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Layer 2 Blockchain Projects – A Guide for Beginners

One of the critical difficulties confronting the blockchain community is the matter of scalability. While the technology has proven its high potential over the years, several aspects limit its applicability to a large scale.

The scalability problem has been on our minds since humankind came up with the first technological inventions. We’ll expand on that in this post, looking at the particular case of Layer 2 blockchains.

Layer 2 (L2) blockchain definition

The “Layer 2 blockchain technology” concept is gaining traction on the market. We often refer to Layer 2 solutions as “off-chain” blockchain technology. Their primary purpose is to enhance the capacity of blockchain transactions while keeping the distributed protocol’s decentralized benefits.

Solving the scalability problem will go a long way toward ensuring blockchain’s general acceptance.

The architecture must strike a balance between security, decentralization, and scalability to build a good blockchain ecosystem. For instance, Layer 2 blockchain technology systems can work together with blockchains such as Ethereum.

Obviously, in this case, our L2 solution would leverage Ethereum’s security and structure.

We are basically adding smart contracts to the main blockchain protocol that interact with off-chain events. If you know this technology, you will understand how easy this is, compared to editing the Ethereum protocol structure.

Layer 2 (L2) platforms and protocols manage data so that the base layer does not carry an excessive burden. In this way, the blockchain network can accommodate substantially higher transaction throughput.

Do we need L2 solutions?

Scaling blockchains is becoming more crucial as the technology becomes more widely used globally. Faster blockchain processing capacity will be available shortly, thanks to current research.

Theoretically, a blockchain should be capable of handling any number of transactions per second (TPS). However, experience proves that this isn’t the case, as traditional and new blockchains suffer from data congestion.

L2 scaling solutions can help solve problems like these by enabling a series of efficient mechanisms. The secret to scalability is improving the system’s efficiency without raising block sizes or overcomplicating the network.

The trade-off between decentralization and efficiency is a famous issue among crypto pundits. Finding the right balance between the two forces appears challenging, but the last improvements give hope to the market.

The Bitcoin and Ethereum blockchains, for example, are unable to process hundreds of TPS. Even worse, as volume grows, so do costs.

The problem of L1 solutions

Systems such as Bitcoin and Ethereum need to face their scalability limits daily. Consider that Paypal and Visa currently manage thousands of transactions per second. Therefore, the market can hardly accept that Ethereum processes roughly 15–20 transactions per second.

The decentralized network must obtain a global consensus when a transaction happens. All nodes in the network keep a full copy of the trades to validate them. This structure makes blockchains highly decentralized systems, with pros and cons.

The ultimate objective of L1 blockchains is to re-decentralize the infrastructure, protocols, and applications on the internet.

There are several degrees of solutions available. Without the requirement for a central authority, Layer 1 roots data transfers in an immutable, cryptographically safe way.

By executing off-chain calculations, Layer 2 allows you to dramatically minimize data processing on the blockchain. In the event of a disagreement on the network, the base chain will remain the final judge.

The L2 key benefit is that it minimizes the quantity of data saved on the base L1 system. The mechanism frees up processing resources for other tasks while maintaining security and decentralization benefits.

Popular L2 examples

Developers came up with a broad set of solutions to build L2 structures efficiently and elegantly. Among these, we can mention at least two of them:

State payment channels

The Bitcoin Lightning Network is a famous example of a blockchain state payment channel. Raiden, Celer Network, and Connext are all examples of state channels in Ethereum.

Channels in Ethereum work best under two conditions:

  • The counterparties should know and trust each other.
  • The volume of transactions should be significant.

Channels represent the oldest solution developers proposed to fix the scalability issue in the blockchain industry.

Plasma

Plasma is Ethereum’s native “sidechain,” which leverages smart contracts and Merkle trees to generate an infinite number of child chains. The child chains are nearly identical to Ethereum, but they have their consensus process and business logic.

Plasma stores transaction data and processing in the child chain, then periodically sends state data to Ethereum.

When plasma blockchain members want a withdrawal, they must wait for a “challenge period” (one or two weeks). The mechanism allows other users on the child chain to submit proof to oppose the withdrawal.

After the challenge time, the owner will get the funds if the transaction is legal. If the system highlights the withdrawal as fraudulent, the algorithm will trigger a fund reversal process. 

OMG Network and Loom Network are examples of this type of technology.

Final thoughts

L2 technology is on the right track, with up to 1,000 times scaling factors. Welcoming new users will be effective due to decreased transaction costs and speed.

Layer 2 solutions will contribute to a thriving and healthy blockchain ecosystem in the future, supporting higher adoption of the technology.

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In general, features such as lower costs, faster transactions, and greater chain usability represent the future of this technology. By following this path, the industry can only reach its ultimate widespread adoption purpose.

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