereum more interesting and competitive, offering higher performance than Ethereum would offer without Layer 2.
Layer 2 – types
1. Sidechains. This is the most popular form of scaling a given ecosystem, but also the least optimal. It involves the introduction of a sidechain that has its own structure and consensus. It is bidirectionally linked to the main network. This allows us to transfer assets from one chain to another. However, we cannot take this literally. So how does it work? Assets are blocked on the main
chain and then bumped to the sidechain in a 1:1 ratio. Transferring assets to the core network involves burning them on the sidechain and unblocking them on the main network. The sidechain has its own miners and validators.
2. State Channels, which are similar to Bitcoin’s Lightning Network in their functionality. They support payments and all kinds of updates to the respective ecosystem. Literally translated as ‘State Channels’. They are an off-chain system for sending transactions. As a user, you lock part of the state of a given chain into a multisig contract and then transfer tokens between each other. Everything takes place outside the main chain, but according to its rules. Only the final state is sent to the main chain.
3. Rollups. The newest and most widely used layer two. There are two types of rollups – ZK-Rollups and Optimistic Rollups. Transactions occurring in this layer are literally wrapped in bundles of several transactions at the same time. They take place on the main chain, but all the calculations necessary for its execution take place off-chain; i.e. off-chain. This maintains maximum security, higher throughput, and lower costs.
Summary
The use of layer two solutions is becoming increasingly popular. Already, even some NFT games need such a solution in order not to empty the wallet during the game. Layer two, if only cryptocurrency adoption grows, will be an inseparable part of the whole ecosystem.
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