What Is Layer 2?
Layer 2 is a term used in blockchain circles when talking about solutions that help scale an app by processing transactions off the main blockchain network, called the mainnet or Layer 1. A Layer 2 blockchain solution acts as a scaling solution while at the same time retaining the same security and decentralization as the mainnet.
The primary purpose of a Layer 2 solution is to increase the transaction speed, called throughput, and reduce network fees, called gas fees, on the Ethereum network. There are numerous examples of successful Layer 2 solutions in the blockchain world.
Layer 2 Blockchain Examples
Some of the most common Layer 2 blockchain examples are given below which use Layer 2 protocols blockchain.
The Lightning Network is a primary Layer 2 protocols blockchain designed to enhance the transaction process of Bitcoin. It has solved the scalability problem of Bitcoin by speeding it up. It is a micropayment solution that solves the issue of limited block size.
Plasma is a Layer 2 solution designed for Ethereum and can be considered a substitute for the lightning network on Ethereum. It was proposed by Vitalik Buterin and Joseph Poon. It uses smart contracts and cryptographic verification to speed up transactions.
Optimism is a cost-effective and super-fast Ethereum Layer 2 solution. It is open-sourced, secured, and decentralized with an on-chain value of $800M +. It is equivalent to Ethereum Virtual Machine (EVM).
Arbitrum is also a Layer 2 solution for Ethereum that was launched in 2021. It is designed for Ethereum and adopted by some big names such as Uniswap, AAVE, and balancer.
Starknet is a decentralized and permissionless Layer 2 solution that works on the Ethereum blockchain. It is easy to deploy and supports scale as well.
What is Blockchain Scalability?
Layer 2 solutions exist to solve the problems of blockchain scalability. In an ideal setting, a blockchain would process unlimited transactions per second or throughput. However, the Bitcoin network can only handle up to 7 TPS. To deal with these issues, developers create solutions that expand the capabilities of the blockchain. The result is that more transactions can be processed per second.
Scaling is critical because it allows blockchain networks to compete with existing networks. Existing centralized networks can provide quicker settlements at scale, which could affect the adoption of blockchain networks by the masses. Layer 2 scaling solutions have emerged as one of the best fixes to this problem.
Types of Layer 2 Solutions
There are numerous types of Layer 2 solutions. The main ones are sidechains, channels, and rollups.
Sidechains are built as separate blockchains, which run parallel to the mainnnet. With a sidechain, the users do not use the security of the mainnet. Instead, they have their consensus mechanism. As a result, some blockchain experts view them as less secure.
An excellent example of a sidechain is Polygon, which is designed as a Layer 2 scaling solution for creating Ethereum-compatible blockchains. It features a native token called MATIC that is used to pay gas fees, for staking, and governance.
Channels are a Layer 2 scaling solution that reduces load and transaction costs on layer-1 by allowing users to transact a set number of times off-chain and submit these transactions to Layer-1.
A good example of Channels is the Celer Network, which is a system that runs on top of existing and future blockchains. It uses off-chain scaling, which helps developers create, operate, and use highly scalable DApps. Another example is the Bitcoin and Litecoin Lightning Network. These are off-chain challenges that allow transactions to be settled faster and cheaply.
Rollups are a Layer-2 scaling solution that executes transactions off the Layer-1 networks and posts the transaction data to the mainnet. Since the transaction data is on Layer-2, these solutions are secured using Layer-1 security.
A good example of Rollups is Optimism, which orders transactions that can then be auctioned off to other parties for a set period. These parties are known as Sequencers and Verifiers. Sequencers run transactions on Layer-2 and submit the data to Layer-1. Meanwhile, Verifiers are nodes whose role is fraud proofing. They achieve this by comparing the new state root to the one a Sequencer submits.