Understanding Layer 2 Blockchain: A Scalability Solution for Web3

Layer 2 is a crucial component in the development of the blockchain ecosystem. Layer 2 is designed as a solution to scalability issues in blockchain while maintaining security and decentralization.

What is Layer 2? This article will discuss the concept of Layer 2, examples of protocols, its advantages and challenges, and the impact of Layer 2 on Web3 applications.

Blockchain’s Scalability Problem

Three essential factors determine a blockchain’s effectiveness.

1. Decentralization: Blockchain is distributed across multiple networks, rather than a single centralized server.
2. Security: Blockchain's ability to withstand attacks or unauthorized data changes.
3. Scalability: Blockchain's ability to handle increasing workloads and visitors.

However, it is difficult to balance these three factors. If you want to improve two factors, one other factor must be sacrificed. This is known as the scalability trilemma.

Scalability is blockchain’s major issue. To improve scalability so that blockchain can handle more workloads, decentralization or security must be reduced. However, these two factors cannot be compromised because they directly affect user trust.

This scalability issue results in higher blockchain transaction costs and slower transaction times.

The Concept of Layer 2

Layer 2 is designed as a solution to blockchain’s scalability issues. Simply put, Layer 2 is an off-chain network, system, or technology built on top of a blockchain, also known as Layer 1.

The Function of Layer 2

Layer 2 serves to develop the capabilities already possessed by the base layer. In addition, Layer 2 is designed to improve scalability and reduce transaction costs without sacrificing security and decentralization, which are the main characteristics of blockchain.

Building a Layer 2 is more efficient than upgrading the Layer 1 itself. Updating Layer 1 requires a hard fork or drastic protocol changes. Meanwhile, Layer 2 can be seamlessly integrated with Layer 1 without disrupting its main structure.

How Layer 2 Works

Layer 2 works by processing transactions outside the main blockchain, thereby reducing the load on the main network. In general, Layer 2 solution technologies are divided into:

1. Rollup
2. Optimistic rollup: Transactions are processed off-chain and only the final results are sent to layer 1.
3. Zero-knowledge rollup: Combines multiple off-chain transactions and sends proof of validity to layer 1.
4. State channel: Opens a channel in Layer 1 for off-chain transactions handled by two or more parties.
5. Sidechain: A separate blockchain that can handle transactions independently, but still runs parallel to the main blockchain.
6. Nested blockchain: One main chain is connected to several secondary chains. The main chain assigns tasks and controls parameters, while the secondary chains process them and report back to the main chain for feedback and approval.

Example of Layer 2 Protocols

Below are examples of Layer 2 protocols developed as a solution for blockchain’s scalability.

Arbitrum: Layer 2 Solution for Ethereum

Technology:

1. Optimistic rollup: Assumes all transactions are correct unless challenged.
2. Fraud proof: If someone suspects there is invalid data, they will submit a fraud proof.
3. Compatible with Ethereum’s smart contracts.

Advantages:

1. Significantly reduces gas fees (10-100 times cheaper than Ethereum’s mainnet)
2. Compatible with Ethereum’s tools and smart contracts.

Used for

1. DeFi applications (e.g., DEX)
2. NFT platforms for cheaper minting and trading

Metis: Simplifies DAO Creation

Technology:

1. Optimistic rollup to batch transactions and submit a summary to Ethereum.
2. Additional tools for DAO management and governance.
3. Focuses on lower gas fees and higher throughput.

Advantages:

1. Easy to operate and low transaction costs.
2. Compatible with Ethereum smart contracts (EVM).
3. User-friendly with built-in onboarding and customer support.

Used for:

1. DAO and decentralized projects that require scalable governance.
2. dApps that require faster and cheaper transactions on top of community management features.

Polygon zkEVM: Transaction Validation with Cryptographic Proof

Technology:

1. zk-rollup to generate mathematical proofs for transaction validation.
2. zkEVM to support EVM and run Ethereum smart contracts without validation.

Advantages:

1. Instant finality without a challenge period, unlike optimistic rollups.
2. Higher scalability and lower fees.
3. Compatible with Ethereum.

Used for:

1. dApps that require fast confirmation with high data traffic.
2. NFT and gaming projects that require low fees and instant transactions.

ImmutableX: NFT and Gaming on Ethereum

Technology:

1. zk-rollup to batch NFT transactions and generate proof of validity on Ethereum.
2. Focuses on gas-free, carbon-neutral NFT transactions.
3. Integration with Ethereum and supports instant confirmation.

Advantages:

1. No gas fees for NFT minting and trading.
2. High throughput that supports thousands of transactions per second.
3. Environmentally friendly.

Used for:

1. NFT marketplaces and digital art platforms.
2. Blockchain games that require fast and free NFT transactions.

Shibarium: Solution for Shiba Inu’s Ecosystem

Technology:

1. Layer 2 network on top of Ethereum.
2. Proof-of-Stake consensus for security.
3. Processes transactions outside of Ethereum’s main network.
4. Token burning mechanism.

Advantages:

1. Faster transactions than Ethereum’s main network.
2. Lower gas fees to make microtransactions more affordable.
3. Scalable and supports a growing number of users and applications.
4. Security guaranteed by a PoS mechanism.

Used for:

1. Supports dApps, smart contracts, and Shiba Inu’s metaverse.
2. Staking, governance, and NFT-related activities.
3. Runs the Shibaswap DEX and other ecosystem services.

Lightning Network: Solution for Bitcoin Transactions

Technology:

1. Payment channels: Two parties lock funds on Bitcoin’s main chain, then perform the transaction instantly off-chain.
2. Final balance is settled on Bitcoin’s main chain.
3. Supports multi-hop routing, so transactions can pass through multiple channels before reaching the recipient.
4. Supports transactions smaller than one satoshi (the smallest unit on Bitcoin’s main network). These microtransactions are performed off-chain.

Advantages:

1. Bitcoin payments are near instantaneous.
2. Very low transaction fees.
3. Maintains Bitcoin’s security and decentralization.
4. Supports microtransactions smaller than one satoshi.

Used for:

1. Bitcoin payments for everyday activities.
2. Microtransactions and tipping using Bitcoin.

Also Read: What is A Decentralized Exchange (DEX)? A Complete Guide for Beginner and Professional Investors

Advantages and Challenges of Layer 2

Advantages of Layer 2

The implementation of Layer 2 offers various advantages.

1. Increases transaction speed
2. Reduces transaction costs
3. Improves blockchain scalability
4. Reduces traffic on the main blockchain
5. Can have additional features such as privacy and interoperability
6. Enhances user experience

Challenges of Layer 2

Layer 2 technology is not foolproof. There are still challenges and weaknesses that must be addressed.

1. It still depends on Layer 1 security.
2. Vulnerabilities in Layer 1 can affect Layer 2.
3. Layer 2 validators can commit fraud or scams.
4. Some Layer 2 solutions have slow withdrawal processes, resulting in less liquidity.
5. Layer 2 requires large computing power to operate.

The Implications of Layer 2 on Web3 Applications

Layer 2 plays an important role in the development of the Web3 ecosystem.

Improves Scalability

In Layer 2, transactions are processed off-chain or in integrated groups. This reduces the load and congestion on the main blockchain and allows Web3 applications to handle more transactions.

Reduces Transaction Costs

Layer 2 solutions reduce the cost per transaction by reducing the number of transactions on the main blockchain. As a result, blockchain processes are more economical.

Improves Transaction Speed

Layer 2 technology processes transactions off-chain, and only the final results are sent to the main layer.

Supports Complex Applications

Layer 2 scalability solutions enable developers to create more sophisticated decentralized applications (dApps) and smart contracts that operate efficiently.

Improves User Experience

Thanks to faster and cheaper transactions, Layer 2 enhances the user experience when using blockchain. This is particularly important for applications that require real-time interaction.

FAQ

What is blockchain’s biggest challenge?

The biggest challenge of blockchain is scalability. To improve scalability, security or decentralization must be compromised.

Why does blockchain need Layer 2?

Blockchain needs Layer 2 to overcome scalability issues, namely the ability to support an increasing number of users and transactions. Layer 2 reduces the load on the main blockchain, allowing it to run efficiently.

What is the difference between Layer 1 and Layer 2?

Layer 1 is the main blockchain itself, which stores all data. Meanwhile, Layer 2 is an additional layer to reduce the workload of Layer 1. Layer 2 performs some of Layer 1's tasks outside the main chain, then periodically sends the results to Layer 1.

Aside from Layer 2, does blockchain have other additional layers?

Yes. A Web3 application is comprised of several layers:

1. Layer 0: The infrastructure.
2. Layer 1: The data layer and the main blockchain.
3. Layer 2: The networking layer that facilitates communication between nodes and where off-chain scaling solutions are connected.
4. Layer 3: The consensus layer that stores consensus protocols and mechanisms.
5. Layer 4: The application layer, where an application is built and interacts with the blockchain.

Conclusion

Layer 2 is a technology built on top of Layer 1 as a solution to blockchain’s scalability trilemma. This technology is not yet perfect, but Layer 2’s scaling solution will continue to be developed and upgraded. Layer 2 will undoubtedly play a crucial role in growing and diversifying the blockchain ecosystem.

What is a blockchain? Learn all about it in this article: What is Blockchain and How Does It Work? A Complete Guide for Beginners.