But there also exists a whole category of solutions that are not native to blockchains called layer 2 solutions. They move a part of the burden carried by the main chain off-chain, reducing the amount of data stored directly in the blockchain. This allows for greater capacity per individual blockchain, enabling a greater transaction rate and a more efficient network.
This article sheds light on the pros and cons of layer 2 solutions, presenting some of the hottest ones out there.
Layer 2 Solution Essentials
- Second-layer solutions move a part of blockchain data off-chain.
- Though they are off-chain, second-layer solutions run on smart contracts and are enrooted in the blockchain, meaning that they benefit from all its security perks.
- The Lightning Network is a Bitcoin-specific solution made possible by SegWit.
- Ethereum’s second-layer solutions include Optimism and Arbitrum.
Layer 2 solutions and security
As blockchains emerged, they quickly amassed global recognition. This was primarily due to their decentralized nature, introducing the concept of trustlessness. So, if blockchains are what eliminates the factor of trust, how can it be safe to move a part of the blockchain data to the second layer on top of the blockchain?
This is because although they are not a part of the chain, layer 2 solutions are still enrooted in the blockchain. This means that they refer to the blockchain to resolve any dispute and fact-check transactions. In a sense, a blockchain acts like a decentralized notary that cannot be bribed. They cannot be bribed because every possible outcome is predetermined in smart contracts, with no possibility of something new and unexpected happening after the fact.
Bitcoin and the Lightning Network
Segregated Witness is a Bitcoin-specific fix. It was designed to address transaction malleability, which made it possible to change transaction IDs. Additionally, SegWit virtually increased Bitcoin’s block size from 1 MB to 4 MB by introducing the concept of block weight. But the story does not end here. SegWit provided a platform for the development of layer 2 solutions. The first one for the Bitcoin protocol is the Lightning Network.
Lightning uses blockchain transactions and smart contracts to create a secure network. The participants in this network are able to transact at a very high speed. The Lightning Network can achieve a throughput of millions to billions of transactions per second. Additionally, the Lightning Network charges very low fees, which is made possible by transacting and settling off-blockchain.
One of Lightning’s interesting features is that it theoretically allows for cross-chain transactions. This means that we could potentially have transactions between different SegWit-compatible blockchains. The Lightning Network started its testing period on 18 January 2018 and is currently run by over 15,000 nodes, including Bitstamp’s own Lightning node.
Layer 2 proposals for Ethereum
One of the most popular Ethereum’s layer 2 solution is called Polygon, a platform that uses interconnected networks to optimize decentralized applications (dapps).
Polygon's networks are built as Ethereum sidechains, or independent blockchains that run separately from the main Ethereum chain with their own security guarantees. However they also leverage the security of the main chain to finalize transactions and store critical information central to their operation. In addition, sidechains often have bridges that enable users to transfer assets between it and the main chain.
Blockchain scaling solutions such as these must be put in place to enable greater network throughput. Effective scaling has the potential to make crypto transactions much faster and more user-friendly without compromising security. With solutions such as the Lightning Network and Polygon, blockchain scaling is already well under way.