Major blockchains such as Ethereum and Bitcoin have a number of advantages, but they are characterized by low speed and high fees. Layer 2 technology, which increases network throughput and scalability, is the solution to this problem. This solution is gaining popularity: the total locked value of L2 blockchains currently exceeds $14 billion.
We explain what Layer 2 is in cryptocurrency and how this technology works, and provide an overview of the most popular networks of this type.
Layer 2: what you need to know
Layer 2 (second-level solution) is a protocol that runs “on top” of the main blockchain (first-level network). Many protocols of this type are being developed for Ethereum and Bitcoin. The main task of L2 solutions is to reduce the load on the main network.
There are several varieties of Layer 2 blockchains, but they all have a similar operating principle:
- Processing transactions outside the main network. Sidechains, state channels, and rollups can be used for this.
- Combining the received data into a single record.
- Transferring this record to the first-level network.
This method of data processing reduces the load on the main blockchain, which is important for networks with a large number of users and low bandwidth. It reduces fees, increases transaction processing speed, and provides opportunities for scaling. At the same time, the security and technical features of the main network are preserved, including compatibility with ecosystem products.
Why are L2 blockchains needed?
First-level blockchains have a number of advantages, including security and a huge ecosystem. However, mass use of such networks is almost impossible without scaling. L1 blockchains themselves have low speeds — for example, Ethereum has a speed of about 20 TPS. Processing transactions on such networks is a costly process, which leads to high gas prices: conducting transactions becomes unprofitable for most users.
Transferring transaction processing to a second-level blockchain solves these problems without compromising the security and decentralization of the main network. The authors of L2 projects are finding ways to ensure fast and inexpensive processing of large volumes of transactions, relieving the main blockchain and making crypto transactions more accessible for regular use.
Top 5 popular Layer 2 solutions
Most L2 networks have a similar purpose: to increase transaction speeds and reduce fees. This goal can be achieved in various ways. Let’s take a closer look at some of the most popular L2 solutions on the cryptocurrency market.
Lightning Network
Lightning Network is a second-layer solution for Bitcoin. The network uses payment channels that are opened between users. Such a channel is a multi-signature wallet, within which users can instantly exchange assets (including micropayments) without fees. The result of the transactions is sent to the main network after the channel is closed.
Arbitrum
Arbitrum is a Layer 2 Ethereum solution that uses Optimistic Rollup technology. It involves combining transactions into batches (rollups) that are processed outside the main network and then sent to Ethereum for confirmation. Transactions are considered valid until proven otherwise. Fraud protection is provided by validators and a fraud proof mechanism.
Optimism
Optimism is another solution for Ethereum that works with optimistic rollups. As with Arbitrum, it works by batch processing transactions and automatically recognizing them as valid. To protect against fraud, users are given a challenge period during which a network participant can provide evidence of the invalidity of a transaction.
Polygon
Polygon is an L2 network for Ethereum that uses Zero-Knowledge (zk) Rollup technology (batch transaction processing). Unlike optimistic rollups, Polygon uses a zero-knowledge cryptographic proof system to confirm transactions. The transactions themselves are not disclosed, which ensures security and confidentiality.
Base
Base is a Layer 2 solution from the Coinbase crypto exchange. The system uses the OP Stack framework from Optimism and works with optimistic rollups. One of its main advantages is full integration with Coinbase products, which allows for the creation of an extensive ecosystem and simplifies the use of this solution for exchange users.
How are L2 networks changing crypto payments?
Second-layer blockchains have several important advantages:
- Accelerated processing of crypto transactions. This is especially relevant for businesses that use crypto payments, such as online stores and online platforms.
- Lower transaction costs. Processing transactions through an L2 network requires fewer resources, which reduces fees and makes crypto payments a more cost-effective method of payment.
- Reduced load on the main network. Second-level solutions relieve the main blockchain, which is important for large projects such as Ethereum or Bitcoin. This increases throughput and simplifies scaling.
