Layer 2 Blockchain: Exploring the Extent of Its Scalability

Layer 2 blockchains are one of the most promising concepts in the crypto community. Many developers believe this technology can solve scalability issues and make blockchain usage significantly more affordable. 

Why are Layer 2s so important? Explore this guide to see how they work and to learn more about their exciting applications.

Key Takeaways:

• A Layer 2 is a secondary blockchain that’s built on top of a main blockchain system.

• A Layer 2 blockchain uses the main chain's security and other features, while its own separate framework expands the system's capabilities.

• The upcoming Ethereum Dencun upgrade is likely to impact Layer 2 blockchains and provide even more opportunities for their utilization. 

What Is a Layer 2 Blockchain?

A Layer 2 blockchain is a secondary blockchain that’s built on top of the main blockchain system. It uses the main chain's security and other features while its own separate framework expands the system's capabilities.

Why Are Layer 2 Blockchains Necessary?

Layer 2 blockchains were designed to solve the blockchain trilemma, which refers to the difficulty of making a network that’s simultaneously secure, decentralized and scalable. A Layer 2 blockchain works to address the so-called trilemma by adding scalability to the network.

Layer 2s add a whole new space for processing transactions on a blockchain. Since a Layer 2 blockchain is built on the main chain, it inherits all of the main chain’s security and decentralization. Thus, it can perform extra transactions at a quicker speed so the network doesn't get congested as more users join.

This feature makes Layer 2 blockchains an essential part of modern web3 development. When so many people are relying on blockchains to store data, execute multiple transactions and provide security, scalability is in high demand. Chains with a Layer 2 can provide their users with additional speed and lower transaction fees.

How Does a Layer 2 Blockchain Work?

A Layer 2 blockchain enhances scalability by changing how transactions are processed. When you use a Layer 2 blockchain, your transactions are first processed on it. Layer 2s use a variety of cryptographic proofs and other methods for verifying these transactions as they occur. However, transactions aren’t fully confirmed until they’re posted on the main chain. To finalize transactions and transfer assets, there are occasional cross-chain communications whereby the Layer 2 blockchain will post performed transactions on the main chain.

Different types of Layer 2s handle blockchain tasks differently. Following are some of the common mechanics currently used by certain types of Layer 2 blockchain projects.

Rollups

A rollup is essentially a type of bundled transaction. Instead of requiring the main chain to handle each transaction as it happens, a Layer 2 blockchain can collect and process several similar transactions before sending them all to the main chain at once. 

Some rollups, such as zero-knowledge rollups, even take the off-chain processing one step further by verifying the transactions with a smart contract and then providing the validity proof to the main chain to finalize the transaction. Rollups improve transaction throughput because the main chain only has to look at a single block of transactions, making it easier to validate transactions. Most rollups don’t have a separate consensus mechanism. Instead, they just use the consensus mechanism of their parent chain.

Sidechains

Sidechains have even more independent operations than rollups. They run parallel to the main network while still operating on the same code or computational engine as the main chain. Sidechins often use their own consensus mechanism, without needing permission from the main network. They simply connect to the main chain occasionally to pass assets back and forth between the chains. In addition to having a separate consensus mechanism, sidechains usually have their own tokens and protocols.

Validiums

A validium is a type of scaling solution that uses validity proofs to verify multiple off-chain transactions. These smart contracts rely on zero-knowledge proofs to finalize transactions. If there’s an invalid transaction, the proof won’t let the transaction progress to the main chain. If it is in fact a valid transaction, the knowledge that all data is correct goes to the main chain, while the underlying transaction data is stored off-chain. The simple verification of validity proofs allows a smart contract to be executed on the main chain without requiring excessive amounts of data transfer.

Pros and Cons of a Layer 2 Blockchain

Like any other blockchain feature, Layer 2 blockchains work well in some situations but can cause problems in others.

Following are the benefits of a Layer 2 blockchain.

• Scalability: With a Layer 2 blockchain, a network can keep running smoothly and efficiently even as more users are added. Layer 2s make it possible for any blockchain to plan ahead for a future with more users.

• Reliability:As opposed to making a brand-new blockchain from scratch, designers of Layer 2s are building on a solid base. They get all the decentralization and security of the original network, along with a familiar codebase and system.

• Flexibility: Layer 2 blockchains can add features not found on the main chain. They allow a blockchain to expand its services as developers come up with more applications for their technology.

• Speed: A Layer 2 solution can drastically increase the number of transactions a blockchain performs. Most systems with good Layer 2s in place can easily handle thousands of transactions per second (TPS).

• Affordability: Without so much congestion on the blockchain, transaction fees become a lot cheaper, encouraging more people to use the blockchain with greater frequency.

Following are some disadvantages of a Layer 2 blockchain.

• Non-Composability: A composable blockchain has several interconnected assets that can be assembled in a variety of ways. Layer 2s reduce composability, because they often specify that only certain assets can be used on certain chains. This makes it harder for some decentralized applications (DApps) to interact with specific blockchains, and can intimidate developers who may be less tech-savvy.

• Lack of Liquidity: In some cases, Layer 2s almost entirely take over traffic from the main chain. This becomes a problem when all the main blockchain assets are locked, while users only focus on working with tokens on the second layer. As liquidity declines, completing trades and maintaining value on the main chain can be difficult.

• Security Vulnerabilities: Layer 2s inherit security from the main chain. However, certain mechanics, such as blockchain bridges, may add potential security vulnerabilities to otherwise secure networks.

• Reduced privacy: Layer 2s often require users to work with third-party services. This can sacrifice some of the anonymity they might otherwise have on the main blockchain.

Best Layer 2 Projects

As soon as the Layer 2 concept was introduced, blockchain developers began experimenting with it. There are now countless Layer 2 blockchain options available for processing transactions. Following are some of the best Layer 2 projects to check out.

Mantle Network

Mantle Network stands out because it's governed by a decentralized autonomous organization (DAO). This community-led Layer 2 system on Ethereum has a modular structure. People can operate on different levels, depending upon the level of security and the type of transaction they need. It has many tools for deploying smart contracts, so it's popular with hands-on users.

Eclipse

Unlike many other Layer 2 blockchain projects, Eclipse isn’t attached to a single chain. Instead, it's a customizable rollup architecture that can be used on multiple blockchain networks. Developers can use Eclipse to deploy Layer 2 rollup services on systems like Celestia, NEAR and Solana. People can create rollups for all sorts of projects and find an off-chain scalability solution that suits their unique needs.

Optimism

This Layer 2 blockchain uses optimistic rollups that treat every transaction as valid. Transactions are only rolled back if they get fraud proofs that identify an invalid transaction, so the network doesn't have to spend a lot of time manually confirming blocks. This consensus mechanism requires people to provide a stake for each new block, so it maintains security even without extensive verification or time spent looking for fraud proofs.

Arbitrum

Arbitrum has an impressive speed of 40,000 transactions per second, and features very low fees. Its scaling solution uses optimistic rollups to create a streamlined and convenient system, and is a favorite with DApp developers, who can code on it with the basic language used for the Ethereum virtual machine (EVM).

Polygon

Polygon is one of the most popular Ethereum Layer 2 scaling systems. This Layer 2 blockchain makes it easy to develop new programs. Polygon is used for many different DApps and payment channel projects, and developers can also use Polygon’s software development kit to build their own sidechains.

Lightning Network

Unlike many Layer 2 blockchains, Lightning Network operates on Bitcoin. The Layer 2 blockchain provides a simple way for people to experience faster transactions in exchange for crypto micropayments. Though Lightning Network is fairly simple, it's the backbone of countless Bitcoin transactions. The option of selecting different payment channels based on desired transaction speed is quite useful.

How Will the Upcoming Ethereum Dencun Upgrade Benefit Layer 2 Projects?

The Ethereum blockchain is already known for its unusually high level of Layer 2 blockchain projects. A new update to Ethereum may provide even more opportunities for Layer 2 developers. The Cancun-Deneb Upgrade, also known as EIP-4844 (or more informally as “Dencun”) will introduce a foundation for a type of scalability called Danksharding. The Proto-Danksharding available in the Dencun update will provide a versatile, short-term data storage method that makes it easier to perform rollups. Layer 2 projects can benefit in many ways from the Dencun update.

Scalability

Ethereum’s new Dencun system revolves around the concept of "blobs." Short for “binary large objects,” blobs are short-term data modules that allow rollups to temporarily use data without having to pay to permanently store all the data on the execution layer of the main chain. This greatly increases storage capacity so the network can handle more transaction data. It also makes it simpler to transfer data so the network can improve transaction throughput while maintaining its security guarantees.

Lower Gas Fees

The main reason users are so excited about the Dencun update is that it promises to lower gas fees on the main Ethereum blockchain. Since Proto-Danksharding encourages more Layer 2 development, it can help to move unnecessary transactions off of the main chain. This reduced transaction throughput results in lower transaction fees for all users whether or not they take advantage of the new rollup and data storage system.

Reduced L2 Rollup Transaction Costs

One of the most impressive ways that transaction fees will be lowered is during transfers between Layer 1 and Layer 2, as it will become vastly cheaper to take information from a Layer 2 blockchain and transfer it to the main chain. Experts estimate that rollup transaction costs may cost less than $0.001 per transaction, making it possible to create a highly affordable payment channel so users can send transactions back and forth while paying barely any fees.

Modular Data Availability

Proto-Danksharding uses a modular approach to data storage. The data needed for transactions can be broken down into “blobs” for storage, so users can access necessary data without needing to look at entire blocks. This enhanced data availability will allow people to use blockchains for a variety of web3 development projects. Currently, Ethereum isn’t a fully modular system, but this update paves the way toward increased modularity.

The Future of Layer 2 Blockchains

With their ability to provide scalability and affordability, Layer 2 blockchain networks appear to many observers as the future of blockchains. In just a few years, they've transitioned from an occasional novelty to an essential part of web3 development. There are payment channels, DApps and much more built on Layer 2 blockchain concepts. Not only are more and more smart contract projects operating on Layer 2s, but Layer 2 systems are increasingly being created to assist with these projects.

In addition to becoming more prevalent in the future, Layer 2s seem to be moving in a few specific directions. Especially with Ethereum's focus on sharding and Danksharding, it's likely that new Layer 2 blockchain projects will begin to prioritize modularity. 

Another trend to watch is that of enhanced security measures. Though Layer 2s get some built-in security from their underlying blockchains, options such as optimistic proofs often sacrifice security for speed on the second layer. Some projects are moving away from this approach and trying to create stronger security guarantees for their Layer 2 blockchain systems.

The Bottom Line

With their capacity to manage multiple off-chain transactions, Layer 2 blockchains can lower transaction fees, enhance transaction throughput and increase transaction speed. By using the architecture of their underlying blockchain, they can ensure users still enjoy a reliable and familiar experience. As demand for processing multiple transactions quickly increases, Layer 2 blockchains are likely to become an essential part of the blockchain universe.

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