Blockchain technology offers huge benefits – decentralization, transparent interaction, high levels of security, and immutable record keeping. It has enabled a thriving crypto ecosystem to grow and support continuous technological innovation. However, one of the main problems with many blockchain networks is their scalability. Scaling is an issue when the amount of data passing through the blockchain hits a limit due to the insufficient capacities of the blockchain.
In an ideal case, a blockchain would be able to process countless transactions per second, also known as throughput or with the acronym TPS. However, the Bitcoin main chain can only handle about 3-7 TPS. By comparison, Visa can process more than 20,000 TPS using the VisaNet centralized electronic payment network. The difference is in the level of decentralization and privacy that Bitcoin and other blockchains aim to provide.
Similarly, Ethereum is coming to a point where it faces scalability challenges. As of summer 2022, Ethereum is processing an estimated 500,000 transactions per day, which equates to 30 transactions per second. By comparison, Visa’s payment system can process up to 150 million transactions per day and 65,000 transactions per second. This far exceeds the processing power of Ethereum. Ethereum 2.0 is expecting it to increase to 20,000-100,000 transactions per second however it will take few years to reach that maximum capacity.
What Are Layer-2 Scaling Solutions?
Layer 2 refers to secondary frameworks or protocols that build on top of existing blockchain systems. The main purpose of these protocols is to solve the transaction speed and scaling problems faced by major cryptocurrency networks. It not only reduces workload on main net, but maintains the same security and decentralization standards as the underlying blockchain.
Layer-1 v/s Layer-2 Blockchains
Layer 1 blockchain refers to the underlying blockchain network architecture and protocols that serve as the foundation for decentralized applications (dApps) and other blockchain-based use cases. It is the core layer of a blockchain system and consists of the basic building blocks that enable data storage, transaction processing, and consensus mechanisms.
Layer 2 blockchain solutions are technologies that build on top of existing layer 1 blockchain networks, such as Ethereum, to increase their scalability and efficiency. Layer 2 solutions allow for off-chain processing of transactions, which helps reduce the amount of data that needs to be stored on the main blockchain, thereby increasing its scalability.
One of the key differences between layer 1 and layer 2 blockchain technology is scalability. Layer 1 blockchain networks have limited transaction processing capacity, which can result in slow processing times and high fees during periods of high demand. Layer 2 solutions address this issue by reducing the amount of data that needs to be stored on the main blockchain, thereby increasing its capacity.
Advantages of layer 2 blockchain solutions
Layer 2 blockchain solutions offer several advantages, including:
- Scalability: Layer 2 solutions can help increase the transaction processing capacity of existing blockchain networks, making them more scalable and able to handle higher volumes of transactions. By offloading transactions from the main blockchain, layer 2 solutions can reduce congestion and increase throughput.
- Speed: By processing transactions off-chain, layer 2 solutions can significantly reduce transaction processing times, resulting in faster and more efficient transactions.
- Lower fees: Layer 2 solutions can help reduce the fees associated with blockchain transactions by reducing the workload on the main blockchain and reducing the amount of data that needs to be stored on it.
- Improved privacy: Layer 2 solutions can enable privacy-preserving transactions by using techniques such as zero-knowledge proofs and state channels to keep transaction data off the main blockchain.
- Interoperability: Layer 2 solutions can enable interoperability between different blockchain networks, allowing for the seamless movement of assets and data between them.
- Flexibility: Layer 2 solutions can be tailored to specific use cases and can be designed to work with a variety of blockchain networks, making them a flexible and versatile solution.
Overall, layer 2 blockchain solutions offer several advantages over traditional layer 1 blockchain networks, including improved scalability, speed, privacy, and interoperability, making them an essential component of the blockchain ecosystem.
What Types of Layer-2 Solutions Out There?
There are several types of Layer 2 scaling solutions, each with its own approach to increasing the scalability of blockchain networks. Here are some of the most common types of Layer 2 solutions:
- State Channels
State channels blockchain solution
State channels are a layer 2 blockchain solution that allows for off-chain transactions between two parties. State channels enable fast and cheap transactions by keeping most of the transaction data off the main blockchain.
Projects – Lightning Network, Celer Network, Trinity
Here’s how state channels work:
- Two parties create a contract that defines the rules of their transaction.
- They deposit their cryptocurrency into a shared channel, which is a smart contract on the blockchain.
- They then conduct their transactions off-chain, using the rules defined in the contract.
- Once they are finished, they close the channel and settle their balances on the main blockchain.
State channels are useful for microtransactions, where the cost of conducting the transaction on the main blockchain would be prohibitive. They can also be used for real-time, interactive transactions, such as online gaming or instant messaging.
Plasma layer 2 solution
Plasma is a layer 2 scaling solution for Ethereum that was first proposed by Vitalik Buterin and Joseph Poon in 2017. The goal of Plasma is to enable the Ethereum network to process a large number of transactions, while still maintaining the security and decentralization of the blockchain.
Plasma chain projects- Polygon, Loom Network
Here’s how Plasma works:
- A smart contract is created on the Ethereum network that serves as the root chain.
- Child chains, also known as Plasma chains, are created off of the root chain. These Plasma chains are fully functional blockchains with their own validators, but they are connected to the Ethereum network.
- Transactions on the Plasma chains are processed off-chain, and are only submitted to the Ethereum network when a block is finalized.
- The finality of blocks on the Plasma chains is enforced by the root chain, which acts as a final arbiter for any disputes that arise.
Plasma is useful for applications that require high throughput, such as decentralized exchanges or gaming platforms. It can also be used for micropayments, where the cost of conducting the transaction on the main Ethereum network would be prohibitive.
Blockchain rollups are a type of Layer 2 scaling solution that aim to improve the scalability of blockchain networks by grouping multiple transactions together before submitting them to the main blockchain for verification. There are two types of rollups: optimistic rollups, which assume that most transactions are valid and only require minimal verification, and ZK-rollups, which use zero-knowledge proofs to verify transactions off-chain before submitting them to the main chain.
- Optimistic Rollups
Optimistic Rollups are a Layer 2 scaling solution for blockchain networks that offer several advantages over traditional on-chain transactions. Here’s how they work:
- Transactions are processed off-chain and bundled into batches.
- The batches are then validated by a small group of validators who check for fraudulent or invalid transactions.
- Once the batch is confirmed, it is sent to the main blockchain and added to the ledger.
Optimistic Rollups are useful for applications that require high transaction throughput, such as decentralized exchanges and gaming platforms. They are also ideal for micropayments, where the transaction cost on the main blockchain would be prohibitively expensive.
Optimism and Arbitrum are popular optimistic rollup projects
- Zero-Knowledge Rollups
Zero-Knowledge Rollups (ZK Rollups) are a layer 2 blockchain solution that enables fast and efficient transactions while maintaining the security and decentralization of the underlying blockchain network.
Projects- Minaprotocol, immutableX, loopring, ZK Sync
Here’s how ZK Rollups work:
- Transactions are processed off-chain and bundled into batches.
- The batches are then verified using zero-knowledge proofs, which enable the network to verify the transactions without revealing any of the transaction data.
- The verified batches are then submitted to the main blockchain, where they are added to the ledger.
ZK Rollups are useful for applications that require high throughput, such as decentralized exchanges or gaming platforms. They can also be used for micropayments, where the cost of conducting the transaction on the main blockchain would be prohibitive.
To sum up, the implementation of layer 2 scaling solutions is paramount in overcoming the scalability and usability limitations of blockchain technology. These solutions allow for increased transaction throughput, decreased fees, and enhanced functionality, all while maintaining the security and decentralized nature of blockchains. As more projects adopt layer 2 technologies, we can anticipate remarkable progress in the blockchain industry, along with the emergence of fresh use cases for decentralized applications.
Stay tuned for our upcoming articles, where we will dive deeper into various layer 2 projects and provide detailed insights into their technical details, advantages, limitations, and potential use cases. Whether you are a blockchain enthusiast, developer, or investor, our articles will provide valuable insights into the latest developments in blockchain scaling solutions.