What is layer-2 in crypto? What is a layer-2 blockchain?

A blockchain consists of three main layers: keeping security a top priority, making sure everything works all the time, and allowing everyone to participate in how the blockchain works.

However, when many people use blockchain at the same time, it slows down. This is where layer-2 comes into play, and it can be thought of as an upgrade to layer-1 blockchains. Layer-2 makes blockchains scalable, faster, and less crowded while keeping everything manageable and secure.

In this article, we will discuss what a layer 2 blockchain is, the different layers of blockchains and specifically what are the key differences between layer 1 and layer 2 blockchains.

What is Layer-2 blockchain?

As the name suggests, layer-2 in crypto came after layer-1 and is built on top of layer-1 to improve its performance and scalability.

The main problem with Layer 1 protocols is their high fees and slow transaction speeds, especially during a volatile market and peak usage periods. Layer 2 blockchains have emerged with sidechains, state channels, and aggregations, among other solutions that improve upon the underlying layer 1 blockchain in terms of faster transaction times and lower fees.

Understanding blockchain layers

Layer-1 (L1), also known as the base layer of a blockchain network, controls core functions that include consensus mechanisms such as Ethereum (ETH) proof of stake or Bitcoin’s proof of work and transaction agreements, among other core functions. . Although decentralization and security are the most important features of L1s, bottlenecks such as slow transaction speeds and expensive fees sometimes plague them.

Layer 2 (L2) blockchains are built right on top of layer 1 blockchains to solve the underlying problems. Layer 2 blockchains use techniques such as aggregation, sidechains, and state channels; This reduces transaction overhead and enables faster and cheaper transactions without compromising security.

L2 blockchains have come a long way and solved many problems in L1 and the overall blockchain ecosystem; however, additional optimization is required to improve interoperability, user experience, and certain application features. This is where Layer-3 (L3) blockchains come into play.

L3 blockchains specialize in building custom protocols for applications across web3 industries, including but not limited to NFTs, DeFi, and gaming. In simpler words, L3 blockchains facilitate cross-chain functionality between different blockchains so that any end user can access multiple blockchains at once, increasing accessibility and interoperability.

These three layers of blockchain described above come together to form a complete stack that guarantees the future scalability, security and availability of blockchain technology.

Layer-1 and layer-2 blockchain

Layer 1 and layer 2 blockchains differ primarily in their functions in the blockchain ecosystem. Consensus mechanisms and autonomy are at the core of layer 1 blockchains. Bitcoin and Ethereum are two of the popular layer 1 blockchains that are autonomous in the way they work when recording and verifying transactions on the chain. However, as mentioned earlier, when there is significant volatility in the market, layer 1 blockchains experience critical scalability issues, which have a direct impact on fees rising and transaction delays.

Layer 2 blockchains are developed on top of layer 1 protocols with a specific control mission, which is to improve the scalability and performance of L1 blockchains over time. There are many techniques that L2 blockchains use to make L1s efficient, but the most common are combining several transactions into a single transaction and processing transactions off-chain; this directly reduces the workload of the protocol without creating too many negative effects.

Aggregations, state channels, and sidechains are some of the many solutions offered by L2 blockchains that combine to allow faster and cheaper transactions and reduce congestion on the underlying L1 protocols.

In the long run, both layer-1 and layer-2 come together to create an effective system: layer-1 provides the underlying security and decentralized consensus, while layer-2 makes blockchain technology even better by improving scalability and user experience. makes it happen. It is suitable for common use cases such as gaming and decentralized finance (DeFi).

List of Layer-2 blockchains

There are more than 100 layer-2 blockchains, and more blockchains develop occasionally. Here we will talk about the three best layer-2 blockchains ever:

Polygon (POL)

Polygon is a layer-2 blockchain, also called ‘sidechain’, which is a scaling solution running on the Ethereum blockchain. Cryptocurrency projects use Polygon to improve the scalability, flexibility, and autonomy of their platforms. POL (formerly known as MATIC) is Polygon’s native token and is used for governance and network transaction fees on the Polygon blockchain.

Optimism (OP)

Optimism is a layer-2 blockchain that uses optimistic rollups to scale the Ethereum ecosystem. This layer 2 platform works on a community-driven governance model to benefit the ecosystem in the long run.

The Optimistic Aggregation protocol is at the heart of Optimism as it helps ease Ethereum’s load by executing transaction data outside of Ethereum and then periodically sending it to the Ethereum blockchain. This entire process helps reduce transaction costs and improves the performance of the Ethereum blockchain, and more projects can be built on Ethereum using the Optimisim L2 blockchain.

Arbitration (ARB)

Arbirtum is a layer 2 blockchain that also uses optimistic aggregation to store off-chain data, reducing traffic on the Ethereum blockchain. It offers web3 applications and smart contracts that offer lower and faster transactions compared to using Ethereum as a standalone blockchain.

Advantages and challenges

Now you understand why layer-2 blockchains are a critical part of the entire web3 ecosystem. However, this does not mean that they will not face any difficulties. In this section, we will briefly discuss the benefits and challenges presented by layer-2 blockchains.

Advantages: Scalability

Off-chain processing of transactions is a key feature of L2 blockchains and has a direct impact on increasing scalability, as congestion on the underlying L1 blockchain is significantly reduced.

Lower Transaction Costs

The migration of new users and projects from web2 to web3 becomes attractive because layer-2 blockchains significantly reduce transaction costs thanks to the off-chain transaction processing described above.

Faster Transactions

When transactions are processed off-chain, not only is the fee reduced, but the time it takes to get from point A to point B is also reduced. The L2 blockchain aggregates multiple transactions, increasing their speed and in turn providing an improved experience while preserving the user experience. security too.

Challenges: Security Dependencies

L2 blockchains do not share the autonomy and high level of security compared to layer 1 blockchains. There are still vulnerabilities and bugs with L2 blockchains that are being resolved by blockchain developers.

Complexity and Adoption

Not everyone can integrate a layer-2 project into layer-1 protocols as it may require specialized infrastructure knowledge of both L1 and L2 blockchains. This means that many users and new projects may face a steep learning curve to adopt this layer-2 technology.

Interoperability Issues

Performance and fast transactions are a big advantage of layer 2 blockchains, but interoperability issues still exist. This problem is being solved by the introduction of L3 blockchains, which increases cross-chain functionality between different blockchains, as explained in part 2 of this article.

The future of layer-2 blockchains

Layer 2 blockchains in crypto will continue to solve the scalability issues currently faced by layer 1 blockchains like Bitcoin and Ethereum. With the increasing adoption of decentralized technology, affordable blockchain technology will become the most important requirement and this is where layer 2 blockchains can handle this incoming traffic without compromising decentralization or security.

It is also expected that interoperability between layer-1 and layer-2 blockchain will continue to be improved. This will help create a unified ecosystem that will provide greater accessibility to assets and data across all blockchains. In simpler terms, user experiences such as blockchain wallet integrations, transaction volume, and other key metrics that determine blockchain performance will be improved, encouraging mass adoption.

Other key expectations from Layer 2 blockchains are rollups, zk proofs, etc., as new cryptocurrency startups continue to build on this blockchain technology. The innovation sector continues to progress. It is also possible that the Layer-2 blockchain solution will eclipse other blockchain layers and become the future of a decentralized economy.