Read More: What Is Layer 2?

Scalability Challenges in Blockchain Networks

Blockchain networks, like Bitcoin and Ethereum, face scalability challenges due to their inherent design. While Bitcoin still utilizes the Proof of Work (PoW) consensus algorithm, Ethereum has transitioned to the Proof of Stake (PoS) consensus mechanism with the launch of Ethereum 2.0.

Although PoS offers better scalability compared to PoW, Ethereum still faces limitations in terms of transaction throughput. That’s why developers planned the introduction of sharding in the coming months.

PoW can process only a limited number of transactions per second, with Bitcoin averaging 7 TPS and Ethereum 20 TPS. In contrast, traditional centralized systems, such as VISA, can process more than 24,000 TPS. These limitations lead to increased transaction fees and longer settlement times, creating the need for Layer 2 scaling solutions.

The “blockchain trilemma” refers to the challenge of achieving decentralization, security, and scalability simultaneously in a public blockchain network. Increasing scalability often compromises decentralization or security.

Layer 1 solutions, like Ethereum’s transition from PoW to Proof of Stake (PoS) and sharding, aim to address these challenges. However, Layer 2 scaling solutions are necessary to further enhance throughput without compromising the core characteristics of the original blockchain.

Overview of Layer 2 Scaling Solutions

Layer 2 scaling solutions work on top of the base layer (Layer 1) of a blockchain network to improve its capacity, transaction speed, and overall efficiency. These solutions include state channels, rollups (optimistic and zero-knowledge), and plasma chains.

By moving some data and computation off-chain, Layer 2 solutions enable higher transaction throughput, reduced fees, and faster processing times.

Differences from Layer 1

Read More: What Is Layer 1

• Layer 1 is the base layer where the main blockchain network operates, while Layer 2 is a secondary layer built on top of Layer 1.

• Layer 1 solutions involve modifications to the core protocol and consensus mechanism, while Layer 2 solutions focus on optimizing transaction processing and data management.

• Layer 2 solutions often provide greater flexibility for upgrades and innovations since they don’t require changes to the underlying blockchain protocol.

Advantages of Layer 2 Scaling Solutions

• Increased transaction throughput: Layer 2 solutions enable more transactions per second, helping to alleviate congestion on the main blockchain.

• Lower transaction fees: Off-chain transactions generally have lower fees, making Layer 2 solutions more cost-effective for users.

• Faster processing times: Layer 2 solutions can process transactions faster than the main blockchain, improving the user experience.

• Improved privacy: Some Layer 2 solutions, such as state channels, only reveal the final state of transactions, offering enhanced privacy for users.

• Easier upgrades and innovation: Layer 2 solutions can be updated and improved more easily than Layer 1, as they do not require changes to the main blockchain protocol.

The Role of Layer 2 in Improving Blockchain Performance

Arbitrum, and Optimism are three well-known Layer 2 scaling solutions supported by the Ethereum network. To process transactions faster than the primary Ethereum network, these solutions rely on the development of secondary networks, such as sidechains.

One of the most popular Layer 2 Ethereum solutions, operates as a sidechain connected to the Ethereum network, enabling faster transactions with lower fees and increased capacity. It also provides a simple platform for developers to create dApps and smart contracts.

Key Benefits of Using Layer 2 Solutions in the Ethereum Ecosystem

• Enhanced scalability: Layer 2 solutions can handle more transactions per second, allowing the Ethereum network to support a growing number of users and applications.

• Reduced gas fees: By offloading some transactions to Layer 2, users can save on gas fees, making Ethereum more accessible and affordable.

• Improved user experience: Layer 2 solutions often provide faster transaction confirmations, creating a more seamless user experience.

• Developer-friendly: Layer 2 platforms offer tools and resources for developers to build and deploy dApps more easily, fostering innovation within the Ethereum ecosystem.

• Composability: Many Layer 2 solutions maintain the composability of Ethereum, ensuring that applications built on Layer 2 can interact with each other and with Layer 1.

Comparing Layer 1 and Layer 2 Solutions

Let us first introduce Across Protocol, an innovative hybrid bridge solution, to better understand the differences between Layer 1 and Layer 2 solutions. Across Protocol connects Ethereum’s Layer 2 and Layer 1 scaling solutions, allowing tokens to move freely between them. To provide users with a seamless experience, this hybrid solution combines the best features of Layer 1 and Layer 2 solutions.

Key features of the Across Protocol include:

• Lively Oracle: Enables faster and more affordable transactions.

• Bonded Relayer: Ensures transaction safety and reliability.

• UMAS: A type of financial contract that facilitates complex blockchain-based financial transactions.
  With the introduction of the Across Protocol, we can now compare Layer 1 and Layer 2 solutions more effectively.

• Base layer modifications: Layer 1 solutions involve changes to the blockchain protocol itself, while Layer 2 solutions build upon the existing protocol.

• Implementation complexity: Layer 1 upgrades often require significant development efforts and consensus among network participants, while Layer 2 solutions can be developed and deployed more independently.

• Scalability focus: Layer 1 solutions primarily focus on improving security and decentralization, while Layer 2 solutions target increased transaction throughput and reduced latency.

• Composability: Layer 2 solutions often maintain the composability of the base layer, ensuring that applications built on Layer 2 can interact with each other and with Layer 1.

• Upgrade flexibility: Layer 2 solutions offer greater flexibility for upgrades and modifications, as they don’t require changes to the underlying blockchain protocol.