Layer 2, or the Lightning Network is a second layer on top of Bitcoin’s blockchain that allows for instant transactions at low fees. It was originally developed to mitigate some scaling issues but has since evolved into an entirely separate entity. The network supports bitcoin and other cryptocurrencies as well as its own currency, lumen (LN).
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Layer 2 is a technology that was introduced to the blockchain world by Satoshi Nakamoto in 2009. It has been used for many different purposes, such as speeding up transactions and providing privacy.
Who enjoys being stopped in traffic, particularly when they are in a hurry? You may consider extra road building to break the bottleneck at times like this. Surprisingly, there is a bitcoin equivalent to this problem called as the scalability issue.
This occurs when the capacity of a blockchain network reaches a particular point. It happens when a big number of users try to transact at the same time in the case of cryptocurrencies.
As for a remedy, there’s something called Layer 2 that seeks to address the scalability issue in the crypto industry. But what is this scaling issue, and how can a Layer 2 network address it?
The Scalability Issue with Blockchain
If you look at the current market capitalization of cryptocurrencies, you’d be amazed at how many individuals have obtained these coins—for whatever reason. Bitcoin (BTC) has a market size of more than 686.21 billion dollars, whereas Ethereum (ETH) has a market cap of more than 286.55 billion dollars at the time of writing (January 25, 2022).
These startling data show that a growing number of individuals are getting interested in different cryptos. The blockchain network grows busier as more transactions are performed. This is when the problem of scalability enters the picture.
Take the Ethereum network, for example. Due to high demand on the Ethereum blockchain, transaction speeds are slowing and ETH gas costs are approaching unsustainable levels. The same can be said about Bitcoin’s blockchain, which must handle a massive number of transactions at the same time.
To increase the network’s operational efficiency and operations, a Layer 2 scalability solution was created.
Layers and purposes of the blockchain
Additional access roads and streets will be introduced as Layer 2 if the source of the road congestion is a scalability problem. This phrase refers to the solutions that have been created and intended to assist with the scalability of a blockchain network.
Transaction speed and procedures may be hindered, and transaction fees may rise, as we previously indicated when a network is excessively crowded. These are the problems that Layer 2 tries to fix. Let’s have a look at Layer 1 first to get a better understanding of how Layer 2 operates.
Layer 1
The basic or base consensus layer in the crypto realm is Layer 1, often known as the main chain. Almost all transactions and settlements take place here. Bitcoin, Ethereum, and other crypto networks are only a few examples. Consider it a highway that almost all automobiles and other vehicles heading in one direction pass through.
The issue of traffic congestion arises as the number of automobiles on the road grows. The same can be said for transactions entering and exiting the blockchain network, requiring scaling solutions.
Improvements to consensus protocols are included in certain Layer 1 scaling solutions, and the phrases Proof of Work (PoW) and Proof of Stake (PoS) may occur more often. The alternative option is sharding, which divides the whole blockchain network into separate databases called “shards.”
Layer 2 solutions may be a great option if a network wants a larger number of transactions completed per second or cheaper fees—or potentially both.
Layer 2
Layer 2 is only an additional layer on top of Layer 1. The benefit is that it does not need any Layer 1 modifications, ensuring that the base layer’s systems and processes are not interrupted or changed. The purpose of Layer 2 is to aid Layer 1’s capacity by processing transactions off-chain.
This requires a Layer 2 solution that can offload work, reduce overall congestion, and eliminate single points of failure. As a consequence, transaction speeds and user experience will not be affected, but instead will function easily and securely—exactly as they should.
Scaling Solutions for Layer 2
In an ideal world, a blockchain network would be able to process an unlimited number of transactions per second. This is referred to as TPS (throughput per second). However, a brief examination of the current state of crypto networks reveals that processing an endless number of transactions is still a long way off.
The capacity of the Bitcoin main chain is 3 to 7 TPS, significantly less than Visa’s 20,000 TPS. Bitcoin’s network, on the other hand, is unquestionably more secure since it is decentralized, and every transaction must be accepted, mined, disseminated, and validated by numerous nodes or blockchain infrastructure data keepers.
Scaling Solutions for Layer 2 were developed to increase the network’s speed and efficiency while maintaining its dependable security and integrity. These are some examples:
Channels of government
Channels of government employ multi-signature contracts to facilitate fast off-chain transactions and finalize them with the main chain. This reduces network congestion, transaction fees, and processing delays.
Sidechains
This is a distinct blockchain that operates in tandem with the main chain and is compatible with the Ethereum Virtual Machine (EVM). It uses two-way bridges to interact with Ethereum and has its own consensus and block parameters.
Rollups
When a consensus is obtained, these transactions are executed outside of the main chain and the data is sent to Layer 1. ZK-rollups and optimistic rollups are the two forms of rollups.
Hundreds of off-chain transactions are collected or rolled up in zero-knowledge (ZK) rollups to provide a compact non-interactive argument knowledge (SNARK). ZK-rollups simply need validity evidence instead of transaction data. This reduces the time and cost of verifying a block.
Optimistic rollups, on the other hand, do not do any calculations and instead “notarize” the transaction by proposing the new state to the main chain. Optimistic rollups are good for minimizing gas prices since computation is the most costly component of utilizing Ethereum.
Plasma
This is designed utilizing smart contracts and Merkle Trees—a means of organizing vast volumes of data in a more clear manner—for the Ethereum network. Plasma enables an endless number of side chains, or smaller duplicates of the Ethereum network, to be created.
Examples of Layer 2 networks
Now that you know what Scaling Solutions for Layer 2 are, let’s look at some examples in the crypto world.
Bitcoin Lightning Network (Bitcoin LN)
The Bitcoin Lightning Network (Bitcoin LN) is a decentralized system that enables users to make low-cost, high-volume micropayments in real time. This payment protocol is one of the most commonly used channels for quick and simple Bitcoin transactions.
Loopring
Loopring creates its own projects using Ethereum’s open-source smart contracts. It was created to solve the problems that both centralized and decentralized exchanges confront by enabling investors to maintain their funds in their own wallets while trading in a centralized way.
Polygon
Polygon develops security for the Ethereum network as well as for developers. It contains tools that developers may utilize to design Ethereum-based technologies that are optimized.
Optimism
Optimism highlights improvements to the affordability of Ethereum transactions. Optimism also helps the speed of transactions for Ethereum users.
Finally, some ideas
Beyond the second layer, Blockchain’s Layer 2 brings undeniable advantages to the network it supports as well as its users. The creation of Layer 2 addresses the rising pressure on numerous crypto networks, including Bitcoin and Ethereum, as we previously observed.
New individuals will be able to experience the great potential that digital currency have to offer as more routes for crypto transactions open up. It should come as no surprise that additional networks will soon make crypto transactions more accessible, quicker, and cheaper.
Layer 2 is a protocol that was designed to run on top of the TCP/IP protocol. It allows for faster transactions and improved scalability. Reference: what is layer 2 protocol.
Frequently Asked Questions
What is meant by layer 2?
A: Layer 1 is the visible layer, and where most of your gameplay takes place. Layer 2 is additional content that can be accessed by holding down a button while in game.
What is the function of layer 2?
A: Layer 2 is the flow of music from left to right in a rink.
What does layer 2 and layer 3 mean?
A: Layer 2 refers to a tracks volume. The first layer is the default and when you put your hand on it, that means its 100% of the way up. Layer 3 would be 80%, then 60%.
