Solving Crypto’s Scalability Issue what Is Layer 2 - banks and money -

Solving Crypto’s Scalability Issue: What Is Layer 2?

Solving Crypto’s Scalability Issue: What Is Layer 2?

Don’t you just hate it when you get stuck in traffic, especially when you’re in a hurry? At times like these, you’ll begin to wonder just how many roads there are to actually serve thousands of cars and commuters every day. Interestingly, this dilemma has a counterpart in the cryptocurrency world, known as the scalability issue

This occurs when a blockchain network reaches certain capacity limitations. You can think of it as vehicle traffic building up because of the congested roads. In the case of crypto, it’s when many people are trying to transact at the same time. As for a solution, there’s this thing called Layer 2 that aims to solve the scalability problem in the crypto space. But what really is this scalability issue and how can Layer 2 network set it right? Let’s find out.

Solving Crypto’s Scalability Issue what Is Layer 2 – banks and money –

The blockchain scalability problem in a nutshell

If you’re going to take a quick look at the market capitalization of cryptocurrencies today, you’d be surprised to discover the number of people that may have actually gotten their hands on these coins—no matter the purpose. At the time of writing (January 25, 2022), Bitcoin (BTC) has already reached a market cap of over 686.21 billion USD, while Ethereum (ETH) has over 286.55 billion USD.

These huge numbers only prove that more and more people are starting to explore different cryptos. And the more transactions there are to complete, the busier the blockchain network becomes. This is where the scalability issue comes into play.

Let’s take the Ethereum network, for example. On the Ethereum blockchain, high demands translate to slower transaction speeds and almost non-sustainable ETH gas prices. The same goes for Bitcoin’s blockchain, which needs to cope with the influx of many transactions at a time.

To increase the network’s operational efficiency and better improve its processes, a Layer 2 scalability solution was developed.

What are blockchain layers and how do they work?

If the road congestion is the so-called scalability issue, additional access roads and streets will be Layer 2. This is the term used to call the solutions created and designed to help better scale a blockchain network

Earlier, we mentioned that the transaction speed and processes might be slower and transaction costs can get higher when a network gets intensely busy. These problems are what Layer 2 tries to clear out. To help you better understand how Layer 2 works, let’s first talk about the layer that comes before it—Layer 1.

Layer 1

In the crypto space, Layer 1 or the main chain is the standard or base consensus layer. This is where almost all transactions take place and are settled. Examples include the Bitcoin network, Ethereum network, and other crypto networks. You can think of it as the highway where nearly all cars and other vehicles heading in a specific direction pass through. 

When the volume of cars increases, the problem begins as traffic builds up. The same goes for transactions that enter and are completed in the blockchain network—hence, the need for scaling solutions. 

Some Layer 1 scaling solutions include consensus protocol improvements, where you might encounter the terms Proof of Work (PoW) and Proof of Stake (PoS) more often. The other one is called sharding, where the entire blockchain network is broken up into distinct datasets called “shards.”

If a network calls for a bigger number of transactions completed per second or lower fees—or perhaps, both—Layer 2 solutions can be another good option.

Layer 2

Layer 2 is simply another layer built on top of Layer 1. The good thing about it is that it doesn’t need to make any changes to Layer 1, which means that the base layer won’t have any interruptions or alterations to its systems and processes. The goal of Layer 2 is to help boost the capability of Layer 1 by handling transactions off-chain

This means the Layer 2 solution must be able to offload the workreduce the overall congestion, and avoid single points of failure. By doing so, transaction speeds and user experience won’t be compromised but rather run smoothly and securely—just like how it should actually operate.

Digging deeper into Layer 2 scaling solutions

Ideally, a blockchain network would be able to handle an unlimited number of transactions per second. This is referred to as throughput or TPS. However, if we’re going to have a quick look at how crypto networks are doing today, processing an infinite number of transactions is still so far from being a reality.

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The Bitcoin main chain can run around 3 to 7 TPS—figures that are way too far from Visa’s approximately 20,000 TPS. On the flip side, Bitcoin’s network is undeniably more secure, given that it is decentralized and every transaction must be approved, mined, distributed, and confirmed by multiple nodes or a blockchain infrastructure’s data keepers.

To increase the speed and efficiency of the network, while keeping its reliable security and integrity, Layer 2 scaling solutions were developed. These include:

  • State channels

State channels use multi-signature contracts to facilitate fast transactions off-chain and finalize them with the main chain. This reduces the congestion in the network, transaction fees, and processing delays.

  • Sidechains 

This is an independent blockchain compatible with Ethereum Virtual Machine (EVM) and runs in parallel to the main chain. It works with Ethereum via two-way bridges and operates under its own consensus and block parameters.

  • Rollups

These execute transactions outside the main chain and post the data to Layer 1 when consensus is reached. Rollups have two types: ZK-rollups and optimistic rollups. 

The zero-knowledge (ZK) rollups gather or roll-up hundreds of transactions off-chain and create a succinct non-interactive argument knowledge (SNARK). With ZK-rollups, only validity proof is needed instead of transaction data. This makes it faster and cheaper to validate a block.

Optimistic rollups, on the other hand, don’t do any computation but propose the new state to the main chain or “notarize” the transaction. Computation is the expensive part of using Ethereum, making optimistic rollups ideal for reducing gas costs.

  • Plasma

This is designed for the Ethereum network and is built using smart contracts and Merkle Trees—a way of organizing a massive amount of data in a simpler way. Plasma enables the development of an unlimited number of side chains or smaller copies of the Ethereum network.

Examples of Layer 2 network

Now that you understand what Layer 2 scaling solutions are, let’s move on to its examples in the crypto space.

  • Bitcoin Lightning Network

The Bitcoin Lightning Network is a decentralized system that allows users to make instant, high-volume micropayments at lower costs. This payment protocol is among the widely used channels for quick and easy Bitcoin transactions.

  • Loopring

Loopring uses open-source smart contracts from Ethereum to develop its own projects. It’s created to solve the challenges faced by centralized and decentralized exchanges, by allowing investors to store their investments in their own wallets while completing trades in a centralized way.

  • Polygon

Polygon offers development in the security of the Ethereum network, as well as for the developers. It features tools utilized by developers to create optimized Ethereum-based technologies.

  • Optimism

Optimism features improvements to the affordability of Ethereum transactions. Apart from that, Optimism also develops transaction speed for Ethereum users.

Solving Crypto’s Scalability Issue what Is Layer 2 – banks and money –

Beyond the second layer

Blockchain’s Layer 2 undeniably offers a lot of great benefits to the network it supports, as well as its users. As we’ve discovered earlier, the development of Layer 2 addresses the increasing load on different crypto networks, including that of Bitcoin and Ethereum.

As roads to crypto transactions open, more and more people will get to try their hands on the remarkable potential digital coins have to offer. It’ll be no surprise that soon, we might see other networks provide more accessible, faster, and cheaper crypto transactions in no time.

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