Do you hate being stuck in traffic, especially when you’re in a hurry? In this case, you start thinking about how many roads can serve thousands of cars and commuters every day. Interestingly, the same situation exists in the cryptocurrency space, known as the scalability problem.
This happens when the blockchain network reaches a certain capacity limit. You can think of it as a gradual increase in vehicle traffic due to congestion on the road. In the cryptocurrency space, this can happen if many people try to transact at the same time. To solve this problem, the second layer came into being, aiming to solve the scalability problem of cryptocurrencies. But what exactly is the scalability problem, and how can a second layer network solve it? Let’s explore together.
Blockchain Scalability Issues Briefly
If you take a quick look at the day-to-day market capitalization of cryptocurrencies, you’ll be surprised how many people have already bought into these currencies (regardless of their purpose). At the time of writing (January 25, 2022), the market capitalization of Bitcoin (BTC) has exceeded $686.21 billion, while the market capitalization of Ethereum (ETH) has exceeded $286.55 billion.
These huge numbers confirm that more and more people have started to explore different cryptocurrencies. At the same time, the more transactions to be completed, the busier the blockchain network becomes. This brings scalability issues.
Let’s take the Ethereum network as an example. On the Ethereum blockchain, high demand has resulted in changing transaction speeds and ETH gas prices have become increasingly expensive. The same is true for Bitcoin’s blockchain, which needs to deal with an influx of transactions at the same time.
To increase the operational efficiency of the network and improve processes, developers have come up with Layer 2 scalability solutions.
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What are blockchain layers and how do they work?
If the scalability problem is equivalent to road congestion, then the second layer is equivalent to additional roads and streets. This term is used to refer to solutions created and designed to scale blockchain networks.
Earlier, we mentioned that when the network becomes very busy, transaction speed and flow can slow down and transaction costs can become higher. And these are the problems that the second layer has to solve. To help you better understand how the second layer works, let’s talk about the first layer first.
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Layer 1
In the cryptocurrency space, the first layer (or main chain) is the standard or base consensus layer. Almost all transactions take place and settle here. Examples include the Bitcoin network, the Ethereum network, and other cryptocurrency networks. You can think of it as a highway through which almost all cars and other vehicles traveling in a specific direction pass.
When the number of vehicles increases, congestion problems start to appear. The same goes for transactions that come in and are done in a blockchain network – so we need scaling solutions.
Layer 1 scaling solutions include consensus protocol improvements, also known as Proof of Work (PoW) and Proof of Stake (PoS) terms you may hear often. There is also a method called sharding, which divides the entire blockchain into different data sets, called “sharding”.
If the network needs to complete more transactions per second or lower fees — or both, a second-layer solution might be another good option.
Layer 2
In simple terms, the second layer is another layer built on top of the first layer. The benefit is that no changes to the first layer are required, that is, there are no disruptions or changes to the systems and processes at the base layer. The goal of the second layer is to help enhance the capabilities of the first layer by processing off-chain transactions.
That is, the second layer must be able to share work, reduce overall congestion, and avoid single points of failure. In this way, transaction speed and user experience are not affected, and transactions can run smoothly and safely as usual.
Deep Dive into Layer 2 Scalability Solutions
In an ideal world, a blockchain network is capable of processing an unlimited number of transactions per second, which is called throughput or TPS. However, based on the actual performance of the current cryptocurrency network, we will see that processing an infinite number of transactions is still far from a reality.
The Bitcoin main chain can run around 3 to 7 TPS — a number that is a far cry from Visa’s around 20,000 TPS. But on the other hand, Bitcoin’s network is undoubtedly more secure because it is decentralized and every transaction must be approved, mined, distributed and confirmed by multiple nodes or data stewards of the blockchain infrastructure.
In order to increase the speed and efficiency of the network while maintaining its reliable security and integrity, Layer 2 scaling solutions have emerged. These include:
- Status channel
- State channels use multi-signature contracts to facilitate fast off-chain transactions and finalize transactions through the main chain, reducing network congestion, lowering transaction fees, and avoiding processing delays.
- Side chain
- This is an Ethereum Virtual Machine (EVM) compatible standalone blockchain that runs in parallel with the main chain. It works with Ethereum via a two-way bridge and operates under its own consensus and block parameters.
- Rollup
- Volumes execute transactions off the main chain and publish data to the first layer when consensus is reached. There are two types of rollups: ZK-rollups and optimistic rollups. Zero-knowledge (ZK) stacks collect or aggregate hundreds of off-chain transactions and create succinct non-interactive argumentative knowledge (SNARK). The use of ZK rolls only requires proof of validity and does not require transaction data. This makes validating blocks faster and cheaper. Optimistic stacks, on the other hand, do not perform any calculations, but instead propose new states or “notarized” transactions to the main chain. Computation can be expensive when using Ethereum, making optimistic rolls ideal for reducing gas costs.
Layer 2 Network Example
Now that you understand what a Layer 2 scaling solution is, let’s move on to the Layer 2 paradigm in the cryptocurrency space.
- Bitcoin Lightning Network
- The Bitcoin Lightning network is a decentralized system that allows users to make instant, high-volume micropayments at low cost. This payment protocol is one of the widely used, fast and easy Bitcoin transaction channels.
- Loopring
- Loopring uses open source smart contracts from Ethereum to develop its own projects. It was created to solve the challenges faced by centralized and decentralized exchanges, allowing investors to store investments in their own wallets while completing transactions in a centralized manner.
- Polygon
- Polygon provides development services for the security of the Ethereum network as well as for developers. Developers use its tools to build optimized, Ethereum-based technology.
- Optimism
- Optimism improves the affordability of Ethereum transactions. In addition to this, Optimism also develops transaction speeds for Ethereum users.
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Beyond the second floor
There is no doubt that the second layer of blockchain brings many benefits to the network it supports and its users. As we discussed earlier, the second layer was developed to address the increasing load on different crypto networks, including Bitcoin and Ethereum.
With the opening of the cryptocurrency trading road, more and more people will try to use digital currency to explore its extraordinary potential. Soon, we will see other networks offer more accessible, faster, and more affordable cryptocurrency transactions.
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April 24, 2024
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