A blockchain is structured into three primary layers: prioritizing safety, ensuring constant functionality, and allowing inclusive participation in its operations.
However, simultaneous usage by many individuals can lead to a slowdown in the blockchain’s performance. This is where layer-2 solutions come into play, serving as enhancements to layer-1 blockchains. Layer-2 technology improves blockchains by making them more scalable, faster, and less congested while ensuring safety and governance.
In this article, we will explore what layer-2 blockchain is, the various layers of blockchain, and highlight the key distinctions between layer-1 and layer-2 blockchains.
What is layer-2 blockchain?
As implied by its name, layer-2 in the crypto landscape is built on top of layer-1, aiming to enhance its performance and scalability.
The main challenges faced by layer-1 protocols include high transaction fees and slow processing speeds, particularly during periods of market volatility and peak usage. Layer-2 blockchains introduce various solutions such as sidechains, state channels, and rollups, which collectively optimize the layer-1 blockchain to facilitate faster transaction times and reduced costs.
Understanding the layers of the blockchain
Layer-1 (L1), recognized as the foundational layer of a blockchain network, manages essential functions including consensus mechanisms like Ethereum’s (ETH) proof-of-stake or Bitcoin’s proof-of-work, alongside transaction settlements and other critical operations. Although decentralization and security are paramount for L1s, they can experience bottlenecks like slow transaction times and high fees.
Layer-2 (L2) blockchains are constructed atop layer-1 blockchains to address the fundamental challenges. They implement techniques such as rollups, sidechains, and state channels, which decrease the transactional load and enable quicker, cost-effective transactions without compromising on security.
While L2 blockchains have made significant advancements and resolved many of L1’s issues as well as others in the blockchain landscape, further optimization is needed to enhance interoperability, user experience, and specific application characteristics. This is where layer-3 (L3) blockchains enter the discussion.
L3 blockchains are specialized in crafting distinct protocols for applications across web3 sectors, including NFTs, DeFi, and gaming. Simply put, L3 blockchains promote cross-chain functionality, allowing users to access multiple blockchains simultaneously, thus enhancing accessibility and interoperability.
These three blockchain layers combine to form a comprehensive stack that ensures the future scalability, security, and accessibility of blockchain technology.
Layer-1 vs layer-2 blockchain
Layer-1 and layer-2 blockchains primarily differ in their roles within the blockchain ecosystem. Governance mechanisms and autonomy are central tenets of layer-1 blockchains. Notable layer-1 blockchains like Bitcoin and Ethereum function independently, effectively recording and validating transactions on-chain. However, as noted earlier, significant market volatility can lead to critical scalability issues for layer-1 blockchains, directly causing spikes in fees and transaction delays.
Conversely, layer-2 blockchains are designed to enhance the scalability and performance of layer-1 protocols over time. Various techniques employed by L2 blockchains aim to optimize L1s, with common methods including bundling multiple transactions into one and executing transactions off-chain, which significantly alleviates workload while maintaining minimal negative impacts.
Solutions like rollups, state channels, and sidechains are examples of how L2 blockchains enable quicker, more cost-effective transactions while reducing congestion on underlying L1 protocols.
Ultimately, both layer-1 and layer-2 work collaboratively to establish an effective system: layer-1 provides the foundational security and decentralized consensus, while layer-2 enhances scalability and user experience, making blockchain technology more applicable for common uses like gaming and decentralized finance (DeFi).
List of layer-2 blockchains
There are over 100 layer-2 blockchains, with new ones emerging regularly. Here are three of the leading layer-2 blockchains currently:
Polygon (POL)
Polygon, known as a layer-2 blockchain or ‘sidechain’, serves as a scaling solution for the Ethereum blockchain. Various cryptocurrency projects utilize Polygon to improve the scalability, flexibility, and independence of their platforms. POL, previously recognized as MATIC, is the native token of Polygon, facilitating governance and transaction fees on the Polygon network.
Optimism (OP)
Optimism is a layer-2 blockchain that employs optimistic rollups to scale the Ethereum ecosystem. This platform operates on a community-centered governance model aimed at long-term benefits for the ecosystem.
At the heart of Optimism is the Optimistic Rollup protocol, which alleviates the burden on Ethereum by executing transaction data externally and subsequently posting it to the Ethereum blockchain periodically. This approach reduces transaction costs and boosts the Ethereum network’s performance, enabling more projects to build on Ethereum using the Optimism L2 blockchain.
Arbitrum (ARB)
Arbitrum is another layer-2 blockchain that utilizes optimistic rollup technology to store off-chain data, thus decreasing congestion on the Ethereum blockchain. It delivers web3 applications and smart contracts that provide quicker and less expensive transactions compared to utilizing Ethereum directly as a blockchain.
Benefits and challenges
At this point, it is clear that layer-2 blockchains are integral to the web3 ecosystem. However, they also face various challenges. This section outlines both the benefits and challenges associated with layer-2 blockchains.
Benefits:
Scalability
The key feature of L2 blockchains is their ability to process transactions off-chain, which significantly boosts scalability by alleviating congestion on the underlying L1 blockchain.
Lower Transaction Costs
Layer-2 blockchains attract new users and projects transitioning from web2 to web3 due to their significant reduction in transaction costs, primarily from off-chain transaction processing.
Faster Transactions
Off-chain transaction processing not only decreases fees but also minimizes the time required for transactions. By bundling multiple transactions, L2 blockchains enhance speed and improve the user experience while preserving security.
Challenges:
Security Dependencies
Compared to layer-1 blockchains, L2 blockchains have less autonomy and a lower security level. There are ongoing vulnerabilities and issues associated with L2 blockchains that developers are addressing.
Complexity and Adoption
Integrating a layer-2 project into layer-1 protocols can be complex, requiring specific infrastructure knowledge of both L1 and L2 blockchains. Consequently, many users and new projects may encounter a steep learning curve when adopting layer-2 technology.
Interoperability Issues
While performance and rapid transactions are significant advantages of layer-2 blockchains, interoperability problems persist. These issues are addressed by introducing L3 blockchains, which enhance cross-chain capabilities across various blockchains, as highlighted in section 2 of this article.
The future of layer-2 blockchains
Layer-2 blockchains will continuously tackle the scalability challenges faced by layer-1 blockchains like Bitcoin and Ethereum. As decentralized technology gains traction, the demand for cost-effective blockchain solutions will rise, a realm where layer-2 blockchains excel in managing increasing traffic without compromising decentralization or security.
Additionally, ongoing improvements in interoperability between layer-1 and layer-2 blockchains are anticipated, contributing to a unified ecosystem that grants broader access to assets and data across all blockchains. This alignment will enhance user experiences related to blockchain wallet integrations, transaction throughput, and other vital metrics influencing blockchain performance, ultimately fostering mass adoption.
Moreover, the ongoing innovation within the layer-2 space, including advancements in rollups, zk-proofs, and more, is expected to progress as new cryptocurrency startups continue to build on this technology. It is possible that layer-2 blockchain solutions may surpass other layers, positioning themselves as the cornerstone of a decentralized economy.
