What is a layer 2 blockchain solution?
Layer 2 (L2) is a secondary network or technology that operates on top of an existing blockchain system. The purpose is to improve transaction speed and scalability limitations that face major blockchain protocols.
Generally, this entails unloading a portion of a blockchain network’s transactional burden to an adjacent network that will handle the processing and report back to the base layer to finalise the results. Through this, the base layer blockchain becomes less congested and ultimately more scalable.
What are the benefits of a layer 2 solution?
- The main chain doesn’t need to go through any structural change.
- Higher throughput without waiving base layer network security.
- Reduced fees.
Why we need L2 solutions
Ideally, a blockchain would handle any number of transactions per second (TPS), though this is not the case. L2 scaling solutions can help solve problems like these by providing breathing space for the main blockchain without needing to increase block sizes or introducing other measures that would change the protocol’s capacity for decentralisation and high levels of security.
For instance, the Bitcoin and Ethereum blockchains aren’t able to process thousands of TPS, and when volume goes up, so do fees. The potential to hinder long-term growth and adoption is the reason why higher throughput is so desirable.
Can the base layer (L1) be scaled?
Yes, propositions to protocol improvements regarding operations and data processing are possible. For example, the Ethereum network is proposing to move from a proof-of-work (PoW) consensus to a proof-of-stake (PoS) consensus algorithm. This new method of consensus supports faster transaction speeds and energy efficiency in the block finalisation process.
Examples of Layer 2 solutions
Bitcoin: The Lightning Network
The Bitcoin blockchain can only handle around 3 – 7 TPS, a fraction when compared to centralised payment networks. Bitcoin’s low TPS and block size is a conscious decision to keep hardware low, allowing for high levels of decentralisation. Every Bitcoin transaction must be accepted, mined, distributed, and validated by a global network of nodes.
The Bitcoin Lightning Network is one of the most adopted Layer 2 solutions for Bitcoin. Like many other L2 solutions, it takes transaction bundles from the main chain to process off-chain before transferring the information back. Specifically, the Lightning Network runs on state channels, which are attached channels that perform these operations. Lightning also brings forth smart contract functionality to Bitcoin – a significant improvement to the overall network.
Ethereum: The Polygon Network
The Polygon Network is a Layer 2 scaling solution designed to improve the overall adoption of the Ethereum network. It’s a protocol for developing and connecting Ethereum-compatible blockchain networks.
Polygon functions through Commit chains, which are transaction networks that operate alongside the main blockchain, usually identified as side chains although with a PoS model. The L2 network’s commit chains bundle transaction batches and confirm them before returning the data to the L1 base chain. Polygon is structured to support a complete multi-chain ecosystem, ensuring interoperability between another and the Ethereum network.