Layer 2: Everything to Know
By Beluga Research September 6, 2023
- Layer 2 is a scalable solution built on top of a blockchain that improves transaction speed and reduces fees by conducting off-chain transactions
- These solutions address scalability issues in blockchain technology by moving some transaction processing off-chain while maintaining security
- There are different types of Layer 2 solutions, including state channels, sidechains, off-chain computation and rollups
- Disadvantages exist such as centralization concerns, security risks, complexity, potential single points of failure and limited functionality
Layer 2 is a scalable solution built on top of a blockchain that improves transaction speed and reduces fees by conducting off-chain transactions. These solutions scale blockchain networks for growth without compromising security.
Instead of modifying the base layer, layer 2 protocols build on existing blockchains for greater efficiency. By moving some transaction processing off-chain while maintaining security, layer 2 solutions significantly increase transaction capacity and reduce fees.
A Brief History
Layer 2 solutions originated from the Lightning Network, a payment protocol proposed in 2015. It addressed Bitcoin's scalability limitations by enabling off-chain transactions. The Lightning Network established payment channels between users for fast, low-cost transactions, with final settlement recorded on the Bitcoin blockchain.
Since then, layer 2 solutions gained traction in the cryptocurrency space. Various projects and protocols emerged, each with unique approaches to scaling and enhancing blockchain networks. Notable layer 2 solutions include the Raiden Network for Ethereum, the Plasma framework and state channels.
Layer 2: Everything to Know
- State Channels. Users conduct transactions off-chain, periodically updating the blockchain with the latest state. Opening a state channel allows multiple transactions without recording each one on the main blockchain. This approach improves scalability and reduces costs. The final state is recorded on the blockchain when participants close the channel.
- Sidechains. Independent blockchains are interoperable with the main blockchain. They operate alongside the main chain but have their own rules and consensus mechanisms. Sidechains handle many transactions off-chain and periodically settle the final state on the main chain. This enables faster, cheaper transactions while leveraging main blockchain security.
- Off-chain Computation. Some layer 2 solutions move complex computations off-chain to lessen the main blockchain's burden. By performing off-chain computations and submitting results to the blockchain, scalability significantly improves. This benefits applications requiring heavy computational tasks, like decentralized finance (DeFi) platforms.
- Rollups. These combine on-chain and off-chain processing benefits. They bundle multiple transactions and submit a single proof to the main blockchain, reducing computational load. Two types of rollups exist: optimistic rollups assume transactions are valid unless proven otherwise, while zk-rollups use zero-knowledge proofs to ensure transaction validity without revealing details.
To understand layer 2, it's important to grasp the basics of blockchain technology. Blockchain is a decentralized ledger that records all transactions across a network of computers called nodes. However, popular blockchains like Bitcoin and Ethereum have low transaction throughput, leading to congestion and high fees during peak demand. This scalability challenge hampers mainstream adoption and the potential of cryptocurrencies as a medium of exchange.
Layer 2 solutions tackle these scalability issues by moving some transactional load from the main blockchain to an auxiliary layer. By doing so, they increase network capacity and reduce transaction costs. Layer 2 protocols leverage the security of the underlying blockchain while providing faster and cheaper transactions.
- Off-chain Transactions . Layer 2 solutions enable off-chain transactions, which are faster and cheaper than on-chain transactions. Instead of recording every transaction on the main blockchain, these solutions facilitate transactions off the main chain. Trusted participants can transact directly with each other without involving the main blockchain for every transaction.
- State Channels. These allow participants to conduct a series of off-chain transactions without recording each one on the main blockchain. They act as temporary side chains involving only the participating parties. State channels enable fast and inexpensive transactions, with the final settlement accurately recorded on the blockchain. This reduces congestion on the main blockchain.
- Plasma. A Layer 2 technology, Plasma creates a hierarchical structure of interconnected blockchains. It establishes child chains, or plasma chains, connected to the main blockchain. These child chains process a high volume of transactions independently, periodically committing aggregated data to the main blockchain. Plasma chains offer increased throughput and scalability, suitable for applications requiring frequent and fast transactions.
- Rollups. This solution combines the security of the main blockchain with the scalability benefits of layer 2. They batch multiple transactions together and submit a single proof to the main chain, reducing computational load and transaction fees. There are two types of rollups: ZK-Rollups and Optimistic Rollups. ZK-Rollups use zero-knowledge proofs to validate transactions, while Optimistic Rollups rely on fraud proofs to challenge potentially incorrect transactions. Both types significantly improve scalability compared to on-chain transactions.
- Scalability. Layer 2 solutions reduce on-chain transactions, relieving congestion and enabling faster transactions.
- Lower Transaction Fees. These solutions minimize the burden on the main blockchain, resulting in reduced fees for users.
- Faster Confirmation Times. Most layer 2 solutions process transactions off-chain, enabling quick settlement and improving transaction speed.
- Enhanced Privacy. Layer 2 solutions provide an additional layer of privacy compared to traditional on-chain transactions.
- Interoperability. Layer 2 facilitates the transfer of assets and data between multiple blockchains, enhancing collaboration.
- Centralization Concerns. Some layer 2 solutions may introduce centralization through trusted intermediaries, compromising decentralization.
- Security Risks. Layer 2 solutions require careful design and auditing to ensure the security and integrity of the underlying blockchain.
- Complexity. Developing and maintaining layer 2 solutions require specialized knowledge, limiting accessibility for less technically inclined users.
- Potential Single Point of Failure. Depending on the design, a failure or compromise in a layer 2 solution could disrupt the entire system.
- Limited Functionality. Some layer 2 solutions may not support certain complex functionalities or interactions available on the main blockchain.