Layer 2 scaling solutions are a promising new direction in blockchain technology that promises to address the speed and scalability problems with Layer 1 blockchains.
The main goal of introducing blockchain technology through Bitcoin was to create a distributed ledger system that could record transactions transparently and decentrally. But as the blockchain ecosystem grew, it became clear that Layer 1 blockchains had severe constraints, including slow transaction speeds and scalability problems. All of these problems stem from the fact that each node on the network can’t keep track of every single transaction that takes place on the network.
These issues were addressed with the introduction of Layer 2 scaling solutions, which allowed for handling more transactions following validation on parallel blockchains. After that, they are moved to the main blockchain, where their record becomes unchangeable.
By providing more transactions per second, less gas fees, and the guarantee that all transactions are permanently recorded on the mainnet, layer two solutions improve the user experience. These solutions include Ethereum’s Polygon and Bitcoin’s Lightning Network. By offloading transaction processing to a parallel network, Layer 2 solutions have reduced mainnet congestion and eliminated the scaling issue plaguing Layer 1 blockchains.
Rollups are now a standard option among Layer 2 solutions. Optimistic rollups and zero-knowledge rollups are the two main categories of rollups. The two varieties serve distinct purposes, each with its own benefits. A wide range of alternatives is available to developers and consumers regarding Layer 2 scalability, including sidechains, state channels, plasma chains, nested blockchains, and caladiums, all of which have advantages and disadvantages.
Despite the obstacles, Layer 2 solutions are enabling the kind of transaction speeds and costs that are perfect for scaling the blockchain ecosystem, which will let this technology reach its full potential. Improvements in scalability, speed, and cheap petrol prices will propel advancements in blockchain technology, with a focus on Layer 2 and Layer 1 blockchains. New uses will emerge due to this development, expanding and diversifying the blockchain ecosystem.
How Can Layer-2 Scaling solutions Be Addressed?
Ethereum has played a pivotal role in driving the blockchain industry’s meteoric rise, whether as a medium of exchange or for utilizing its immutability for record-keeping and cryptographically secured nature.
However, Ethereum is now confronted with the scalability problem, as do many other blockchains. Approximately 30 transactions per second (tps) or half a million transactions per day (approximately) are processed by Ethereum as of summer. Ethereum pales in comparison to Visa’s payment system, which can handle 150 million transactions daily at 65,000 tps—a number that is orders of magnitude higher. When a blockchain reaches its limits, gas prices skyrocket, and network congestion sets in, making it possible for transactions to take hours to complete.
Now we reach Layer 2, the Data Link Layer (DLL). This approach addresses the scalability problem with blockchain by shifting transaction processing away from the Ethereum mainnet (Layer-1) and onto third-party networks. It does this while keeping the decentralization and security features of the Ethereum blockchain and reducing the strain on the mainnet.
Comparing Blockchains at Different Levels
In a blockchain system, the distributed database, or Layer-1, is the network that connects each node to the central database and implements the consensus procedures. In contrast to Ethereum’s Layer-1, which shifted to a Proof of Stake (PoS) consensus method during ‘The Merge’, Bitcoin’s Layer-1 is the Bitcoin network, which employs a Proof of Work (PoW) consensus process.
On the other hand, Layer 2 is a network that applies an overlay over the blockchain. As a Layer-2 solution, Lightning Network is what Bitcoin needs. Ethereum is the foundation for several Layer-2 networks, including Plasma, Polygon, Optimism, and Arbitrum.
What Makes Them Crucial?
When compared to other blockchains, Ethereum has some of the best network security and stability features. This blockchain is used for transactions and building projects by many people and businesses. But the network gets increasingly crowded as the amount of transactions grows.
To combat this, miners prioritize more outstanding gas fee transaction confirmations. However, consumers are stuck paying more for gas, which drives up the minimum price and sometimes makes a transaction unprofitable.
With Layer-2, the main net, the underlying network, can offload the processing of massive volumes of data to various third-party processing channels, with the outcome merely being recorded on the Layer-1 blockchain.
Layer-2 Scaling Solutions’ Benefits
The user experience and main net congestion can be enhanced with increased transactions per second (tps). All transactions are combined into one package to save gas costs before being recorded onto the mainnet.
Layer-2 solutions help keep networks secure because upgrades do not affect the blockchain. This is because Layer 2 is constructed on top of the blockchain.
Each is optimized for different requirements to make room for Layer-2 networks tailored to individual applications.
To fix the scalability problems with Layer 1 blockchains, developers have developed Layer 2 scaling solutions, which have many benefits. These technologies improve the customer experience by lowering gas expenses dramatically and increasing the number of transactions per second.
They accomplish this by recording many small transactions on separate blockchains and then moving them to the main blockchain to ensure the records cannot be altered. By removing the transactional load of the main net, this approach decongests it and fixes the scalability issue that Layer 1 blockchains experience.
By consolidating numerous transactions into a single mainnet transaction, rollups—a widely used Layer 2 scaling solution—offer a distinct benefit. Additional Layer 2 solutions are available, giving developers and users even more options.
Layer 2 Scaling Solutions’ Drawbacks
The leading blockchain can lose some of its liquidity. Users should conduct their due diligence before utilizing Layer-2 solutions due to the potential security and privacy issues. Might make it harder for apps built on Ethereum to communicate with one another.
There are certain downsides to Layer 2 scaling solutions despite their usefulness in fixing the scalability problems with Layer 1 blockchains. Layer 2 blockchain validators’ ability to perpetrate fraud is a significant cause for alarm. This risk is inevitable because Layer 2 scaling solutions use a different set of validators for processing transactions.
Also, while Layer 2 scaling solutions do an excellent job of decreasing costs and increasing transaction speeds, they sacrifice some decentralization. For example, because they employ a different consensus process, sidechains provide a less decentralized experience than the Ethereum mainnet, even though they share the same user experience.
The procedure of unplugging from Layer 2 solutions is another obstacle. For instance, plasma chains require multiple withdrawal days to permit arbitration claims, even though they can enable low-gas, high-speed transactions. Trying to get money out of fungible assets can contribute to the cost of capital.
Finally, remember that much processing power is needed to create and implement Layer 2 scaling solutions. For example, caladiums aren’t susceptible to cyber-attacks and have almost no withdrawal delays. Still, they’re expensive and don’t work well for low-throughput use cases because of how much computing power they demand.
Layer 2 scaling solutions are still getting much attention in the blockchain world and are evolving despite these limitations. They are fundamental to resolving the scalability trilemma and will be pivotal to the future expansion and diversification of the blockchain ecosystem. Therefore, it’s essential to keep working on them.