The invention of Bitcoin in 2009 introduced blockchain technology to the world. Its primary objective was to offer distributed database technology that can support transparent transactions while maintaining decentralization and security. Bitcoin was created because it was necessary for a native token to exist in order to enable payment for the network transactions. However, as the adoption of this blockchain technology grew, the user demand surged, and the shortcomings of Layer 1 blockchain (slow transaction speed and scalability issues) became evident.
An L1 blockchain, which is known as a primary chain, is the foundational protocol that is utilized in processing and securing transactions directly. Examples include Ethereum and Bitcoin. To enhance scalability and performance, these primary networks rely on Layer 2 solutions. Layer 2 solutions are protocols that are built on the main chain to handle high-volume transactions smoothly.
The proof-of-work consensus technique used by Layer-1 blockchains requires an exorbitant amount of processing power to produce a single block of transaction data on the network. This mechanism itself is to be blamed for the main scalability problem within the blockchain networks. As the number of transactions increases, the networks become congested, and this leads to high gas fees and longer confirmation times.
Changing the consensus mechanism is considered a dangerous exercise because Layer-1 blockchains themselves process and settle transactions on their respective blockchains, thereby any change in the underlying protocol can be disruptive.
Facing a scaling issue of its own, Ethereum, a well-known Layer-1 blockchain, is now operating on a Proof-of-Stake consensus mechanism. This change was executed back in 2022 and was called “The Merge.” The project is now working towards upgrades like sharding that can increase the throughput. If the protocol comes together and combines with Layer 2 rollups, Ethereum can slowly process around 100,000 transactions per second. You can also learn how Layer 2 solutions are transforming Ethereum transactions to boost speed and scalability even further.
What Is A Layer 2 Blockchain Network And Why Is It Needed?
Layer 2 blockchain solutions such as Ethereum-based Polygon blockchain and Bitcoin-based Lightning Network have emerged in response to the growing popularity of Layer-1 blockchains.
The main mission of the Layer 2 blockchain solutions is to handle the transactions off the main blockchain. This reduces the congestion and the cost of the transaction. These Layer 2 solutions process large volumes of activity off-chain.
The final results are then submitted to the main blockchain or the mainnet. This ensures that the data is stored securely and permanently recorded. These solutions were designed mainly to help Ethereum scale as the demand for transactions surpassed the network’s abilities.
L2 blockchain solutions are successfully shifting the transactional load onto their network and declogging the mainnet by making sure that the mainnet manages crucial elements of decentralization, data availability, and security.
This ensures that a variety of decentralized apps (DApps), which are becoming more and more common in today’s world, can access strong decentralized security standards while resolving the scaling issue that plagues Layer-1 blockchains like Bitcoin and Ethereum.
Key Layer 2 Scaling Techniques
As we all know, the demand for decentralized applications and blockchain has grown over the years, and due to this, there has been a significant strain on the Layer-1 blockchain networks. This strain has led to the development of Layer 2 solutions. Here, we have listed the most relevant scaling techniques that are currently being used in the industry:
- State Channels: Through state channels, users can carry out a number of off-chain transactions between parties, and only the opening and final state is recorded on the blockchain. This setting becomes one of the best options for high-frequency, low-value transactions because it offers speed and low fees. In this setup, congestion is removed as most of the activity is happening off-chain.
- Payment Channels: Payment Channels are a category of state channels whose function is to facilitate rapid and frequent value transfers. Once a channel is opened, users can exchange funds off-chain, with minimum delay and low transaction costs. The blockchain will register the opening and closing balances, which reduces congestion on the network. This mode of payment is ideal for micropayments and recurring transactions between known parties.
- Sidechains: Sidechains are nothing but blockchains that run along with the main blockchains, such as Bitcoin and Ethereum. With this setup, users can easily move assets from the main chain to the sidechain. With this protocol, the transactions are faster, cheaper, and do not overload the mainnet.
Benefits of Layer 2 Scaling
Below are some of the main advantages that Layer 2 solutions bring to the table:
- Increased transaction volume: With the introduction of Layer 2 solutions within the blockchain industry, most of the execution is carried out off-chain. As the execution is off-chain, more transactions are carried out, and congestion on the mainnet is reduced.
- Reduced transaction costs: Layer 2 blockchains carry out multiple transactions that are bundled and then settled together on the mainnet. Due to this, users pay significantly less in gas fees compared to using Layer-1 directly.
- Faster transaction speeds: With Layer 2 solutions, whatever transactions are carried reach finality instantly. This is because the transactions carried out are off-chain. Faster transaction speed is essential in gaming, trading, or for real-time payments.
- Enhanced privacy: In many Layer 2 models, transaction data is not exposed until the final state has been submitted to the main chain. This allows sensitive information to be protected, and this does not compromise the trustworthiness of the system.
Conclusion
After understanding how Layer 2 solutions work, it is easier to conclude that these solutions are doing more than just reducing pressure off the Layer-1 blockchains. With Layer 2 solutions, the decentralized technology is improving, becoming faster, affordable, and practical for everyday use.
As the adoption increases, new applications will emerge, and these scaling tools will play a major role in unlocking the true potential of Web3.
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