With the growing popularity of cryptocurrencies, we have also begun to witness some of the problems and limitations posed by the underlying technology — blockchain.
Countless products attempted to use blockchain as a technical solution to their problems in the early years of this industry. While some of these solutions have proven successful, others have run into some of blockchain’s inherent limitations.
The main issue is scale, as root blockchains such as Ethereum can only process 15–20 transactions per second. There are other issues as well, such as high gas prices and a lack of privacy. Root blockchains could theoretically implement changes to address these issues, but it would almost always come at the expense of decentralization — one of the primary reasons for using blockchain in the first place.
Now, the question is how do we implement blockchain solutions for scale, privacy, and cost-effectiveness while preserving decentralization? Layer 2 blockchain technology is the answer for this.
What is Layer 2 Blockchain Technology?
The concept of “Layer 2 blockchain technology” is gaining popularity. Layer 2 blockchain technology is also known as an “off-chain” solution. Its primary goal is to increase blockchain transactions’ capacity while retaining the decentralized benefits of a distributed protocol.
Solving the scalability issue will significantly aid in the mainstream adoption of blockchain.
To create a good blockchain ecosystem, we need to balance security, decentralization, and scalability in the architecture. Layer 2 blockchain technology systems connect to, say, Ethereum and rely on Ethereum as a foundational layer of security and finality.
To put it another way, rather than changing the core Ethereum protocol, we add smart contracts to the main blockchain protocol that interact with off-chain activities.
How does Layer 2 blockchain technology work?
Layer 2 (L2) platforms and protocols process data in a way that reduces the burden placed on the base layer (root chain). The blockchain network can handle much higher transaction throughput by offloading transactions from the main chain onto layer 2 platforms.
Why do we need L2 solutions?
Scaling blockchains is becoming increasingly important in order to promote widespread adoption of the technology by private individuals and businesses worldwide. With ongoing research, faster blockchain processing capacities will be available soon. This process is possible by scaling the various blockchain layers.
A blockchain should be able to handle any number of transactions per second (TPS), but this is not the case. L2 scaling solutions can assist in resolving issues like these by allowing the main blockchain to breathe without increasing block sizes or introducing other measures that would alter the protocol’s capacity for decentralization and high levels of security.
For example, the Bitcoin and Ethereum blockchains cannot process thousands of TPS, and as volume increases, so do fees. Higher throughput is desirable because it has the potential to hinder long-term growth and adoption.
What can Layer 2 technology do that Layer 1 can’t?
Blockchain networks, like Bitcoin and Ethereum, have inherent scaling constraints.
Ethereum handles about 15–20 transactions per second, compared to Paypal and Visa, which handle hundreds and thousands of transactions per second, respectively.
Why is this blockchain architecture so slow to process?
When a transaction occurs, the decentralized network must reach a global consensus. To validate transactions on the network, all nodes on the network keep a full copy of the transactions. It intended to eliminate the need for a middleman in order to solve the problem of double-spending.
Blockchain networks can function as the decentralized web ecosystem’s layer 1 (or base layer). The ultimate goal is to ‘re-decentralize’ the world wide web’s infrastructure, protocols, applications, and various layers.
What solutions do we have?
There are several levels of solutions. Layer 1 is the security layer that anchors data transactions in an immutable, cryptographically secure manner without the need for a central authority.
Layer 2 enables you to drastically reduce data processing on the blockchain by performing computations off-chain. When there are disagreements, the base chain will continue to be the final judge.
The main advantage of the second layer is that it reduces the amount of data stored on the base layer. Taking transactions off the base layer while remaining anchored to it would free up processing resources to do other things while retaining the benefits of security and decentralization.
Second layer scaling is on the right track, and scaling factors of up to 1,000 times are significant achievements that back up this claim. Because of the lower transaction costs, financial incentives, and the speed with which users can activate network effects, onboarding users to these systems will also be successful.
In the future, many Layer 2 solutions will contribute to a vibrant and robust blockchain ecosystem, promoting its widespread adoption. Overall, factors such as reduced cost, increased speed, and improved chain usability are in place. The final pieces of the puzzle are the widespread integration of these solutions and user-friendly interfaces that do not necessitate in-depth blockchain knowledge.