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We heard a lot of praising words about cryptocurrencies like decentralized; you don’t need an intermediary such as a Bank, secure using cryptography, making sure no one tampered with the transactions and focusing on privacy.

But the main problem with cryptocurrencies is scaling. Meaning there is a threshold for a cryptocurrency blockchain to process the transaction.

For example, the Bitcoin blockchain can process 4 to 6 transactions per second, having a 10 minute transaction verification on the blockchain compared to the private transaction handling company Visa which has the capacity of processing more than 65,000 fiat currency transactions per second.

To solve this scaling problem, solutions are proposed and known as Layer 1 and Layer 2 solutions.

Layer 1 solutions are simply proposing changes in the blockchain, like changing the entire blockchain algorithm. For example, Ethereum shifted to Proof-Of-Stake (POS) from Proof-Of-Work(POW), which handles up to 35 transactions per second, whereas POS can handle up to 100,000 transactions.

Sharding is another Layer 1 solution where each node maintains its own version of blockchain called shard instead of maintaining the full copy of the entire crypto blockchain. Individual shards provide proofs to the main blockchain and interact with one another to share addresses, balances, and general states using cross-shard communication protocols; this way, a crypto blockchain can process the transactions effectively and efficiently.

But these Layer 1 solutions might not be effective in the near future to beat centralized payment processors like Visa.

So, the solution is Layer 2.

What Are Layer 2 Solutions?

As a name, layer 2 solutions are second layers built upon the coin blockchain to address the scaling and efficient issues of the main blockchain.

In layman’s terms, a layer 2 solution is a blockchain protocol that depends and builds upon the original layer 1 blockchain for processing the transactions without tampering with any of the decentralization or security characteristics that are integral to the original blockchain.

Layer 2 solutions take the layer 1 transaction burden and shift them into their system architecture, then handle the transaction processing load. In the end, reporting to the main blockchain results in finalization.

Types of Layer 2 Solutions.

Nested Blockchain.

Nested blockchain work within or, to be precise, work atop the main blockchain to process the transaction.

Even if the Nested chain processes the transactions, the main chain remains in control of overall parameters and sets the rules for the whole network.

Multiple nested blockchains can be built upon the main blockchain, linking them through a parent-child connection. The parent chain assigns and distributes the tasks among its children, who in turn execute them and send back the result to the mainchain, relieving their parent of its workload and increasing scalability.

However, the main blockchain does not take part in the network functions of nested chains unless there is a need to resolve a dispute.

State Channels.

State Channels enable two way communication between offline transactions and the main blockchain by using multi-signature or smart contracts.

Simply put, state channels connect the offline transaction happening on the wallet, exchange etc., to the main blockchain using smart contracts or multisig.

The advantage of the state channel is there is no need for any validation for the transaction from the layer 1 main blockchain nodes. Instead, the resource is sealed-off through a smart contract. When the transaction is complete, the final state of the whole channel is added to the layer 1 public ledger for recordkeeping purposes.

The best example for state channels is Bitcoin Lightning Network which allows micro-transactions within a limited time frame with a low fee. Another example is Ethereum’s Raiden Network lets participants on the blockchain run smart contracts through their channels.

Sidechain.

A sidechain is a separate blockchain attached to the main blockchain. You can think of it as a different version of a blockchain co-existing with the current version.

Sidechains have their own different consensus and block parameters from the main chain but depend on the main blockchain for transaction confirmation, handling security and dispute.

The connection between the main chain and side chains is done through a two-way peg which allows digital assets such as bitcoin to be transferred back and forth between the mainnet and the new sidechain.

Sidechains are used for large batches of transactions lifting heavy burdens for the main chain.

Rollups.

As a name, Rollups collects a batch of transactions and presents them as a single transaction to the main blockchain.

There are two types of rollups.

• Optimistic Rollups.

Optimistic rollups assume all the transactions are valid. This assumption speeds up the validation scaling of the blockchain capacity.

To protect from fraudulent transactions. Optimistic rollup protocols allow people to contest bunk trades. The fraudulent transaction is submitted directly to the main chain to check if it’s legit and to settle the dispute. Both parties have staked coins and would lose money if they are wrong or lie.

• Zero-Knowledge Rollups.

Contrary to Optimistic Rollups, Zero-Knowledge Rollups rely on cryptography called zero-knowledge proof to validate the transaction and then submit them to the main chain.

The zero-knowledge proof allows someone to mathematically prove that a statement is true without disclosing additional information about that statement (like a passport). In crypto, this additional cryptography is called SNARKs (succinct non-interactive argument of knowledge). SNARK only permits valid transactions to be uploaded to the rollup.

Benefits of Layer 2 Solution.

Better Scalability.

One of the major problems faced by the many blockchains is scalability, not being able to process the transactions fastly, making users wait to get transaction confirmation for minutes, even for hours.

Layer 2 solutions take some burden off from the main blockchain processing transaction offline so that the user gets a rich experience of transaction getting confirmation.

Lower Transaction Fee.

Blockchain relies on miners to confirm the transactions. To confirm the transactions, miners have to solve the complex cryptographic problem for that they need a high-end hardware setup; in return for the work, they receive a reward from the transaction as a fee.

As more and more people join the blockchain network, making the network crowded puts pressure on miners to process the transactions faster. To lift the pressure, the miner becomes selective. Only choosing the transaction having a higher fee makes the whole network transaction fee go higher.

Layer 2 solutions decrease the computation power required to process the transactions by processing transactions off-chain. This will allow miners to handle more transactions while users can pay lower fees, a win-win solution for everyone.

Better Security and Privacy.

By default blockchains are secure using cryptography, and the Layer 2 solution does not make any change in the core structure of the blockchain, only adding one extra layer on top of the blockchain to process the transaction. This, in return, guarantees the security and protection of the main chain while ensuring greater throughput.

When it comes to privacy, blockchains are not private. All the transactions recorded on the blockchain are available to the general public even though they are in cryptographic form, making it hard to reveal the person’s identity behind the transactions, but it is possible to trace the transactions and reveal the identity of the person behind the transaction.

Layer 2 solution comes as a savior processing transaction off the chain, private-by-default solution.

These are the benefits offered by the Layer 2 solutions to the blockchain and the user. Despite these benefits, layer 2 solutions also have some drawbacks.

Drawbacks of layer 2 Solution.

Extra Onboarding Process.

When an extra layer is added to the main chain, both the L1 chain and the DApps running on the chain are required to create an additional account for the new L2 chain.

The onboarding process is a daunting task because if your funds are sent to several L2 protocols, you might find it difficult to keep track of them all.

Hamper Main Chain Liquidity.

Liquidity is a key factor that runs a coin blockchain which decides how active a blockchain is and how it grows in future, attracting more users.

Plus, a blockchain like Ethereum needs liquidity to provide decent support to its goods and tokens.

An additional layer added on top of blockchain handling transactions directly impacts the main blockchain liquidity.

Conclusion.

Layer 2 solutions solve the big problem of scaling and benefiting both users and blockchain, even though having some drawbacks.

What do you think about layer 2 solutions? Have you used one?