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Introduction to Layer-2 Scaling Solutions

Bhumika Dutta
Mar 29, 2022

By offering decentralization of money, high levels of security, and irreversible record-keeping, blockchain technology has revolutionized several sectors. Security refers to a blockchain protocol's protections against malicious actors and network assaults, while decentralization refers to the meaningful distribution of computing power and consensus throughout a network.

But, like with anything, there are drawbacks, and one of the most significant negatives of blockchain is its scalability. When the volume of data traveling via the blockchain reaches a limit due to the blockchain's limited capacity, scaling issues arise.

What is Blockchain Scalability?

In an ideal world, a blockchain would be capable of processing an unlimited number of transactions per second, also known as throughput or TPS (Transactions per second). The Bitcoin main chain, on the other hand, can only handle 3-7 TPS. To address these issues, developers are striving to expand the scope of what a blockchain can do. As a result, a greater number of transactions per second and quicker processing times are possible.

Scalability is critical because it is the only way for blockchain networks to compete fairly with older, centralized systems that provide quick settlement times. One possibility is to use Layer-2 scaling solutions.

In this blog, we will learn about Layer-2 scaling solutions.

What are Layer-2 Scaling Solutions?

A supplementary framework or protocol created on top of an existing blockchain system is referred to as Layer-2. The primary purpose of these protocols is to address the major cryptocurrency networks' transaction speed and scale issues.

As previously stated, Bitcoin and Ethereum are currently unable to execute thousands of TPS, which hurts their long-term growth. Higher throughput is required before these networks can be effectively adopted and used on a larger scale.

Layer-2 protocols establish a supplementary framework through which blockchain transactions and operations can occur without relying on layer 1 protocols (main chain). As a result, these methods are sometimes referred to as "off-chain" scaling options.

To understand Layer-2 scaling solutions, it is important to learn about the main chain or the Layer 1 scaling solution as well.

What are Layer 1 Scaling solutions?

A blockchain is regarded as a Layer-1 network, whereas a Layer-2 protocol is a third-party interface that may be utilized with a Layer-1 blockchain.

To boost scalability, layer-1 scaling solutions supplement the blockchain protocol's basic layer. Layer-1 solutions alter the protocol's rules directly to boost transaction capacity and speed while allowing for additional users and data. To boost total network throughput, layer-1 scaling methods might include increasing the amount of data included in each block or speeding the pace at which blocks are validated.

The Ethereum network, for example, is transitioning to a proof-of-stake (PoS) consensus process. This new mining approach allows for speedier transaction times and more efficient energy use during the mining process.

Another layer 1 scalability method is sharding, which divides the task of authenticating and verifying transactions into smaller chunks. It better distributes the burden over the peer-to-peer (P2P) network, allowing more nodes to contribute computational power. As a result, blocks can be completed more quickly.

Now that we have a basic idea of what the main chain is, let us move on to the working of the layer-2 solution to increase the scalability of the blockchain.

How do Layer-2 Solutions work?

A link is established between Layers 1 and 2, and a summary of Layer-2 transactions is uploaded to Layer 1 at regular intervals for a permanent record. How transactions are confirmed before they are "cast in concrete" on the main chain is a crucial concern for Layer-2 networks.

It comprises unloading a part of the transactional weight of a blockchain protocol to an adjacent system architecture, which then conducts the majority of the network's processing and only reports back to the main blockchain to complete its findings. The base layer blockchain becomes less crowded — and eventually more scalable — by abstracting the majority of data processing to secondary architecture.

So, to cope with congestion, instead of sending every transaction via Layer 1, it works to handle these transactions on a secondary blockchain known as "Layer-2."

Types of Layer-2 solutions:

Following are some of the examples of Layer-2 solutions:

Sidechains:

Sidechains are a cross between Layer 1 and Layer-2 scaling methods. A sidechain is a blockchain that is linked to the main chain of a cryptocurrency, such as Bitcoin.

They're linked via a two-way peg (2WP), which is a technology that permits open bitcoin transfers from the main chain to a tier two chain that requires some third-party trust.

Sidechains have the potential to execute transactions quickly and with lower costs than Bitcoin or Ethereum. In addition, sidechains may be used to test new protocols and can be built to support new sorts of transactions more simply than upgrading the main chain.

Plasma Chains:

The Plasma Layer-2 solutions for Ethereum employ child or subsidiary blockchains to help the parent chain with verification. Plasma chains, like sidechains, have their consensus mechanism and produce transaction blocks.

Plasma chains are comparable to Polkadot smart contracts or parachains. They are, however, organized in a hierarchy to remove transactions off the main chain, which frees up time and improves salability.

[Parachains are short for “parallel chains.” As one might expect, in a system of linked blockchains, these chains run parallel to one another.

They're all built on the same framework, so they all have the same security features, and they're all linked to the same central relay chain. They may, however, each function independently to handle their applications.

Polkadot is built on this concept. Because the distribution is efficiently dispersed to manage workloads, parachains allow for very quick transactions.]

State channels:

Crypto is put in an Ethereum smart contract, and a channel is established between the two parties. Layer-2 is where signed tickets are created after payments are made. On Layer 1, a ticket is signed after it is completed. If state channels have previously been opened, they can be bidirectional and handle another party.

Rollups:

Rollups are Layer-2 scaling solutions that offload transaction processing off the main Ethereum network while still posting transaction data to layer 1. Because the transaction data is on layer 1, the same layer 1 security requirements apply to rollups. This is, in fact, the distinguishing feature of rollups for users.

Rollups are advantageous because they lower transaction prices, enhance transaction throughput, and broaden participation. There are two types of rollups, each with its own set of security features:

Optimistic rollups:

Optimistic rollups run on Layer-2 in parallel with the Ethereum Mainnet and do not execute any work by default. Instead, they publish the modified state to the Ethereum Mainnet when the transaction is complete, thereby notarizing the transaction.

Optimistic rollup transactions are published into the main Ethereum blockchain, improving transaction efficiency by lowering gas costs.

Zero-knowledge rollups:

ZK rollups (zero-knowledge rollups) combine thousands of transactions of the main Ethereum chain to construct a cryptographic proof known as SNARK (succinct non-interactive argument of knowledge). This is referred to as validity proof, and it is published on the Ethereum Mainnet.

The data of all transactions are kept on Layer-2 by the smart contract for a ZK rollup, and it can only be modified with validity proof.

In other words, instead of all the transaction data, ZK rollups just require validity confirmation. Because less data is included in this function, the cost of transacting is reduced.

BottomLine: How important are Layer-2 solutions?

Layer-2 solutions are significant because they provide scalability and greater throughput while maintaining the Ethereum blockchain's integrity, allowing for total decentralization, transparency, and security while lowering carbon emissions.

Even though no one Layer-2 solution presently satisfies all of these requirements, they still strive to enhance all of these qualities.

In this article, we have read about the definition of Layer-2 solutions and how it is connected to the layer-1 solutions, along with the different types of scaling solutions.

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Introduction to Layer-2 Scaling Solutions

What is Blockchain Scalability?

What are Layer-2 Scaling Solutions?

What are Layer 1 Scaling solutions?

How do Layer-2 Solutions work?

Types of Layer-2 solutions:

Sidechains:

Plasma Chains:

State channels:

Rollups:

Optimistic rollups:

Zero-knowledge rollups: