What Are Blockchain Layer 2 Solutions? A Beginner’s Guide

Have you ever been stuck in traffic on a congested highway, wishing for a faster way to reach your destination? Imagine if you suddenly discovered a side road that is less crowded and offers a smooth passage!

This concept is not a dream but a reality in the blockchain universe.

Layer 2 (L2) solutions, also known as layer 2 networks, are the much-needed side roads of blockchain technology designed to speed transactions and reduce congestion from layer 1. But how do these technologies work, and why are they becoming vital in our digital age?

What are Layer 2 Solutions?

Layer 2 scaling solutions, or as commonly said, Layer 2, is a technology that operates on top of a base layer blockchain. Its core purpose is improving blockchain’s throughput by providing a side platform or dealing with transactions.

Let’s take a step back. Blockchain networks like Ethereum, Litecoin, and Bitcoin operate on a Layer 1 chain.

Layer 2 chains are primarily built to enhance the efficiency, operational capacity, and scalability of L1 chains. The idea is to offload some transactional load from the L1 and transfer it to the new architecture.

Why Are Layer 2 Solutions Indispensable?

Indeed, Layer 2 solutions have immense relevance within the crypto universe today. But why?

Let’s go back some years.

In 2009, Bitcoin, the first and largest blockchain network, launched. At the time, the number of users was so minimal. Satoshi Nakamoto, the project’s creator, was the primary Bitcoin miner in the project’s early years. 

Over time, Bitcoin began to accrue value. There were very few transactions in those early years, and the Bitcoin blockchain could sufficiently deal with the transactional demand.

Fast forward a decade, and millions now use blockchain tech, with Bitcoin and Ethereum having the most significant numbers of investors. Those blockchains process hundreds of thousands, perhaps millions of transactions daily.

The big problem!

Bitcoin only has a transactional capacity of about eight transactions every second, while Ethereum’s maximum is 20 tps. Consequently, myriads of transactions remain pending every second within the two chains.

Of course, that’s a big flaw for a blockchain network that initially claimed the capacity to redefine the finance universe. No one wants to use a financial system lacking efficiency and scalability. 

The need for scalability and efficiency led to a demand for better technologies, namely Layer 2 solutions. 

How Do Layer 2 Solutions Work?

The functionality of Layer 2 solutions can be defined simply as an enhancer or amplifier of the base layer blockchain. But how do they even achieve this?

At the fundamental functionality, Layer 2 solutions process the transactional load of the mainchain off the chain. They batch all these hundreds, maybe thousands of transactions into one transaction, process them and eventually record the feedback on the main blockchain layers.

How does this help the main chain?

By processing the transactions off layer one, Layer 2 networks reduce the computational load of the chain. Consequently, the blockchain network improves the speeds while reducing the costs of transactions.

Furthermore, Layer 2 solutions run secondary protocols on the base layer. As such, they provide solutions, including rules and systems designed for optimal performance.

Even while giving fast and highly efficient transactions, Layer 2 networks will never compromise the integrity of the primary layers.

Categories of Layer 2 Networks?

The Layer 2 realm is divided into several categories, depending on how each platform functions. Here are the major Layer 2 types:

Rollups

Zero Knowledge Rollups

The fastest-growing category of Ethereum Layer 2 solutions in 2023 was ZK rollups. So, what are Zk rollups?

These are Layer 2 solutions designed to use the power of Zero-Knowledge proofs in providing scaling services. These technologies take off the processing tasks from the main chain and only return records of transactions in blocks.

Interestingly, with the power of ZKPs, these rollups look into every transaction. However, with the processes also come higher computing costs.

Optimistic Rollups

This type of rollup works under the assumption that every transaction in the chain is valid. In essence, they capitalize on the honesty of participants.

They also bundle large numbers of transactions and submit them to the L1. Unlike ZK rollups, their optimistic counterparts do not check transaction validity.

However, for integrity purposes, users of Optimistic rollups have the freedom to challenge any suspicious transaction before a short time window lapses. If challenged, the transaction must undergo fault proof to check validity.

Plasma

A plasma chain is a blockchain network managed by a series of smart contracts operating on the main chain. The contracts collect and process transactions off-chain, generating cryptographic verification elements. After processing batches of transactions, these contracts send the summary to the main chain. 

Channels

Channels are payment systems operating off the primary chain, allowing users to complete off-chain transactions directly to each other. After the completion of transactions, they are bundled and added to the primary layer of the chain. Channels are mainly beneficial to gaming app transactions. 

Sidechains

As the name suggests, Sidechains are independent blockchains that interoperate with the main chain. Investors can move assets between the primary and side chains and complete transactions. Essentially, there is always a huge possibility of parallel processing in a sidechain-mainchain setup. 

Characteristics Of Layer 2 Solutions

The big question many investors could ask is, what makes a good Layer 2 solution? Well, there are several vital attributes that every good Layer 2 solution must possess to offer efficient and secure services, including; 

• Scalability — The fundamental purpose of creating Layer 2 solutions is to bolster scalability. This means bolstering the transaction throughput, making it relatively higher than the L1.
• Interoperability – A Layer 2 must be capable of operating with its L1. Moreover, the ability to interoperate with several chains makes Layer 2 an even more attractive option. 
• Cost efficiency – Another reason many run to Layer 2 solutions is to benefit from lower transaction costs. You can imagine the high gas fees of L1 chains like Ethereum and BTC. Something with better cost efficiency is needed to offer lower transaction fees.
• Speed – What is a Layer 2 solution without speedy transactions? L1 transactions are often sluggish, taking long times to reach complete confirmations. Layer 2s, however, enjoy top speed in transaction processing. 
• Security – Like L1 chains, Layer 2s also demand high security to protect investors. Most Layer 2s tend to use the security features of the L1. Moreover, they add fraud proof to prevent system manipulation. 

Layer 2 Scaling Solutions

The Lightning Network for Bitcoin

Bitcoin, the largest blockchain network, seems the most vastly affected by the scalability problem. The recent emergence of Ordinals and BRC-20 tokens on the Bitcoin blockchain exposed the need for even further scale.

So, are there any solutions to the Bitcoin scaling dilemma? Well, yes.

Have you ever heard of the Bitcoin Lightning Network? Well, that’s also a Layer 2 solution. This platform scales Bitcoin’s transaction processing to super heights. It can scale to 1 million transactions every second. 

Arbitrum

With an average throughput of between 2000 and 4000 TPS, Arbitrum stands tall amongst the best Ethereum Layer 2 solutions. It’s the largest of Ethereum Layer 2 service providers. Among the earliest Layer 2s, Arbitrum leverages Optimistic rollup technology. Arbitrum improves the speed and gas fee associated with the Ethereum chain. 

At the heart of this ecosystem is the native token ARB, which currently has a market cap of over $2 billion. ARB is among the tokens expected to perform well in the coming bull run.

Optimism 

Optimism also stands out among the top Layer 2 solutions within the blockchain universe. Explicitly designed for scaling Ethereum, Optimism can attain 2000 in TPS by leveraging Optimistic Rollups. However, the project creators claim that the project’s peak throughput could hit highs of 4000 TPS. The network has a native token called OP, trading at $3.1, with a market cap of $2.9 billion.

zkSync

The most popular ZKP-powered Layer 2 solution is zkSync. Pioneered in 2020, the project managed to capture the attention of many investors due to its ability to simplify payments. However, the project gained vast attention in 2023, especially since its mainnet launch. This project is likely to thrive in 2024.

Base

Built as an Ethereum Layer 2, Base introduced stability, security and scalability features. The network affords users the EVM experience at a fraction of the cost. Features like Account Abstraction (ERC4337), Gasless transactions, smart contract wallets and developer APIs are core in the design of Base.

This product is built on Optimism’s OP Stack. As a brainchild of Coinbase, decentralized apps built on Base will enjoy a unique interaction with COinbase products.

Starknet

The project, which recently airdropped its native token STRK, fits well in this list. Starknet L2 solution can attain a throughput of 2000 to 4000 TPS.

The platform leverages Zero Knowledge Start Proofs to bolster network efficiency and validate transactions off-chain. Owing to its developer-friendly environments, Starknet is becoming a home for DApps, NFTs, DeFI and gaming projects. 

Polygon Matic Layer 2 

With an attained throughput of 65000 TPS, Polygon thrives among the best Layer 2 solutions available within the cryptocurrency realm. The network boasts of having faster transactions and way lower gas charges.

Over the years, Polygon has adopted Zk technology to provide Layer 2 services to its investors.

Polygon also has its native token, MATIC, which has received immense praise in the crypto realm in recent years. It’s seen as a potentially high-gain coin in the coming years. 

Dymension

Dymension, the home of RollApps airdropped its native token DYM early in 2024, making it the talk of the town.

The Cosmos-based blockchain network was designed to provide options for developing and running specialized blockchains, commonly known as RollApps. The idea of Dymension is simply taking away the execution, consensus and data availability tasks from blockchains.

The rollApps operate as independent chains; only their consensus tasks are done via Dymension. 

Owing to the Cosmos base, Dymension fosters proper interoperability of rollapps and even between chains. The Inter Blockchain Communication protocol contributes vastly to bolstering interoperability.

Immutable X (IMX)

Immutable X is a technology designed to touch the gaming sector. It comes with a staggering throughput exceeding 9000 TPS. Immutable X employs Validium technology, enabling a seamless transfer of NFTs at a larger scale.

Final Word

Layer 2 solutions are a significant development in the crypto universe as they address the blockchain trilemma of scalability, costs and speed. These technologies relieve the main chain of its heavy transnational load, bolstering efficiency. Among the technologies implemented by Layer 2, solutions include zero-knowledge proofs and optimistic rollups.

L2s address blockchain challenges, enabling a seamless, fast, cost-effective digital asset environment. Whether for Bitcoin, Ethereum or other chains, the evolution of Layer 2 solutions is a new era for scalability.

FAQ – Frequently Asked Questions