Blockchain technology has forever changed the manner in which we think about and engage in digital transactions through a secure, transparent, and decentralized ledger system. With increasing demand, however, blockchain applications come across an extremely critical challenge: scalability. Scalability- The ability of a blockchain network to process an increasingly large number of transactions efficiently without compromising speed or security. Layer 2 solutions are one promising way out. Here, we will be discussing various Layer 2 solutions for the methodology, benefits, and potential impact on blockchain scaling.
Definition of Blockchain Layer 1 and Layer 2
Before considering solutions to Layer 2, a prerequisite for understanding what one is getting into is knowledge of the difference between Layer 1 and Layer 2 in blockchain.
Layer 1 is the underlying blockchain protocol, which could be Bitcoin or Ethereum. Those networks have a lot of limitations in terms of their speed and capacity. Bitcoin can process maybe around 7 TPS; Ethereum can handle about 30 TPS. Generally speaking, these networks tend to get bottlenecked when demand picks up with significantly higher transaction fees and confirmation times.
Layer 2 solutions are built on top of Layer 1 blockchains in order to scale the latter. They essentially facilitate the possibility of off-chain transactions which are then settled later onto the main blockchain. This way, Layer 2 solutions can somewhat significantly increase the amount of transactions that can be processed per unit of time while keeping costs and congestion low on the underlying blockchain.
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Types of Layer 2 Solutions
There have been different Layer 2 solutions developed, each of them tapping on a different mechanism to increase scalability. These include the following:
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State Channels
State channels enable the execution of transactions by the participants off the central blockchain. Only the result of these transactions is stored on-chain, thereby significantly reducing the transactions that must be processed by the underlying network.
How it works
Participants create a side channel by opening a multi-signature wallet, pledging part of their cryptocurrency as collateral.
Transactions take place off-chain, and the balance for each participant can be updated without having to broadcast each transaction to the main chain.
At the time of closing of the side-channel, this final state is written to the blockchain.
Advantages
In terms of immediate confirmation of transactions
Less expensive, since most of the transactions occur off-chain
Less burden on the central blockchain
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Plasma
Plasma is an application-level blockchain platform, sitting on top of Ethereum. This creates child blocks-or “plasma chains”-that operate autonomously, but still are secured by the main Ethereum chain.
How it works:
Plasma chains can handle enormous transactions. Periodically, these transactions are batched up and sent into the central Ethereum blockchain.
Users can withdraw from the plasma chain back to the main chain at any time they want.
Benefits:
More scalability in the case of processing transactions on child chains.
More privacy in the sense that it can perform transactions off-chain without causing any impact on the main chain.
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Roll up
A layer 2 scaling solution known as Rollup, where multiple transactions are rolled into a single transaction. The two predominant types are Optimistic Rollup and ZK Rollup.
Optimistic rollups are constructed based on the idea that by default, transactions are valid. Calculations are made only in case evidence of fraud is filed in.
Zero-knowledge proofs validate transactions, which increases speedy verification without the details of the transaction within it.
Advantages
ZK-Rollups definitely have a high increase in throughput, even up to thousands of transactions per second.
Gas fees can be reduced with transaction batching.
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Side chains
Side chains are independent chains that operate in parallel with the parent chain and can interact with the parent chain. They allow for the transfer of assets off the parent chain, onto a sidechain.
How it works :
Asset holders can lock their assets on the parent chain, and receive an equivalent amount of assets on the sidechain.
Transactions on the sidechain, can take place independently of aggregation of the parent chain.
Advantages
Greater flexibility and scalability for selected applications.
Facilitates the testing of various types of consensus algorithms and governance models.
Advantages of Layer 2 Solutions
Layer 2 solutions offer many advantages that provide scalable solutions to some of the problems the Layer 1 blockchains experience:
A huge increase in transaction throughput: offloading the transactions from a central blockchain can help increase transactions per second in enormous amounts.
Lowering the transaction fees: There are fewer transactions fighting for space on the main chain hence can enjoy reduced fees allowing more people to access blockchain technology
Faster verification times: On the Layer 2, verification for transactions can be almost instant, so a better user experience in applications requiring an instant transaction such as games and micropayments.
Improved privacy: in most Layer 2 solutions, transactions are done with improved privacy as they either take place off-chain or in a manner that reveals minimal details on the public blockchain.
Interoperability: Through Layer 2 solutions, interoperability among different blockchains is made possible, that is seamless transfers and interactions of assets across different networks.
Challenges and considerations
While there are immense benefits with Layer 2 solutions, there are also challenges they come with that developers and users have to consider:
Security Risks: Off-chain mechanisms introduce security risks if the Layer 2 solution is not prudently designed.
Complexity: When deploying a Layer 2 solution, that happens to complicate the user experience and makes it less intuitive for new users to use.
Liquidity Issues: some of the Layer 2 solutions that experience liquidity issues. It complicates the exit of a customer from the main chain without accruing additional costs or delay.
Some of the layer 2 solutions may give up decentralization for scalability, and that would raise certain questions on the morality of blockchain technology in general.
Future of Layer 2 Solutions
As blockchain technology grows, Layer 2 solutions will become a significant aspect of the development of the decentralized technology of the future. They contribute to its growth in scalability, reduce costs, while increasing user experience, thus becoming an integral part of the blockchain ecosystem. Hence, we would expect better and more efficient Layer 2 solutions with further developments and innovations.
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Conclusion
Layer 2 solutions are about to revolutionize the way of breaking through the bottleneck of blockchain networks’ scalability. It scales up-to increase off-chain transaction throughput, reduces fees, and improves the experiences of users. The demand for blockchain applications makes the following crucial importance of Layer 2 solutions in the future of decentralized technologies grow in realizing the full potential of blockchain and mainstream adoption.
