Layer 2 refers to a framework or technology built on top of an existing Layer 1 blockchain (such as Ethereum or Bitcoin). Its main purpose is to improve the scalability and efficiency of the underlying network by taking some of the transaction volume and processing it off-chain (outside the main chain), and then finalizing it on Layer 1.
Why we need Layer 2
Layer 1blockchains , although secure and decentralized, often face the “Blockchain Trilemma”: it is difficult to achieve scalability, security and decentralization simultaneously. Most Layer 1 blockchains prioritize security and decentralization, which leads to significant scalability limitations:
- Low Transaction Speeds: limited number of transactions per second (TPS).
- HighGas Fees: During times of congestion, transaction fees can become prohibitive.
Layer 2 solves these problems by allowing a much higher volume of transactions to be processed at much lower costs without compromising Layer 1 security.
How Layer 2 works
The exact mechanisms vary depending on the type of Layer 2 solution, but the fundamental principle is the same:
- Off-Chain Transaction Transfer: All transactions are grouped and then executed on a Layer 2.
- Validation and consolidation: These transactions are validated and consolidated into a single “proof”.
- Anchoring on Layer 1: Only this aggregated proof, which contains information about hundreds or thousands of transactions, is sent and recorded on the main blockchain (Layer 1).
This process significantly reduces the load on Layer 1, as Layer 1 has to process one large proof instead of thousands of individual transactions.
Common types of Layer 2 solutions
- Rollups (Optimistic Rollups and ZK-Rollups): These are two of the most popular Layer 2 solutions.
- Optimistic Rollups: Assume that transactions are valid by default, but provide a “dispute window” (dispute period) where anyone can prove fraud. If a fraudulent transaction is proven, it is canceled and the validator is penalized. They are fast, but withdrawals can take longer.
- ZK-Rollups (Zero-Knowledge Rollups): use complex cryptographic proofs in order to verify the validity of off-chain transactions. These proofs are then published on Layer 1. They are highly secure and offer fast withdrawals, but are computationally more complex.
- State Channels: allow users to perform multiple off-chain transactions, recording only the final state on Layer 1. Example: Lightning Network for Bitcoin, Raiden Network for Ethereum. Good for micro-payments, but require participants to be online.
- Sidechains: These are independent blockchains, compatible with Layer 1 but with their own consensus mechanism. Assets can be transferred between Layer 1 and the sidechain via a bridge.
- Plasma: An architecture that uses “mini-blockchains” connected to the main blockchain to manage transactions.
Advantages of Layer 2 solutions
- Improved Scalability: Process many more transactions per second.
- Reduced Costs: Significantly lower transaction fees.
- Faster Completion Speeds: Transactions are confirmed almost instantly on Layer 2.
- Legacy Security: Builds on the robust security of Layer 1.
- Innovation: Enables development of complex applications that would be too expensive or slow on Layer 1.
Layer 2 is essential to the future of blockchain, especially Ethereum, as it helps realize the vision of a decentralized, scalable, and accessible ecosystem for billions of users.
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