June 10, 2022
Layer-2 blockchain solutions are the best for enterprises that need to improve their transaction speed and scalability. They also provide a way for developers to create decentralized applications (DApps) with the ability to scale much more efficiently than before. But what exactly are Layer-2 blockchains?
A layer-2 blockchain solution is a second layer built on an existing blockchain network. Miners can use these solutions to increase the number of transactions processed by a blockchain network while maintaining an immutable ledger’s benefits. Layer-2 solutions can be divided into two categories:
An off-chain solution is where transactions are not processed directly on the blockchain. Instead, they are processed through intermediary nodes or “layers” outside the main chain.
In an on-chain solution, transactions are processed directly on the blockchain. This means that miners must verify every transaction added to the block.
Why Use Layer-2 Blockchain Solutions?
Layer-2 blockchain solutions are essential because they help solve the scalability problem. They also provide a way for users to use blockchain technology without downloading the entire blockchain.
The first layer of the blockchain is known as the base layer or root chain. The base layer is where all transactions occur and where miners store most of the data. All of this data makes up what is called the distributed ledger. So, the more transactions on its network mean it can become relatively slower and more difficult to navigate all the data at once.
This is where layer-2 solutions come into play. Layer-2 solutions allow miners to go beyond just viewing transactions and storing data. They can also view other information about those transactions. This makes it easier for people who are not experts in blockchain technology to use it more effectively without dealing with any complicated technicalities related to storing data in a decentralized manner.
Types of Layer-2 Blockchains Based on Scalability
There are two types of Layer-2 blockchains based on scalability:
Sidechains are blockchains independent of the main chain yet still interoperable with it. They allow users to transfer their cryptocurrency holdings between different chains. For example, if you want to move your funds from Bitcoin (BTC) to Litecoin (LTC), you can use a sidechain that allows transfers between these two currencies. Sidechains ensure security and privacy, as transactions take place off the main blockchain while maintaining the same level of decentralization and transparency as the underlying currency.
State channels are a relatively new concept in blockchain technology. They allow for transactions to take place directly between two users without having to broadcast them to the network for validation or confirmation. State channels save time and energy since they don’t need miners for every transaction between two parties on a state channel.
Examples of Layer 2-based Solutions
There are many examples of layer-2-based solutions spanning different blockchains. The most popular ones include:
Plasma, or Plasma Cash, is a scaling solution that allows fast and cheap transactions. It is to create “child chains” within a blockchain used to establish ownership of assets. Each child chain has its unique tokens, backed by the main currency in the parent chain. Any transaction conducted on these child chains would not need to be recorded on the main blockchain. Parties must only change the child chain they exchanged.
Liquidity is an open-source and permissionless blockchain platform that provides the tools to create customized payment channels. This platform is an off-chain solution that scales with the number of participants in the network. The Liquidity Network enables any application to use its platform to build a token exchange service or a payment channel network.
Rollups is a layer-2 blockchain that combines multiple transactions into one larger transaction before submitting it to the blockchain. It is useful if you want to submit numerous small transactions at once but don’t want your wallet software having to sign each one individually. One example is the Lightning Network, which allows for rollups through payment channels.
Polygon (MATIC) is an American-based platform that runs its cryptocurrency token, named MATIC. You can use MATIC to interact with the network. MATIC Holders can also use the coins to stake on the Polygon network. The platform is built on top of Ethereum blockchain technology and uses smart contracts to execute transactions.
Loopring (LRC) is an open-source layer-2 chain built over Ethereum. The platform is designed to build a decentralized automated execution system that trades across crypto-token exchanges. It also shields users from counterparty risk and reduces trading costs by pooling the liquidity of cryptocurrencies. With Loopring, traders don’t have to deposit their assets with the exchange, but instead can trade directly from their wallets.
The Lightning Network is an off-chain payment protocol that enables instant payments between two parties without fees or miners. It operates as a Layer-2 solution that sits on top of the Bitcoin blockchain, making it possible for users to send and receive payments instantly. You don’t need confirmation from miners on the underlying blockchain network to receive payments.
Immutable X (IMX) is another layer-2 solution built over Ethereum. This decentralized exchange (DEX) enables users to trade non-fungible tokens (NFTs) and other digital assets without any risk of losing their funds. Users purchase their own wallet, which allows them to manage their funds all the time. All transactions are validated using smart contracts before being recorded on the blockchain ledger.
OMG Network (OMG) is the first production layer-2 network built on Ethereum. It is also used to transfer ERC-20 tokens. OMG Network is an open platform where anyone can build and run their own decentralized application (DApp). It is unique in that it has an integrated “scalable” Ethereum Virtual Machine (EVM). It supports multiple virtual machines on top of its base layer blockchain protocol.
The Comparison: Layer-1 vs. Layer-2
Mode of Communications
Layer-1 is a peer-to-peer network. The computers on a Layer-1 network are connected directly and cannot communicate with any other computer outside the network.
Layer-2 is a broadcast domain. It means all devices in the same broadcast domain can see each other’s broadcasts. Switches or routers create broadcast domains.
Layer-1 networks are slower, with speeds measured in megabits per second (Mbps). Conversely, Layer-2 networks are faster, operating at gigabits per second (Gbps).
Nature of Infrastructure
Layer-1 networks rely on a single piece of infrastructure to carry data across a network, while Layer-2 networks use multiple pieces of infrastructure. This means that Layer-1 networks are more reliable than Layer-2 networks since they don’t rely on other systems to carry data across a network.
Type of bandwidth
Layer-1 networks require dedicated bandwidth, meaning they have fixed bandwidth that cannot change on the fly. Layer-2 networks do not require dedicated bandwidth and can be changed as needed.
Possibility of interference
Layer-1 networks require dedicated hardware and software to create virtual networks. Other users cannot interfere with them even when they operate on the same physical network. Layer-2 networks allow traffic isolation by using different channels within the same physical network.
Layer-2 Blockchains at a Glimpse
Layer-2 blockchains are a relatively new concept gaining popularity over the past years. The idea is simple: A Layer-2 blockchain allows for faster transactions, an increased number of transactions per second (TPS), lower costs, and scalability. They also don’t compromise security nor decentralize control over data. These six qualities are what most businesses and miners look for in any blockchain, which explains why businesses are transitioning to layer-2.