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Crypto Layer 2 Scaling Solutions Guide – What Are They and Why are They Necessary?

As the name implies, layer 2 solutions of cryptocurrency are developed to assist with scaling applications. These solutions process transactional data of Ethereum and Bitcoin while still retaining the same security level and decentralization seen in these cryptocurrencies. Layer 2 solutions improve throughput (transaction speed) while simultaneously lowering gas costs. Immutable X, Polkadot, and Polygon are just a few of the popular layer 2 solutions available today.

With blockchain technology, there are a number of advantages, including decentralization, peer-to-peer transactions, high levels of security, and the ability to retain records that are unalterable. It has facilitated the development of a thriving cryptocurrency ecosystem and has served as a foundation for consistent technological advancement. 

Unfortunately, among many other issues, one significant issue with several blockchain systems is their inability to scale. Scaling challenges occur when the volume of data travelling along the blockchain reaches a limit because of the inadequate capacity of most of the blockchains. It is known as a data bottleneck.

In an idyllic scenario, a blockchain can process an unlimited volume of transactions/second, which is known as TPS or throughput in the cryptographic community. On the other hand, the main chain of Bitcoin is only capable of handling 3 to 7 TPS. On the other hand, Visa can execute around 20,000 transactions per second (TPS) through the VisaNet (centralized) electronic payment network. 

Essentially, the difference between Bitcoin and many other blockchains is the grade of decentralization and anonymity that they seek to give. In order to completely replace a basic centralized system, a significant amount of effort and a lot of processing power must be invested. All transactions must be approved, mined, broadcast, and authenticated by a consensus algorithm using a worldwide node’s network.

The developers of blockchain are striving to broaden the boundaries of the maximum capacity of the blockchain to address these issues. It means that a greater quantity of transactions may be processed/second, and thus, processing times can be reduced. The use of layer 2 scaling solutions is one means of achieving this.

Ultimately, this would bring the unifying objective of the public blockchain into reality, which is to enable cryptos and technologies based on blockchain to be available to everybody in a expedient, protected, and well-organized way.

What Is The Significance Of Layer 2 Solutions?

Scalability and higher throughput are vital because they allow the Ethereum blockchain to maintain its integrity while allowing for full decentralization, transparency, and security and lowering the network’s carbon footprint.

Despite the fact that Ethereum is the most commonly used blockchain and, in many ways, the most secure, this does not rule out the possibility that it has significant faults. Because of its sluggish transaction times (13 processes per second) and high gas fees, the Ethereum Mainnet (Layer 1) is notoriously difficult to use. Because Layer 2s are constructed on a foundation of the Ethereum blockchain, transactions are kept secure, fast, and scalable. Ethereum Layer 2s

To examine the advantages and disadvantages of each option, which include throughput, gas expenses, security, scalability, and functionality. There is currently no specific layer 2 solutions to meet all of these requirements. But different layer 2 scaling solutions try to improve all aspects; these solutions are referred to as rollups.

What Are Layer 1 Scaling Solutions?

Layer 1 solutions improve basic protocols (proof-of-work) by altering how they function in terms of data processing. For instance, the Ethereum blockchain is now transitioning to a consensus process known as proof-of-stake (PoS). This new mining approach allows for higher transaction rates and more effective energy consumption during the process of mining.

Sharding is one more layer 1 scalability approach that divides the responsibility of verifying and authenticating transactions into minor pieces, allowing for more efficient processing. It improves the workload distribution across the P2P (peer-to-peer) network, allowing for added computing power to be drawn from a greater number of nodes. All of this contributes to blocks being completed more quickly.

Nevertheless, layer 1 scaling solutions are not the only means of scaling blockchains currently accessible. When it comes to scalability, layer 2 solutions create an extra protocol constructed on the base of blockchains such as those used by Bitcoin and Ethereum.

Using layer 2 scaling methods, throughput may be increased without compromising the fundamental security properties or decentralization included in the main blockchain.

What Are Meant By Sidechains?

Sidechains are, actually, a kind of hybrid of layer 1 as well as layer 2 scaling solutions, and they are becoming increasingly popular. Another blockchain, such as Bitcoin’s sidechain, is related to the main chain using a cryptographic hashing algorithm. Two-way peg (2WP) is a technology that enables the unrestricted transfer of bitcoin from the key blockchain to the layer 2 chain, which necessitates the use of the trust of third-party.

For instance, a Liquid Network, connected to Bitcoin’s main chain, is an example of a sidechain. Like previous layer 2 scaling solutions, sidechains intends to alleviate scalability issues by outsourcing some verification and the procedure of transaction processes to alternative blockchain, as has been done with other layer 2 scaling solutions. It allows the central chain to handle more transactions, allowing it to scale.

What Is Meant By Parachain?

Parallel chains are referred to as “parachains” in this context. According to what you may expect, the parachains route parallel to each other in a network of interrelated blockchains. The fact that they all are developed inside the similar framework allows them to share the similar security features, and they’re all linked to the same fundamental relay chain ensures that they are all interconnected. However, all of them have the ability to act self-sufficiently to handle their respective applications. Polkadot is based on this principle, and it is the heart of the brand. Parachains enable extremely rapid transaction processing since the workload is efficiently distributed over the network.

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Overview of Ethereum 2.0 (POS)

The term “Ethereum 2.0” alludes to the network’s transition to a extra sustainable Proof-of-Stake (PoS) architecture that allows sharding and some other scalability characteristics. It is anticipated that these enhancements would improve the Cryptocurrencie’s scalability while also bringing them on a level with other major blockchains in terms of throughput. As a reward for their assistance to the Ethereum validation effort, Ethereum owners can stake coins in order to collect incentives.

What Is Meant By Hashgraphs?

Hashgraphs are regarded as outside the scope of blockchain technology and a completely separate technology. Although they are quite different, they are similar in that they both use (DLT) distributed ledger technology. Furthermore, contrary to the blockchain, hashgraphs have already been patented, so the one ledger that makes use of Hashgraph is Hedera Hashgraph, which is the only one now in use. 

Hedera is public ledger technology’s third generation, after BTC and Ethereum in terms of popularity. It allows for tremendous scaling at 10,000 transactions per second, fewer costs, less energy use, and shorter processing times, among other benefits.

 What Are Layer 2 Scaling Solutions?

Layer 2 scaling solutions should be able to leverage the main chain’s fundamental security as a foundation. Instead of using additional networks or verifiers to protect the chain. The layer 2 distinguishes itself by deriving its security straight from the main chain instead of sidechains.

Rollups are advantageous because they lower transaction fees, increase transaction speed, and broaden participation opportunities. There are two types of rollups, each with its own set of security features:

  • Optimistic rollups make the assumption that all transactions are legitimate by default and only run computation when a challenge is issued.
  • Zero-knowledge rollups are computations that are performed off-chain and then submitted to the main chain for validation.

Layer 2 scale algorithms and solutions, such as Starkware, Arbitrum and Optimism, allow blockchains to scale, allowing an increasing number of platforms and exchanges to use blockchain networks such as Ethereum.

Optimistic Rollups

Optimistic rollups are executed on Ethereum’s base layer to execute a large range of smart contracts without overloading the network. They continue to enjoy the same levels of protection as the Ethereum main chain, which is a significant advantage. Data aggregators will carry out the computation of Merkle roots in order to increase transaction speeds. They do, however, have a lower throughput than Plasma and ZK Rollups, respectively.

The primary difference between layer 2 transactions and ZK-rollups is that layer 2 transactions take significantly longer to complete. It is necessary to depend on foreign validators to verify the Merkle roots first before the system’s state can be updated in optimistic rollups. However, optimistic rollups have the advantage of being able to endorse smart contracts in a manner similar to that of the fundamental smart contracts blockchain.

Advantages Of Optimistic Rollups

Gas prices are low.

  • Throughput has increased.
  • The capability of smart contracts.
  • The Ethereum Mainnet ensures security.

Disadvantages Of Optimistic Rollups

  • A long period of withdrawal.
  • If a phoney transaction is identified, the rollup will immediately call a fraud-proof and perform the transaction’s computation using the written data available, resulting in extended withdrawal periods if the transaction is disputed.

Zero-knowledge Rollups

In cryptocurrency, zero-knowledge rollups (also known as ZK-Rollups) are a collection of data. The smart contracts securitized this data on the key chain while being carried off-chain (outside of the blockchain) for processing and computation. In less than one minute, they can build a block with the potential to execute 2,000 transactions per second. Zero-knowledge implies that all validators can be confident that they always have the similar info without being revealed.

Because of the off-chain storing of data, the Zero –Knowledge rollups layer 2 scaling method outperforms the layer 1 scaling approach. Important data important to smart contracts are demanded less often on layer 2 blockchains than it is on layer 1 scaling blockchains. Due to this, a significant amount of computing power is saved, and a smaller portion of the blockchain’s capacity is needed for transaction confirmation. Due to which, gas fees are reduced, making transactions both speedier and more affordable.

Advantages Of ZK Rollups

  • Transfers that happen almost instantly.
  • Optimistic rollups are not susceptible to the types of attacks that affect optimistic rollups.
  • Still decentralized and secure.

Disadvantages Of ZK Rollups

  • For smaller systems with less on-chain activity, validity proofs are extremely difficult to compute.
  • The user can influence the order of transactions.
  • Some rollups do not support the Ethereum Virtual Machine (EVM).

What Is Plasma?

The Plasma layer 2 scaling solutions for Ethereum employs secondary blockchains to help the parent chain with verification. Plasma chains are alike to Parachains and Polkadot’s smart contract. They are, however, organized in a grading to remove connections from the core chain, which frees up time and improves salability.

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Examples Of Layer 2 Scaling Solutions for Bitcoin

  • Bitcoin Lightning Network

It is among the most well-known Bitcoin layer 2 scaling solutions, and it has been around since 2009. It does the same thing as another layer 2 scaling solutions: they take transaction packets from the core chain and process them outside of the chain before transmitting the information back. Smart contracts are also made available to Bitcoin users through the Lightning Network, which represents a significant upgrade to the whole network.

There are several advantages to using the Bitcoin lightning network, including scalability, immediate payment, low gas fee, and cross-blockchain swapping.

As the title implies, this layer 2 scaling solution will allow for lightning-fast transactions on the blockchain (Bitcoin), with transactions being completed in milliseconds or less. The current average time for transaction for Bitcoin is approximately 10 minutes. Though, when the network is crowded, the response time can vary significantly.

This network also promises to be able to process billions of transactions per second which is several times sophisticated than the processing speeds of traditional payment providers such as Visa.

It is possible to lower transaction fees significantly by using a layer 2 scaling solution to settle transactions off-chain, allowing immediate micropayments. Furthermore, cross-chain atomic swaps can take place outside the blockchain as long as both chains use the identical cryptographic hash function (which is not always the case).

Examples Of Ethereum Layer 2 Scaling Solutions

  • Optimism

Optimistic Ethereum is an optimistic rollup chain compatible with the Ethereum Virtual Machine (EVM). The most significant advantages of deploying on Optimism are quick, simple, and secure. By using the Optimistic Ethereum Gateway, able to move assets into or out of the network, projects wanting to launch can submit a form to be considered for inclusion on the Optimistic whitelist. In most cases, projects that match their launching criteria will be accepted within two weeks of submission. Uniswap V3 announced the debut of its alpha version on the Optimistic Ethereum mainnet on July 20, 2021.

  • Starkware

Starkware is a company that provides layer 2 scaling solutions for Ethereum blockchain. Starke, Cairo and StarkEx, are the company’s three products. StarkNet is a consent less, decentralized Zero-Knowledge rollup Ethereum blochchain’s layer 2 solution. Developers will now be able to install the smart contracts on the testnet of StarkNet’s without the need for approval. The most significant benefit is the possibility for decentralized Apps to grow to an indefinite amount of users while still benefiting from Ethereum’s embedded systems and security, as previously stated.

Founded in June 2020, StarkEx, a layer 2 scalability mechanism tested and positioned on the mainnet since then. StarkEx has been implemented in a number of different use cases, with noteworthy customers including DeversiFi, dYdX and Immutable. The key advantages of StarkEx are trustless scalability through the use of technology of ZK-STARK, the ability to construct self-custodial decentralized applications, and strong and safe sealing solutions for a variety of applications. 

Cairo is the Turing-equivalent language that powers StarkNet and Starkware and StarkEx, uses it. It enables the scaling of decentralized Apps through the use of STARKs.

  • Arbitrum

A layer 2 scaling solution, Arbitrum, is aimed to improve the scalability and speed of smart contracts (Ethereum) while also providing extra privacy protections. It is possible to perform EVM (Ethereum Virtual Machine) transactions and contracts on layer 2. In all this process it does not affect the security of the layer 1 platform.

Arbitron touts oneself as the appropriate scaling option for DeFi applications, with the capacity to grow any contract using Arbitrum rollup.

A new version of Arbitrum was released on 31st August 2021, and Off-chain Labs, the company behind it, received 120 dollars in series B fundraising, valuing the company at 1.2 billion dollars. Off-chain Labs is the company behind Arbitrum.

Conclusion

Layer 2 solutions have the ability to make a significant difference in the blockchain ecosystem for the better. Using Layer 2 solutions, users may ensure that all of the security precautions implemented on layer 1 scaling solutions are maintained while still transacting swiftly and at very little cost to themselves.

This sort of technology may inspire more individuals to experiment with the Ethereum and bitcoin blockchain and all it offers. Also, consider that several layer 2 solutions are still in the beta stage, which means you should do a thorough study and constantly maintain an open mind and cautious approach when investigating the various layer 2 options.


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Mubashar Nawaz (United Arab Emirates)

Mubashar Nawaz is an experienced crypto writer working for Tokenhell. Having passion for writing, he covers news articles from blockchain to cryptocurrency.

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