What Are Layer 2 Solutions and Why Are They Important?
With the growth of blockchain networks, the consequent growth of transaction volume is often associated with congestion, higher fees, and lower throughput speed. Layer 2 solutions are now a key component in addressing these problems, enabling high-speed, low-cost transactions without a security and decentralisation cost as a consequence of their base blockchain (Layer 1). The main Layer 2 technologies are examined in this article along with their workings and real-world applications for enhancing blockchain scalability.
Scaling Blockchain with Layer 2 Solutions
Understanding Layer 2 Solutions
Layer 2 solutions are frameworks built on top of existing blockchains to handle transactions off-chain, reducing the load on the main blockchain (Layer 1). These solutions are not only scalable but also maintain the security and decentralisation of the network. Think of Layer 1 as a congested highway, in which congestion and high fees increase in proportion with the number of transactions. Layer 2 characterizes a better path with less traffic congestion, improved and more affordable backhaul, and better connections from the highway to ensure both connectivity and credibility.
Key Layer 2 Technologies
Rollups
Rollups are one of the most popular solutions in Layer 2. After off-chain transaction processing and compression into a single data set, they send the output to the main blockchain. This method inherits the security of Layer 1 while saving money. Optimistic rollups assume, without conflict, that the transactions are genuine. For example, Ethereum developers can launch decentralized applications (dApps) over at lower transaction cost and higher throughput using Optimism, among others. Analogy aside, Arbitrum maintains Ethereum tool portability while speeding up transactions and increasing confidentiality.
On the other hand, Zero-Knowledge (ZK) Rollups verify transactions with cryptographic proofs. This offers quicker finality and removes withdrawal delays. Examples are Starkware, which offers tools like StarkNet and StarkEx for creating safe and scalable dApps, and Loopring, which powers a scalable decentralized exchange with ZK Rollups.
State channels
How State Channels Layer 2 Solutions Work (Source: Transak)
State channels enable users to make off-chain (i.e., no on-chain transaction record to be compared) transactions privately, keeping only the final state on the main chain recorded. For example, the Bitcoin Lightning Network allows instantaneous microtransactions among users by providing payment channels to process final balances within the Bitcoin blockchain. Like, the Raiden Network is an Ethereum-based state channel proposal that allows rapid, cheap token transfers.
Side chains
Side chains are independent blockchains that are cryptographically linked to the main chain through a bridge. They operate separately, with their own consensus mechanisms. For instance, Polygon is an Ethereum side chain that can provide faster and cheaper transactions while keeping the Ethereum toolset. Akin to xDAI Chain, another case is a stablecoin-centered side chain for low-cost transactions and decentralized finance (DeFi) applications.
Off-chain computation
Off-chain computation is the process of performing computationally expensive operations off-chain, thereby improving scalability and minimizing cost. For instance, Chainlink Off-Chain Reporting (OCR) batch off-chain data in decentralized oracle networks, saving on-chain cost while ensuring data quality. Likewise, Cartesi offers a platform for computationally demanding dApps by taking advantage of off-chain Linux systems.
Plasma
Plasma splits the core blockchain into smaller chains (known as child chains) that can independently process transactions before sending the results back to the core network. For instance, the OMG Network leverages Plasma to achieve faster and cheaper transactions on Ethereum. Further, Polygon Plasma adopts the same framework with the same approach to enhance Ethereum’s transaction capacity by employing child chains.
Advantages and Challenges of Layer 2 Solutions
Because Layer 2 solutions facilitate faster transaction processing and lessen congestion, they greatly increase blockchain scalability. They also lower transaction costs, which increases consumers’ access to and affordability of blockchain networks. Additionally, they improve the blockchain network’s efficiency by shifting transactions and calculations from Layer 1.
Advantages of Layer 2 Blockchains (Source: CronJ).
Even with all of its advantages, Layer 2 solutions have drawbacks. They can be difficult to deploy since ZK Rollups and other similar methods require sophisticated cryptographic tools. Additionally, there is the potential for centralization, particularly for solutions that depend on a limited number of operators or validators. Furthermore, the adoption of some Layer 2 solutions may be limited since they may not completely support all of the characteristics of Layer 1, such as general-purpose smart contracts.
Conclusion
Layer 2 solutions are critical for the future of blockchain technology. By addressing scalability challenges, they enable faster, cheaper, and more efficient transactions while preserving the core principles of security and decentralization. With practical implementations like Optimism, Polygon, and the Lightning Network already in use, these technologies are driving innovation and making blockchain technology more accessible to users and developers worldwide.
