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What Is Layer 2, What Are Its Applications, And Why Is It Important In Blockchain?

Blockchain has come a long way since the launch of Bitcoin in 2008. In fact, it has become one of the most powerful technological forces, attracting individuals and businesses from all walks of life. That’s precisely why everyone is talking about the Blockchain. Although Blockchain technology came into the mainstream as a by-product of Bitcoin, it has evolved significantly, and now, it allows you to create a more complex and functional network for cryptocurrencies and many other things.

Blockchain technology is not restricted to monetary transactions and cryptocurrency only; in fact, it can also be used to track actual assets. For instance, real estate, automobiles, insurance, and several other commodities can all be tracked using Blockchain. Most importantly, it also enables you to track intangible assets such as copyrights, voting records, certifications, patents, and trademarks while retaining their accuracy and legitimacy.

The main reason behind the rise of Blockchain technology is the fact it's decentralized and offers exceptional security. However, there's one major concern with Blockchain technology that must be addressed, and that is its scalability. For instance, Visa's payment system processes about 24,000 transactions within a second. Meanwhile, Bitcoin can only process 7, and Ethereum can process about 20 transactions per second.

To evolve further and attract more users, Blockchain technology has to solve this issue. That’s where Layer 2 comes in. In this article, we are going to discuss everything you need to know about Layer 2, including what it is, how it works, and why it is important in Blockchain. So, without further ado, let's dive into it!

What Is Layer 2 In Blockchain?

Layer 2, as its name suggests, is an additional working layer within the Blockchain that works separately from Layer 1 (base layer). Basically, it works on top of the base layer and supports it in processing transactions to reduce its workload. As a result, using layer 2 enhances the transaction speed and the ability of the system to tackle more users.

The reason why Blockchain transactions take a long time to process lies within the structure of the Blockchain. For instance, a transaction needs to go through multiple stages before it’s completed in a Blockchain system. These stages typically include acceptance, mining, distribution, and validation. Going through all these stages requires extensive time and resources, which makes the Blockchain transactions slower, affecting scalability and user experience. In centralized transaction systems like PayPal, there are fewer stages, so the data is processed quicker.

As we discussed earlier, layer 2 operates on top of layer 1 and assists it in improving the transaction processing time. Basically, layer 2 relives the base layer of almost all the time-consuming tasks allowing it to focus on only the most important functions like security and control. An important thing to note is that layer 2 must always report to the base layer so that the transactions can be validated and the security of the Blockchain remains intact.

Examples of Layer 2 Blockchain Solutions

Layer 2 helps lessen the burden on the base layer so that it can work more effectively. Here are some examples of how layer 2 Blockchains are benefiting different systems.

1- Nested Blockchains

Nested Blockchain, as the name suggests, is a Blockchain operating on top of another chain. In nested Blockchains, the base layer has control over the secondary layers and utilizes them for different tasks. For instance, it assigns different tasks to the secondary layers in the Blockchain, like executing the transactions, while it watches over the working layers and takes care of overall parameters. The secondary Blockchains also report to the base layer after the task has been completed. This system is similar to a manager in a restaurant who divides tasks and watches over the workers, and the workers report back to the manager.

2- State Channels

State channels enable the participants on a Blockchain network to directly communicate with each other. It allows users to conduct transactions on secondary chains, which also eliminates the need for a middleman. As a result, the participants don't need to wait around for the miners' response, which significantly improves the transaction processing time.

Moreover, state channels use a smart contract mechanism to seal off the resources. As a result, you don't need validation from the base layer when a transaction occurs. Once a transaction is complete, it is recorded on layer 1. The record of the final transaction is kept in a public archive for recordkeeping. Even though the record of transactions is public, the details of the two transacting parties are kept private.

A good example of state channels in action is Bitcoin's Lightning Network, which can carry out numerous microtransactions in a small time frame. Ethereum’s Raiden network also uses state channels to let participants run smart contracts through their channels.

3- Sidechains

Sidechains are specially designed to handle big batches of transactions. In simple words, the sidechain is a smaller Blockchain that is separate from the main chain and takes some of its work. In sidechains, there are multiple smaller chains branching off from the main chain and taking off its workload, and dividing it.

The main chain is responsible for things like security, taking care of any disputes that arise, and keeping and maintaining records. Side Chains are similar to smaller streams breaking off from larger water bodies. Sidechains and state channels are different because a problem on any sidechain would not affect other side chains or the main chain. They also take more work to develop than state channels.

4- Rollups

Rollups is another layer 2 system. In Rollups, computations are run off the main chain, and details of the transactions are sent to the base layer for recordkeeping. These records are sent at timely intervals. Rollups don’t rely on the base layer for executing transactions which allows a lower gas fee to be viable on transactions. Most importantly, in rollups, data is recorded on the base layer, which ensures the security of the system. There are 2 types of rollups: Zero-knowledge Rollups and Optimistic Rollups. Let’s take at both of these!

  • Zero-knowledge Rollups: Zero-knowledge Rollups are a type of Rollup that performs computations off-chain and then send validity proof of the transactions to the main chain.

  • Optimistic Rollups: Optimistic Rollups consider all transactions to be valid until they are proven otherwise. Due to this, a week-long period is needed before the transaction can be validated. This time is enough to resolve a dispute if there is a challenge in terms of the validity of the transaction.

Why Is Layer 2 Blockchain Important?

Now let's look at why Layer 2 Blockchains are necessary to evolve Blockchain technology and to make it faster and more efficient. Listed below are four positive effects of using layer 2 Blockchains.

1- Better Security

In traditional Blockchain systems, the base layer can be altered to increase scalability. For example, we can increase the maximum capacity of the blocks as well as the speed at which validation of new blocks occurs. On paper, it’s a good solution. However, altering the base layer and changing the Blockchain’s main structure can greatly compromise the security of the network. In Layer 2 Blockchain technology, there is no need to make changes to the base layer, and the original structure of the Blockchain is maintained. It’s because layer 2 complements layer 1 actively. As a result, the security and integrity of the Blockchain remain intact using layer 2.

2- Higher Transaction Speed

Layer 2 systems make it possible to perform off-chain transactions in the Blockchain system, which takes off the extra load from the base layer. As a result, using layer 2 can increase the system's speed and scalability. Basically, in layer 2 systems, the workload is divided between layers allowing them to work effectively and quicker than before. Moreover, the main chain no longer has to deal with small tedious tasks and can put its energy and time into decentralizing the system and providing security. The second layer processes data faster and can be optimized and improved to increase the traction speed even more.

3- Better Scalability

Perhaps the biggest and most important benefit of using layer 2 Blockchain technology is how much it increases the scalability of the transaction process. It allows off-chain computations, which help the Blockchain network to process more transactions per second. Moreover, this ensures that every user will get a satisfactory experience with the Blockchain, no matter how burdened the system is. Slowly, layer 2 Blockchain technology can be improved even further to provide even more scalability in Blockchain transactions.

4- Lower Transaction Fees

The fourth benefit of using layer 2 Blockchain technology is the reduction of the gas fee. The reason why a gas fee is charged is that Blockchains need miners to validate each transaction. The miners solve different mathematical algorithms, which takes up a lot of processing power. This system falls short when there are a ton of users on the system who need their transactions to be validated. As a result, the miners have a lot of work to do, which increases the gas fees of each transaction.

Layer 2 blockchain technology decreases the processing power that is needed to validate transactions. This means that miners can easily validate more transactions, and the gassing fee will reduce for the users.

Final Thoughts:

The layer 2 Blockchain solution gives Blockchains a good chance at disrupting centralized transaction systems. Layer 2 not only enhances the user experience and processing power of the Blockchain but also reduces the transaction fees considerably. All in all, layer 2 makes Blockchain technology more and more likely to be accepted in the mainstream transaction market. Perhaps layer 2 will allow the integration of Blockchain in global commerce sooner than we anticipated.

If you want to develop a Blockchain system using the Layer 2 protocols or want to integrate layer 2 into your existing Blockchain, we can help you out. Here at IIInigence, we stand proud as the best Blockchain development agency offering a wide range of services, including Blockchain consultancy as well as cryptocurrency, smart contract, dApp, Decentralized Marketplace, and Metaverse development. So, what are you waiting for? Get in touch with us and schedule a call with one of our experts to see how we can help you fulfill your goals.