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From Slow to Swift: How Layer 2 Scaling Solutions are Accelerating Blockchain Transactions

By Romeo F.
31 Mar 2023
10 min read

Blockchain technology has revolutionized various industries, offering unparalleled transparency, security, and efficiency. However, the scalability limitations of blockchain have hindered its widespread adoption.

In layman’s words, scalability is the ability of a system to handle an increasing workload or demand. In the case of blockchain, scalability is crucial for the network to accommodate a growing number of transactions without compromising on speed or cost.

In the current state, L1 blockchains can only handle a limited number of transactions per second, making it challenging to scale to the level required for mass adoption. For example, the Bitcoin blockchain can only process seven transactions per second, and the Ethereum blockchain can handle approximately 20 transactions per second.

This limitation makes it difficult to use blockchain for use cases that require high transaction volumes, such as financial transactions, supply chain management, and online gaming.

To address this challenge, layer 2 scaling solutions have emerged as promising solutions to improve the scalability of blockchain technology.

Layer 2 scaling solutions are protocols built on top of existing blockchain infrastructure that enable faster, cheaper, and more efficient transactions. They offer a solution to the scalability limitations of blockchain technology, without requiring significant changes to the underlying blockchain infrastructure.

The benefits of layer 2 scaling solutions are numerous. They offer a significant improvement in transaction speed, allowing for near-instantaneous transactions. They also offer lower transaction costs, making blockchain technology more accessible to users. Additionally, they improve the overall user experience by reducing congestion on the blockchain network, resulting in less network downtime and faster confirmation times.

Layer 2 Scaling Solutions are changing the game

Layer 2 scaling solutions are a class of protocols that are designed to increase the capacity and scalability of blockchain networks without requiring significant changes to the underlying blockchain infrastructure. These protocols are built on top of existing blockchain infrastructures, creating an additional layer that handles transactions more efficiently than the base layer.

Layer 2 scaling solutions work by offloading some of the transaction processing tasks from the base layer of the blockchain network to the secondary layer. The secondary layer can handle a much larger number of transactions than the base layer and does so with greater speed and efficiency. This approach allows for a significant increase in the overall transaction processing capacity of the network.

There are several types of layer 2 scaling solutions, including state channels, sidechains, rollups, and plasma. Each of these solutions offers unique advantages and disadvantages, depending on the specific use case.

So, how many types of Layer 2 Scaling Solutions are there?

Layer 2 scaling solutions come in various types, each with unique features and benefits. Understanding the different types of layer 2 scaling solutions and how they differ from each other is crucial in selecting the best solution for specific use cases. In this chapter, we will explore the most popular layer 2 scaling solutions, their features, and their benefits.

Different types of layer 2 scaling solutions
Credit: Finematics

State Channels


State channels are layer 2 scaling solutions that involve creating a private channel between two parties for conducting transactions. Transactions are conducted off-chain, and once they are completed, the results are then transferred to the main blockchain.

Using state channels, protocols can reduce the number of transactions that need to be processed on the blockchain, resulting in faster transaction processing times and lower fees. Examples of state channels include Lightning Network and Raiden Network.


Sidechains


Sidechains are layer 2 scaling solutions that involve creating a parallel blockchain network that runs alongside the main blockchain. Transactions are conducted on the sidechain, and once they are completed, the results are then transferred to the main blockchain.

This approach allows for faster transaction processing times and lower fees, as transactions are conducted on a separate blockchain. Examples of sidechains include Liquid and RSK.


Rollups


Rollups are layer 2 scaling solutions that bundle multiple transactions together into a single transaction, reducing the overall number of transactions that need to be processed by the blockchain network.

Deploying rollups significantly increases the transaction processing capacity of the network, resulting in faster transaction processing times and lower fees. Examples of rollups include Optimistic Rollups and ZK Rollups.


Plasma


Plasma is a layer 2 scaling solution that involves creating a secondary blockchain network that operates under the supervision of the main blockchain. Transactions are conducted on the secondary network and are only recorded on the main blockchain when the network reaches a certain threshold.

This approach allows for faster transaction processing times and lower fees, as transactions are conducted on a separate blockchain. Examples of plasma include OMG Network and Matic Network.

Each type of layer 2 scaling solution has unique features and benefits, making them suitable for different use cases. For example, state channels are suitable for microtransactions, while sidechains are suitable for decentralized finance (DeFi) applications. Rollups are suitable for scaling Ethereum, while plasma is suitable for gaming and entertainment applications.

What makes Layer 2 Scaling Solutions so good?

The primary benefit of L2 scaling solutions is obviously scalability. But it doesn’t end there—here are some added benefits to L2 scaling solutions:


Faster Transaction Speed


The primary benefit of layer 2 scaling solutions is that they significantly increase the scalability of blockchain networks. Layer 1 scaling solutions, such as increasing block size or reducing block time, are limited in their capacity to increase scalability. In contrast, layer 2 scaling solutions can increase scalability by orders of magnitude, allowing for faster transaction processing times and lower fees.


Transactions are cheaper


Layer 2 scaling solutions are more cost-efficient than layer 1 scaling solutions. The cost of conducting transactions on layer 1 scaling solutions increases as the network becomes more congested. In contrast, layer 2 scaling solutions can process more transactions at lower costs, making them more cost-efficient.


Privacy


Layer 2 scaling solutions offer enhanced privacy compared to layer 1 scaling solutions. Transactions conducted on layer 2 scaling solutions are not visible on the main blockchain, making them more secure and private.


Interoperability


Layer 2 scaling solutions offer interoperability between different blockchain networks, allowing for seamless transfers of assets between different networks. This feature is crucial in enabling the widespread adoption of blockchain technology.

Compared to layer 1 scaling solutions, layer 2 scaling solutions offer several advantages. Layer 1 scaling solutions are limited in their capacity to increase scalability, making them less suitable for use cases that require high transaction processing speeds. Layer 1 scaling solutions also suffer from high fees and poor privacy features, making them less attractive for commercial applications.

The potential impact of layer 2 scaling solutions on the blockchain industry is significant. Layer 2 scaling solutions have the potential to increase the adoption of blockchain technology by making it more scalable, cost-efficient, and interoperable. This could lead to the widespread adoption of blockchain technology across various industries, including finance, healthcare, and logistics.

What’s stopping the crypto world to adopt Layer 2 Scaling Solutions?

While layer 2 scaling solutions offer significant benefits over layer 1 scaling solutions, they are not without challenges and limitations.


Technical Difficulties


The adoption of layer 2 scaling solutions is currently low, limiting their potential impact on the blockchain industry. This is partly due to the technical complexity of implementing layer 2 scaling solutions, which requires significant expertise in blockchain technology. It is also partly due to the lack of user-friendly interfaces that allow non-technical users to interact with layer 2 scaling solutions easily.


Centralization


Layer 2 scaling solutions often require the use of trusted intermediaries or operators, which can lead to centralization and potential security risks. In some cases, these intermediaries or operators may have control over the assets being transferred on the layer 2 scaling solution, which could lead to issues such as censorship or theft.


Security


Layer 2 scaling solutions can introduce new security risks, such as the risk of smart contract bugs or attacks. These risks can potentially lead to the loss of user funds or other negative impacts on the network. Mostly because of lower security standards than L1s, as well as centralized control over the system.


Interoperability


While layer 2 scaling solutions offer interoperability between different blockchain networks, there are still interoperability challenges that need to be addressed. For example, different layer 2 scaling solutions may not be compatible with each other, leading to fragmentation and a lack of standardization.

In simpler words, different L2 solutions have to have a common basic guideline that will serve as the industry standard. Otherwise different L2s will adopt different systems leading to more confusion than solution.

These challenges and limitations could potentially impact the adoption and effectiveness of layer 2 scaling solutions. If these challenges are not addressed, they could limit the potential impact of layer 2 scaling solutions on the blockchain industry.

To address these challenges, several solutions are being developed, such as the creation of more user-friendly interfaces for layer 2 scaling solutions, the development of trustless or decentralized layer 2 scaling solutions, and the implementation of better security measures.

Example of Some Successful Layer 2 Scaling Solutions

Developers have been working on L2 scaling solutions for a few years now and the results have so far been great. Polygon, an Ethereum-based L2 is the most popular of the bunch.


Polygon


Polygon is a popular layer 2 scaling solution that enables fast and low-cost transactions on the Ethereum network. It achieves this by using a network of sidechains that can process transactions in parallel to the main Ethereum chain.

Polygon has seen significant adoption in the decentralized finance (DeFi) space, with several DeFi protocols integrating with it. The key factors that contributed to Polygon's success include its ease of integration, low transaction fees, and fast transaction speeds.

Polygon recently launched zkEVM, an EVM-compatible L2 solution that will lessen the workload of the L1 using Zero Knowledge Proof. This could be a significant advancement in the greater Ethereum ecosystem as any EVM-compatible ecosystem can deploy it.

Aave is becoming one of the first major DeFi protocols to run on the zkEVM mainnet.

polygon zkEVM benefits

Optimism


Optimism is another layer 2 scaling solution that aims to improve the scalability of the Ethereum network. It uses a technique called optimistic rollups, which enables it to process transactions off-chain while still maintaining the security and trustlessness of the Ethereum network.

Optimism has seen significant interest from developers, with several DeFi protocols and dApps planning to integrate with it. The key factors that contributed to Optimism's success include its compatibility with existing Ethereum infrastructure, its ability to support complex smart contracts, and its low transaction fees.


Lightning Network


Lightning network level 2 scaling solution diagram
Credit: Bitpanda

The Lightning Network is a layer 2 scaling solution for Bitcoin that enables fast and low-cost transactions. It achieves this by using a network of payment channels that can process transactions off-chain.

The Lightning Network has become very popular among Bitcoin users, with several wallets and exchanges integrating with it. The key factors that contributed to the Lightning Network's success include its low transaction fees, fast transaction speeds, and compatibility with existing Bitcoin infrastructure.

So, what do you think?

We believe the future of layer 2 scaling solutions is exciting, with the potential to revolutionize how we use and interact with blockchain technology. As the industry continues to innovate and develop new solutions, we can expect to see even more progress in the coming year.


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