What is layer-2 in crypto? What is a layer-2 blockchain?

A blockchain consists of three main layers: keeping security as a top priority, making sure everything works all the time, and allowing everyone to participate in how a blockchain works.

However, when many people use a blockchain at the same time, it slows down. That’s where layer 2 comes in, which can be considered an upgrade to layer 1 blockchains. Layer-2 makes blockchains scalable, faster, and less crowded, while keeping everything managed and secure.

In this article, we will discuss what layer-2 blockchain is, the different layers of blockchain, and specifically what the key differences are between layer-1 and layer-2 blockchains.

What is Layer 2 Blockchain?

As the name suggests, layer-2 in crypto came after layer-1 and was built on top of layer-1 to improve its performance and scalability.

The core problem with Layer-1 protocols is high costs and slow transaction speeds, especially during volatile markets and peak usage. Layer-2 blockchains have come up with sidechains, state channels, and rollups, among other solutions that improve on the underlying layer-1 blockchain in terms of faster transaction times and lower fees.

Understanding the layers of the blockchain

Layer-1 (L1), also known as the base layer of a blockchain network, oversees fundamental functions including consensus mechanisms such as Ethereum’s (ETH) proof-of-stake or Bitcoin’s proof-of-work and transaction settlements, among other key functions . Although decentralization and security are a top aspect of L1s, they are sometimes plagued by bottlenecks such as poor transaction speeds and expensive fees.

Read more: What is layer 1 in crypto? What is a layer 1 blockchain?

Layer-2 (L2) blockchains are built on top of layer-1 blockchains to address the underlying issues. Layer-2 blockchains use techniques such as rollups, sidechains and status channels, which in turn reduce the transaction burden and enable faster and cheaper transactions without sacrificing security.

L2 blockchains have come a long way and solved many problems in L1 and the overall blockchain ecosystem. However, additional optimization is needed to improve interoperability, user experience, and specific application features. This is where layer-3 (L3) blockchains come into the picture.

L3 blockchains specialize in creating specific protocols for applications in web3 sectors, including but not limited to NFTs, DeFi, and gaming. In simpler words, L3 blockchains facilitate cross-chain functionality across different blockchains, allowing each end user to access multiple blockchains simultaneously, improving accessibility and interoperability.

These three blockchain layers described above together form a complete stack that guarantees the future scalability, security and accessibility of blockchain technology.

Layer-1 versus layer-2 blockchain

Layer 1 and layer 2 blockchains differ primarily in their functions within the blockchain ecosystem. Consensus mechanisms and autonomy are at the core of layer 1 blockchains. Bitcoin and Ethereum are two of the popular layer 1 blockchains that are autonomous in the way they operate while recording and verifying transactions on the chain. As mentioned earlier, when there is significant market volatility, layer 1 blockchains experience critical scalability issues that have a direct impact on peak fees and delaying transactions.

Layer-2 blockchains are developed on top of layer-1 protocols with a specific mission: improving the scalability and performance of L1 blockchains over time. There are many techniques that L2 blockchains use to make L1s efficient, but the most common are combining several transactions into one and processing transactions off-chain, which directly reduces the workload of the protocol without much negative impact.

Rollups, state channels, and sidechains are some of the many solutions L2 blockchains offer that together enable faster and cheaper transactions and reduce congestion on the underlying L1 protocols.

In the long term, both layer 1 and layer 2 work together to produce an effective system: layer 1 provides the security and decentralized consensus that form its foundation, while layer 2 improves scalability and user experience, making blockchain technology better . viable for common use cases such as gaming and decentralized finance (DeFi).

List of layer 2 blockchains

There are over 100 layer 2 blockchains and more are being developed every now and then. Here we will list the top three layer 2 blockchains so far:

Polygon (POL)

Polygon is a layer 2 blockchain, also known as a sidechain, a scaling solution that runs on the Ethereum blockchain. Cryptocurrency projects use Polygon to improve the scalability, flexibility and autonomy of their platform. POL (formerly known as MATIC) is Polygon’s native token and is used for management and network transaction fees on the Polygon blockchain.

Optimism (OP)

Optimism is a layer 2 blockchain that uses optimistic rollups to scale the Ethereum ecosystem. This layer 2 platform runs on a community-driven governance model that benefits the ecosystem in the long term.

The Optimistic Rollup Protocol is at the heart of Optimism, as it offloads Ethereum by executing transaction data outside of Ethereum and then periodically posting it to the Ethereum blockchain. This entire process helps reduce transaction costs and improves the performance of the Ethereum blockchain and more projects can build on Ethereum by using the Optimisim L2 blockchain.

Arbitration (ARB)

Arbirtum is a layer 2 blockchain that also uses optimistic rollup to store off-chain data, reducing traffic on the Ethereum blockchain. It offers web3 apps and smart contracts that offer lower and faster transactions compared to using Ethereum alone as a blockchain.

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Benefits and challenges

By now you have understood why layer 2 blockchains are a crucial part of the entire web3 ecosystem. However, that does not mean that they do not face challenges. In this section, we will briefly discuss the benefits and challenges that layer 2 blockchains offer.

Advantages:

Scalability

Off-chain transaction processing is the key feature of L2 blockchains, which has a direct impact on increasing scalability by significantly reducing congestion on the underlying L1 blockchain.

Lower transaction costs

New users and projects are attracted to move from web2 to web3 because layer 2 blockchains dramatically reduce transaction costs thanks to the off-chain transaction processing feature described above.

Faster transactions

When transactions are processed off-chain, not only are costs reduced, but also the time it takes to get from point A to point B. L2 blockchain bundles multiple transactions together, making their speed faster and in turn ensuring an improved user experience while maintaining security as well.

Challenges:

Security dependencies

L2 blockchains do not share the autonomy and high level of security compared to the layer 1 blockchains. There are still vulnerabilities and flaws associated with L2 blockchains that are being fixed by blockchain developers.

Complexity and adoption

Not everyone can integrate their layer-2 project into the layer-1 protocols, as this may require specific infrastructure knowledge of both L1 and L2 blockchains. This means that many users and new projects may have to face a steep learning curve to adopt this layer-2 technology.

Interoperability issues

Performance and fast transactions are a major advantage of layer 2 blockchains, but interoperability issues still remain. This problem is solved by the introduction of L3 blockchains that improve cross-chain functionality between different blockchains, as explained in section 2 of this article.

The future of layer 2 blockchains

Layer 2 blockchains in crypto will continue to solve the scalability issues that layer 1 blockchains, such as Bitcoin and Ethereum, currently face. With the increasing use of decentralized technology, cost-efficient blockchain technology will be the top requirement and this is where layer 2 blockchains can manage this incoming traffic without sacrificing decentralization or security.

It is also expected that interoperability between layer-1 and layer-2 blockchain will be further improved. This will help create a unified ecosystem that will provide greater accessibility to assets and data across all blockchains. In simpler words, user experiences such as blockchain wallet integrations, transaction throughput, and other key metrics that determine blockchain performance will be improved, which in turn will drive mass adoption.

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Other key expectations from layer 2 blockchains are that the innovation sector, which includes rollups, zk-proofs, etc., will continue to progress as new cryptocurrency startups continue to build on this blockchain technology. It is also possible that the second layer blockchain solution will overshadow other blockchain layers and become the future of a decentralized economy.