Blockchain networks have come a long way since Satoshi Nakamato first released the seminal Bitcoin whitepaper. There are now dozens of blockchains, multiple consensus mechanisms, and different advances designed to overcome the limitations of early networks like Bitcoin and Ethereum.
However, that doesn’t prevent Ethereum and Bitcoin from realizing similar results. Thanks to the construction of these early networks, improved capabilities can take the form of layer 2 solutions, which effectively amount to another layer added to these blockchains. Although still in its early stages, layer 2 technologies are already demonstrating their potential to make networks more efficient and scalable, adding longevity and functionality.
Layer 2 Is A Big Deal - Here’s Why
Think of layer 1 as the original blockchain networks like Bitcoin and Ethereum. Layer 1 most often is qualified as the settlement layer, where all transactions are settled and added to the ledger.
However, the original layer 1 blockchains are hampered by a few restrictions that inhibit their overall functionality. In the case of Bitcoin, the Bitcoin Core architecture is considered among the most secure. However, the flip side of its focus on security and decentralization is sluggish transaction throughput and limited scalability in terms of how many transactions the network can process.
Ethereum has been running up against similar limitations, but the situation has grown even more dire than that of Bitcoin. Ethereum’s layer 1 blockchain is so clogged that small transactions are costly and slow to process, leading to widespread network congestion and skyrocketing transaction fees. Layer 2 effectively aims to resolve these shortcomings of layer 1 in terms of transaction throughput and scalability while maintaining layer 1’s embedded decentralization and security.
This feat is accomplished by processing transactions on layer 2 instead of layer 1 and eventually combining these layer 2 transactions into a single transaction that is settled back on layer 1. Together, this is termed a rollup, and it has multiple variations. Yet, the more critical part of these solutions is that they address the scalability and throughput issues suffered on layer 1 blockchains while maintaining the decentralization and security of layer 1.
The Case For Layer 2 Lies In The Numbers
For large networks like Ethereum, layer 2 solutions are invaluable. As the dominant home for decentralized applications (dApps), NFTs, GameFi, decentralized finance (DeFi), and more, the number of transactions within the ecosystem regularly exceeds its available throughput, causing delays, raising costs, and, to an extent, stifling innovation. With layer 2, many of the transactions happening across these dApps are recorded off-chain and eventually settled on-chain, saving precious time for the settlement layer and decreasing usage costs.
Immutable X is one of the layer 2 initiatives addressing the shortcomings of existing NFT platforms like exorbitant minting costs and sky-high gas fees. For Immutable X, the answer is a zero-knowledge (zk) rollup. This smart-contract-verified process effectively holds assets in smart contracts, wraps up thousands of transactions off-chain, proves that they are valid, and appends a single transaction proof to the main network chain, in this case, Ethereum.
By handling computation and recording transactions off-chain, Immutable X can process up to 9,000 transactions per second with zero gas fees, contrasting sharply with Ethereum’s ceiling of 13 transactions per second and gas fees that can stretch into tens or hundreds of dollars for seemingly innocuous, small NFT transactions.
Besides Immutable X, which primarily focuses on NFTs, is Polygon, another prominent scaling solution that has convinced app developers to migrate to this more cost-effective solution. Like Immutable X, Polygon delivers high throughput, reaching upwards of 10,000 transactions per second with its own layer 2 solutions.
This heightened scalability takes the load off of Ethereum’s settlement layer, alleviating congestion while accessing Ethereum’s underlying security and ecosystem. Already, the support for this layer 2 solution is widespread, with over 3,000 dApps already running atop the infrastructure and 100,000 active gamers regularly leveraging this newfound scalability.
Looking Ahead At Layer 2
Going forward, innovative layer 2 solutions will go steps beyond their current iterations to create better conditions for network users. Take, for instance, Bitcoin. As layer 2 solutions like Lightning Network significantly reduce the cost structure and lag time for small bitcoin transactions, it builds an effective payment channel, improving overall transactability without sacrificing security.
As blockchain infrastructure gradually aims to replace more traditional centralized infrastructure, the value of layer 2 lies in greater scale of participation and throughput, translating to more real-world use cases and an easier transition to cost-saving technologies, all of which ultimately benefit users.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.