Blockchain has been creating a revolution in many industries, from finance to supply chain. However, problems with scalability, high transaction costs, and slow processing speed are limiting its potential. Layer 2 was born as a solution to solve these challenges, opening up a brighter future for blockchain. In this article, Unich Analyst will join readers to learn about Layer 2 and its potential.
What is Layer 2?
Layer 2 is a term used to refer to solutions built on top of the main blockchain (Layer 1), to improve the scalability, efficiency, and extensibility of the blockchain. Instead of changing the original blockchain itself, Layer 2 solutions act as an additional layer, processing transactions off the main chain, then packaging and sending them back to the original blockchain for confirmation. This reduces the workload on the main blockchain while improving transaction speed and efficiency.
Reason for the birth of Layer 2
Blockchains like Bitcoin and Ethereum are designed to be highly decentralized and secure, but this also leads to some limitations:
- Limited scalability: A blockchain’s ability to handle a large number of simultaneous transactions is limited by the consensus process. For example, Ethereum can process about 15 transactions per second, while Visa can process more than 24,000 transactions per second.
- High transaction costs: Due to the high processing demand, gas fees (transaction fees) can skyrocket, especially during peak times.
- Slow transaction speeds: Due to the consensus process, transaction confirmation times on the blockchain can be long, ranging from a few seconds to a few minutes.
These limitations hinder the widespread application of blockchain in many practical fields. Layer 2 was born to solve these challenges, bringing benefits to both users and developers
Current context of Layer 2:
Currently, Layer 2 is one of the fastest-growing areas in the blockchain industry. Many Layer 2 projects have been deployed and are being widely used, creating practical values.
- The rapid development of Ethereum Layer 2: Ethereum is the most popular blockchain for decentralized applications (dApps). Therefore, Layer 2 on Ethereum is growing very strongly, with many solutions such as Optimism, Arbitrum, zk rollup, and StarkNet.
- Widely applied in DeFi: Layer 2 is being used to improve the scalability and efficiency of DeFi applications, such as lending, trading, and payments, helping DeFi develop more strongly.
- NFT support: Layer 2 is also used to support larger and more efficient NFT marketplaces, making it easier for creators and artists to access the NFT market.
- Competition between solutions: There is strong competition between Layer 2 solutions, which is driving growth and innovation in this space.
Differences between Layer 1 and Layer 2
| Features | Layer 1 | Layer 2 |
| Role | Core infrastructure | Improve performance & scalability |
| Function | Define blockchain rules, process all transactions, store transaction information | Process off-chain transactions, reduce the load on the original blockchain, improve efficiency & scalability |
| Examples | Bitcoin, Ethereum, Solana, Cardano | Optimism, Arbitrum, zk rollup, Lightning Network, Raiden Network |
| Advantages | High security, decentralized | High scalability, low transaction fees, fast transaction speed |
| Disadvantages | Limited scalability, difficult to change | Complexity and security depend on Layer 1, limited interoperability |
| Goals | Security, decentralization, data integrity | Scalability, performance, user experience |
| Technology type | Original blockchain | Solutions built on top of the original blockchain |
| Processing speed | Transaction processing speed is usually slower (Bitcoin, Ethereum) | Transaction processing speed is usually faster |
| Transaction fees | Transaction fees are usually higher | Transaction fees are usually lower |
| Scalability | Scalability is usually limited | Scalability is usually higher |
| Security | High security due to strong consensus mechanism | Security depends on Layer 1, there may be security vulnerabilities if Layer 1 is attacked |
| Interoperability | No interoperability issues | Interoperability between Layer 2 solutions is still under development |
Popular Layer 2 Solutions
Layer 2 is the key solution to blockchain scalability, allowing the blockchain to process more transactions, faster, and at a lower cost. Layer 2 solutions work by processing transactions off-chain, then packaging them and sending them back to the root blockchain for confirmation, reducing the workload on the root blockchain. Here are some popular Layer 2 solutions
State Channels
A state channel is a Layer 2 method that allows two or more users to open a private communication channel, making transactions off-chain. State changes in the channel are stored locally and are only updated to the root blockchain when the channel is closed.
How it works
- Off-chain transaction processing: Transactions are processed in a smart contract off-chain.
- Transaction packaging: Transactions are packaged into a single transaction and sent to the root blockchain.
- Transaction confirmation: The parent blockchain confirms the transaction, assuming that the transaction is valid. If there is a dispute, the user can provide evidence to verify the validity of the transaction.
Examples
- Lightning Network (Bitcoin): A Layer 2 solution for Bitcoin, improving transaction speed and costs for Bitcoin.
- Raiden Network (Ethereum): A Layer 2 solution for Ethereum, improving transaction speed and costs for dApps on Ethereum.
Rollups
Rollups are a Layer 2 method that allows multiple transactions to be processed off-chain and then packaged into a single transaction to be posted to the parent blockchain. There are two main types of rollups: Optimistic rollups and Zero-Knowledge rollups.
Optimistic Rollups
How it works
- Off-chain transaction processing: Transactions are processed in a smart contract outside the main chain.
- Transaction packaging: Transactions are packaged into a single transaction and sent to the root blockchain.
- Transaction confirmation: The parent blockchain confirms the transaction, assuming that the transaction is valid. If there is a dispute, the user can provide evidence to verify the validity of the transaction.
Examples
- Optimism: An Optimistic rollup solution for Ethereum, used by many DeFi applications.
- Arbitrum: An Optimistic rollup solution for Ethereum, used by many DeFi applications and NFTs.
Zero-Knowledge Rollups
How it works
- Off-chain transaction processing: Transactions are processed in a smart contract outside the main chain.
- Generate cryptographic proofs: Use cryptographic proofs to confirm the validity of a transaction without revealing the details of the transaction.
- Submit proofs to the parent blockchain: Cryptographic proofs are submitted to the parent blockchain to confirm the transaction.
Examples
- zk rollups: A Zero-Knowledge rollup solution for Ethereum, used by many DeFi and NFT applications.
- StarkNet: A Zero-Knowledge rollup solution for Ethereum, used by many DeFi and NFT applications.
Sidechains
A sidechain is a sidechain that runs parallel to the main blockchain, allowing separate transactions to be executed and then transferred back to the main blockchain.
How it works
- Create a sidechain: Create a sidechain that runs parallel to the main blockchain, which can have its own rules and consensus mechanisms.
- Transactions on the sidechain: Users make transactions on the sidechain.
- Transfer transactions to the main blockchain: Transactions on the sidechain are transferred back to the main blockchain for confirmation.
Examples
- Liquid Network (Bitcoin): A sidechain for Bitcoin, allowing for faster and cheaper Bitcoin transactions.
- xDai (Ethereum): A sidechain for Ethereum, enabling more scalable DeFi applications.
Sought-after solutions
Optimism Rollup
Strengths
- High compatibility with Ethereum: Optimism rollup uses existing smart contracts on Ethereum, making it easy to deploy and integrate DeFi applications.
- Good performance: Optimism rollup can process hundreds of transactions per second, significantly improving the transaction speed on Ethereum.
- Strong development community: Optimism has a strong development and support community.
- Potential: Optimism has great potential to promote the development of DeFi and NFT on Ethereum, helping to expand the application scope of Ethereum
zk Rollup
Strengths
- High security: Zero-Knowledge technology, providing high security for transactions.
- Cost-effective: zk rollup helps reduce gas fees significantly, attracting many users.
- Low cost: zk rollup has extremely low transaction costs.
- Potential: zk rollups have great potential to promote the development of DeFi, NFTs, and applications that require high security on Ethereum.
Layer2 airdrop hunting opportunities
In the past, Layer 2 was a fertile land for users to earn money from experiencing the network and receiving airdrops from the project. The airdrop number for Layer 2 users is extremely large, from 1000 – 10000 USD for each wallet.
Potential Layer 2 airdrop projects
Scroll Network
Is an emerging Layer 2 project, designed to bring scalability to Ethereum through zero-knowledge rollups (zk-rollups) technology. It aims to provide a fast, efficient, and highly scalable platform for decentralized applications on Ethereum. The project has recently suggested an airdrop for early adopters.
Linea Network
Linea Network is a Layer 2 solution developed by ConsenSys, a leading company in the blockchain industry, to solve the problem of scalability and high costs of Ethereum. Linea is a zero-knowledge rollup network, designed to provide a secure, fast, and efficient environment for decentralized applications (dApps). Linea is currently allowing users to earn XP and this can be a condition for airdropping users.
Base Network
Base Network is a Layer 2 network built by Coinbase, one of the largest cryptocurrency exchanges in the world. It is designed to bring high scalability, efficiency, and security to Ethereum. Currently, Base has announced that they will not issue a token. And this is the key point when every project that announces they will not issue tokens will airdrop a huge amount to users. For example, Arbitrum is about $2,000 per wallet
Advantages and disadvantages of Layer 2
Advantages
- Increased scalability: Processing a large number of transactions, reducing the load on the original blockchain, helping the blockchain process more transactions.
- Reducing transaction costs: Lower gas fees than the original blockchain, helping users save costs.
- Increasing transaction speed: Processing transactions faster, improving user experience, and helping blockchain applications run more smoothly.
- Supporting many applications: Improving the scalability of the blockchain, supporting more complex applications, and opening up more potential for blockchain in many fields.
- Security: Layer 2 solutions are often designed to inherit the security of the original blockchain, helping to maintain the security of the blockchain system.
Disadvantages
- Complexity: Designing and implementing Layer 2 solutions can be more complicated than the original blockchain, requiring specialized knowledge and high technology.
- Security: Although Layer 2 solutions are often designed to inherit the security of the original blockchain, there may still be security vulnerabilities that need to be addressed thoroughly.
- Interoperability: Interoperability between different Layer 2 solutions is still under development, and there is no common standard for Layer 2 solutions to interact with each other smoothly.
- Dependency on the original blockchain: Layer 2 solutions depend on the original blockchain to confirm the final transaction, so the performance of the original blockchain may affect the performance of Layer 2.
- Liquidity fragmentation: The more Layer 2 is developed, the more fragmented the liquidity will be and the efficiency of the user’s capital usage will not be optimized.
Personal opinion
Potential
- Supporting Multiple Blockchains: Currently, Layer 2 is primarily focused on Ethereum. However, in the future, we will see the development of Layer 2 solutions for many other blockchains, such as Bitcoin, Solana, Cardano, etc. This will help expand the application scope of Layer 2 and facilitate competition and innovation in the field.
- Enhanced Interoperability: The current Layer 2 ecosystem is still quite fragmented, with the absence of a common standard for Layer 2 solutions to interact seamlessly with each other. In the future, we will see the development of solutions to enhance interoperability between Layer 2 solutions, allowing users to easily switch between different solutions and maximize the benefits of each solution.
- Improved Performance and Scalability: Layer 2 solutions will continue to be optimized for performance and scalability, allowing them to process large volumes of transactions more efficiently, at lower costs, and at faster speeds. This will open up many possibilities for blockchain applications in areas that require high scalability, such as finance, supply chain, and e-commerce.
Challenges
While the potential of Layer 2 is huge, there are still some challenges that need to be addressed:
- Security: Layer 2 solutions need to be highly secure to avoid attacks. A typical example is the Ronin Network, which was hacked for $600 million from the Ronin Bridge attack.
- Interoperability: Solutions are needed to enhance interoperability between different Layer 2 solutions.
- Complexity: Layer 2 solutions can be very complex, requiring specialized knowledge to deploy and use.
Conclusion
Layer 2 is a potential solution to address the scalability challenges of blockchain, opening up a brighter future for blockchain technology. Layer 2 solutions are being developed vigorously and are expected to play an important role in the widespread application of blockchain in many fields. However, there are still some challenges that need to be solved, such as security, interoperability, and complexity. Developing and optimizing Layer 2 solutions will be the key to fully exploiting the potential of blockchain in the future. The above is all the information about Layer 2 that Unich Analyst has compiled, hopefully the above information is useful to readers.
