The Rise of Layer 2 Solutions: How They’re Transforming Crypto Currency Scalability

In today's environment, maintaining the cryptocurrency's scalability has become the most challenging. The scalability of the blockchains is the main concern, as layer-one solutions are mainly focusing on decentralization rather than security and scalability. Large blockchain networks, such as Ethereum and Bitcoin, are strong but not scalable enough to handle the maximum number of transactions per minute efficiently. Layer 2 blockchain solutions are designed to address the limitations of Layer 1 transactions. Layer 2 solutions are mainly used to enhance the efficiency and scalability of blockchains.

This enhances the functionality of the bitcoins by working on the top of their base layer. This overcomes the limitations of the main blockchain by processing transactions outside the main blockchain, but all the data is stored in the main blockchain. This layer 2 solution opens up opportunities for various applications, such as NFT and decentralized finance.

What Is the Need for Layer Two Solutions in Cryptocurrency Scalability?

In the layer 1 blockchain, there are some limitations, such as a limited number of transactions and transaction fees. Users are going to experience delays and inconveniences due to network load. Bitcoin has a transaction limit of 7 tps, and Ethereum has a limit of 15 tps only. While handling the maximum number of transactions, they are not efficient and scalable. The second solution is an important advancement towards realizing the full potential of blockchain. The layer 2 solution addresses the scalability issue of the layer 1 blockchain.

Every blockchain is connected to another one, and the data of the first chain is interlinked with the second chain; this data is secured by hash#, and every code of the first blockchain is also represented in another one. If you try to change the data in one blockchain, then the whole data is changed, and there are lots of miners working on it, and everyone needs to agree to the change; otherwise, the change is rejected.

Key Types of Layer 2 Solutions

1. State channels: state channels are off-chain communication channels that are used to reduce the number of transactions on the blockchain and reduce the network load. Some parts of the transaction are done off-chain and signed by both parties and will be restored to the chain after the transactions are completed and the channels are closed.

   Advantages:

   • Low fees: the state channel transactions are not recorded on the main blockchain until the channel closes, which leads to a minimization of cost.
   • Instant confirmation: This state channel provides instant confirmation of the channel. This state channel provides instant confirmation of the transaction, which improves the user experience.

   Disadvantages:

   • Limited use: This channel is not appropriate for every transaction. 
2. Plasma: this is a small chain of mini-chains that operates along with the main blockchain. These can work independently and handle transactions quickly.

   Advantages:

   • High efficiency: the plasma chains work independently, so they can handle a large number of transactions.
   • Cost efficiency: plasma chains lower the cost of transactions by making a group of off-chain transactions and only sending summaries to the main chain.

   Disadvantages:

   • Complexity: Plasma chain maintenance and implementation are complicated and require careful design to ensure security.
3. Rollups: rollups are the bundle of chain transactions. These rollups have multiple transactions that get aggregated into a single batch, which is then recorded on a single blockchain.

   There are two types of rollups: ZK rollups and optimistic rollups.

   • ZK Rollups: these are much faster and bind a bunch of transactions you want to add to a blockchain into one rollup.
   • Optimistic Rollups: assume that the transactions are fair and the virtual machines detect fraud.

   Advantages:

   • Enhance performance: ZK and optimistic rollups both have great transactional performance as compared to the layer 2 solution.

   Disadvantages:

   • ZK rollups-
     • High initial cost: the ZK rollups have a high initial cost due to the demand for cryptographic proofs.
   • Optimistic rollups-
     • Delays and effects on the final transaction may arise from the challenging period needed for broad identification.
4. Side chains: these side chains are separate blockchains that run along with the main blockchain. Which uses resources or borrows information from the main chain. The transactions are done on the side chain, and the final transaction is recorded on the main blockchain.

   Advantages:

   • Modification: the side chains are made to fit certain requirements, such as the scalability of the blockchain and privacy.
   • Connectivity: by allowing the transfer of transactions between the side chain and main chain, it promotes connectivity between various blockchains

   Disadvantages:

   • The security: the security models that side chains use for their work are not as strong as the main blockchain.
   • Complexity: maintaining the several changes and coordinating them is difficult.

Benefits of Layer 2 solutions in blockchain

Blockchain technology is greatly enhanced by using Layer 2 solutions. Here are some of the main benefits of the Layer 2 solution.

• Scalability Improvement: Scalability is the main benefit of the Layer 2 solution. By using layer 2 solutions, the maximum number of transactions is handled efficiently, which saves time and transaction costs. This solution adds additional routes. The layer 2 solution can process maximum data without congestion.
• Faster transaction: Transactions become faster due to the layer 2 solution as they provide chain transactions, which provides the user’s faster experience.
• Reduce transactional cost: In the Layer 1 solution, more time is required because it can’t handle the maximum transactions. Due to this, the transactional cost is higher, but by using Layer 2 solutions, the transaction cost is reduced because it can handle maximum transactions per minute.
• Enhance user experience: users get more benefits due to a smooth blockchain experience when layer 2 solutions are used.
• Bitcoin's lightning network enables the use of immediate and microtransactions by allowing quicker and less expensive transactions.
• Reduce environmental impact: the layer 2 solution uses few resources, which results in environmental impact.

Risk of using layer 2 solutions

• Security concerns: the layer 2 solutions introduce the additional risk of receiving certain security features from the main blockchain. Software problems cause misuse of these solutions.
• Centralization: some layer 2 solutions depend on the nodes, which are the main part of the Bitcoin network. If a small group controls the majority of nodes, they can control the transaction.
• Technical challenge: state channels and cryptographic proofs are complicated technologies. These systems need to be maintained.
• Interoperability: achieving seamless exchange of information between the layer 2 solution and the blockchain remains a challenge. Standardization efforts and chain compatibility protocols are important to foster the ecosystem and maximize the benefits of layer 2 scaling.

Real-world application:

• Payments-

The low cost and quick micropayments made possible through the L2 solutions

• Decentralized exchanges-

The L2 solution provides less expensive trading experiences, reduces the adverse impacts of high prices, and facilitates better transaction settlement.

• Gaming and NFTs:

The L2 solutions offer a scalable framework for NFT markets and facilitate easy transactions in the game. 

The future of Layer 2 solutions

The layer 2 solutions are in the initial stage and not fully developed but they have high potential, The technological advancements lead to high scalability in the future. Layer 2 solutions allow quick, less expensive, and scalable transactions, which are said to become an essential part of the cryptocurrency ecosystem.

Conclusion:

The limitations of layer 1 blockchains are being addressed by layer 2 solutions, which leads to transforming cryptocurrency scalability. The layer 2 solution increases the number of transactions and lowers the transaction cost, which leads to an increase in the blockchain technology that is widely used. The Layer 2 solution offers cheaper, faster, and more scalable transactions, which increase innovation in the field of digital finance. The development of a layer 2 solution is expected to have a significant impact on the future of cryptocurrency by ensuring stable and easily accessible blockchain technology.