The term “layer-2” refers to a software or hardware layer operating on top of an existing blockchain protocol. It allows transactions to be processed outside the main blockchain, significantly increasing transaction throughput. There are many reasons why layer-2 protocols could become the key to unlocking blockchain’s full potential as a global technology.
A layer on top of an existing blockchain could be the key to solving the scalability issue
A layer-2 protocol can be built on top of an existing blockchain. These protocols are not new blockchains but function as a second layer that sits on top of the first, providing additional features and services to users.
One example is the Lightning Network (LN), which is currently used by several cryptocurrency projects such as Bitcoin and Litecoin. LN works by offloading microtransactions and other small payments to a secondary network that has lower fees than those associated with traditional blockchains.
That approach allows for faster transactions at lower costs, resulting in improved scalability for the underlying platform it runs on.
Scalability is essential for blockchain to become a truly global technology
Why is scalability so important for blockchain? The answer is simple: Blockchain has to scale to become a truly global technology.
Scalability is the biggest issue in blockchain right now. If you have limited transactions per second (TPS), your network can only handle a small number of users simultaneously. That makes it difficult for many people to use the same network at once.
For example, Bitcoin can currently only process around 7 TPS and Ethereum 15 TPS. That limits their usefulness as tools for developers looking to build decentralized applications on top of them because they aren’t able to handle high demand. But if both networks could process 1 million transactions per second —as layer-2 protocols like Lightning Network promise—they would become much more appealing.
Many projects are building layer-2 protocols on top of Ethereum and other networks
For example, the Lightning Network is built on top of Bitcoin, while Plasma is built on top of Ethereum. Layer-2 protocols are designed to work with existing blockchains, although they can also be built on top of other blockchains.
These protocols differ by their approach to the consensus mechanism and how they secure the network
A consensus protocol is a way that nodes agree on the state of the blockchain.
For instance, Bitcoin uses a “proof-of-work” (PoW) protocol where miners compete to solve cryptographic puzzles to add a block containing transactions to the chain. The first miner to solve this puzzle will get their block accepted by all other miners, who then start working on creating another block.
Layer 2 protocols can potentially increase transaction throughput by several orders of magnitude
If a layer-2 protocol can be built on top of an existing blockchain, it becomes a base layer for applications to build on. As such, the transaction throughput can potentially increase by several orders of magnitude.
For example, let’s take Ethereum as our base layer and run another blockchain on top of it. We could have many transactions per second because these second-layer blockchains will not have to verify every single transaction. Instead, they only need to verify every few blocks and, therefore, can process over 100 times more transactions than Ethereum alone would.
Rollup and state channels have achieved a good balance between security and scalability
Many people have become interested in layer-2 protocols to increase transaction throughput on top of existing blockchains, like Ethereum. Two such protocols that have received recent attention are rollup and state channels.
Rollup is a protocol developed by Ethereum researchers Justin Drake and Vlad Zamfir. It uses Rollup Trees to provide security guarantees without sacrificing scalability. It combines the availability of state channels with their speed, but only relies on consensus or explicit delegation between parties for it to work.
State channels differ from rollups because they require nodes to make public commitments about their account balances periodically. That allows other nodes to verify the validity of transactions through verification scripts instead of requiring each node to store all transactions individually
Layer-2 protocols are promising but still need time for wider adoption
A layer-2 protocol is a blockchain technology that allows for the transfer of value and data by utilizing off-chain protocols. This way, layer-2 protocols separate the consensus from transaction validation on the main chain to a sidechain, which runs parallel to it.
While promising in terms of performance improvements seen so far with layer-2 protocols like Lightning Network or Plasma Cash, there are still many challenges ahead.
The use of layer-2 protocols is still in its infancy, but it will be interesting to see how they develop over time.
It is a promising area for research and development. The scalability problem of blockchain technology needs to be solved before it can become a global solution for many different industries.