What is Layer 2 and Why is it Important? What are the Most Popular Projects of Layer2?

 

What is Layer 2 and Why is it Important?

 

Blockchain technology has revolutionized a number of industries by providing decentralized systems that guarantee immutability, security, and transparency. But when blockchains like Ethereum and Bitcoin became more well-known, they faced several difficulties, particularly with scaling. Enhancements performed directly on the primary blockchain, or "base layer," are referred to as Layer 1 solutions, and they have had difficulty keeping up with growing demand without compromising security or decentralization.

This is where solutions based on Layer 2 (L2) are useful. Scaling solutions that run on top of the underlying blockchain are referred to as Layer 2. By offloading a portion of the transaction flow, these efforts hope to improve the main chain's performance and increase its transaction throughput (TPS). They solve some of the most important problems with blockchain technology by doing this, including expensive transaction costs, sluggish processing times, and constrained scalability.

The basic idea behind Layer 2 is straightforward: create an additional layer where transactions can be handled more quickly and effectively, all while maintaining the security and decentralization of the primary blockchain. Speed and security can be guaranteed by consolidating and recording transactions on the Layer 1 blockchain once they are finished on Layer 2.

 

Understanding Layer 1 and Layer 2

 

Friends who are in contact with cryptocurrencies must be aware of cryptocurrencies such as Bitcoin, Ethereum, etc. After a while, you will hear that the GASFEE of Ethereum is too high (you can read this article about what GASFEE is) and the transaction speed is not enough. Quickly, this gave rise to many problems! In the blockchain, each transaction needs to go through complex verification and recording procedures, which slows down processing and easily causes transactions to be queued for processing. In order to solve these problems, people began to explore different solutions, including blockchain expansion technologies such as Layer1, Layer2 and side chains.

 

Layer 1

Layer1 is the blockchain protocol network layer technology. It establishes its own ecosystem for different public chains. Among the Layer 1 public chains with smart contracts, Ethereum currently has a total market capitalization and usage of The highest, but as mentioned above, transaction fees are still high due to excessive usage. At this time, many competitors began to emerge, creating different public chains and having their own consensus mechanisms to verify nodes.

From EOS, the "Ethereum killer" in early 2018, to the popular Layer 1 public chains Solana, Binance Smart Chain, Cardano, etc., their scalability and transaction speed are not inferior to Ethereum, but the overall number of users and market value are still It cannot outperform Ethereum, and its current total market value is as high as 57.6%, followed by Tron with 14% (source: DefiLIama).

Despite this, there are still different new Layer 1 public chains that continue to be born to challenge Ethereum’s dominance, including Aptos, Sui, and the newly launched Sei, which were launched in the past two years. Layer 1 is still a hundred schools of thought contending, and will eventually remain.

The following items are well-known Layer 1 projects:

Solana, Binance Smart Chain, Cardano, Aptos, Sui, Sei, Zeta, Near

 

Layer 2

Layer2 (second layer) is a concept in blockchain technology. It refers to another layer of protocols established on top of the basic protocol of the blockchain. It is not a separate blockchain and aims to solve the problem of block chain problems. Issues such as chain scalability and transaction speed. But Layer2 is not a blockchain with an independent consensus mechanism. It just transfers the transaction records on the Layer1 public chain to other places for processing, and then transmits the transaction data back to the Layer1 public chain to reduce transaction costs.

Among them, the most mainstream Layer2 operating modes are "Optimistic Rollup" and "ZK-Rollup".

The following will introduce the processing methods and representative projects of each word, as follows:

Optimistic Rollup

Optimistic Rollup uses the "optimistic verification" method. On Layer 2, transactions are processed and recorded quickly, while verification takes place on the main blockchain. Transactions are assumed to be valid and will only be verified on the main blockchain if a transaction is disputed.

Advantages: Optimistic Rollup enables higher transaction throughput because most transactions do not require immediate main blockchain verification, which reduces transaction fees and latency. It can increase the transaction speed of Ethereum to 10 times to 100 times.

Disadvantages: Optimistic Rollup adopts a fraud proof scheme to increase transaction speed, but at the same time take security into account. During the "seven-day challenge period" , if a dispute arises during the period and is submitted as an invalid transaction by other nodes, It needs to be verified, resulting in transaction delays and additional fees.

Representative projects: Arbitrum, Optimism, Starknet.

ZK-Rollup

ZK-Rollup uses Zero-Knowledge Proof for transaction verification. Transactions are aggregated into batches and then proven valid using zero-knowledge proofs, meaning transactions are verified instantly on Layer 2

Advantages: ZK-Rollup ensures instant verification of transactions without waiting for verification from the main blockchain. At the same time, zero-knowledge proofs also provide higher privacy protection; the verification process of ZK-Rollup is relatively efficient and does not require additional dispute resolution. However, designing and deploying zero-knowledge proofs requires some technical and computational costs.

Disadvantages: The implementation of zero-knowledge proof is relatively complex and requires advanced mathematics and cryptography knowledge, which may make the development and maintenance of the protocol more difficult. Transaction size limit: ZK-Rollup may be limited by the transaction size when processing a large number of transactions, because zero-knowledge proofs need to be included in the transaction, which may cause some limitations.

Representative projects: Zksync, Taiko, Polygon zkEVM, Linea.

 

Types of Layer 2 Solutions:

There are several types of Layer 2 solutions, each with different mechanisms to achieve scalability. The most common approaches include:

1. State Channels:  These entail setting up a secret channel of communication between two or more parties, allowing several transactions to take place without utilizing the main blockchain. The final state of the transactions is noted on the base layer after the channel is closed. State channels are well-known, and one such example is the Bitcoin Lightning Network.  

2. Sidechains:  Independent blockchains that operate in parallel to the main chain are known as sidechains. They are anchored to the foundation layer for security and finality, but they employ their own consensus processes. Sidechains that offer scalability without sacrificing Ethereum's security include Polygon (previously Matic).

3. Rollups: Multiple transactions are combined into a single batch, or "rolled up," and published to the base chain. There are two varieties available: zk-Rollups, or zero-knowledge rollups, and optimistic rollups. Because of Ethereum's scalability, rollups are very well-liked and are thought to be the most promising Layer 2 solution for upcoming development.

 

Why Are Layer 2 Projects Necessary?

Alongside the growth of decentralized applications (dApps), non-fungible tokens (NFTs), and decentralized finance (DeFi), there has been an increasing need for Layer 2 projects. Transaction fees (also known as "gas fees") have increased dramatically as more users engage with these Ethereum applications, making participation prohibitively expensive for regular users. Furthermore, Ethereum is not fast enough for large-scale applications; it can only process about 15 transactions per second.

By handling transactions off-chain or on a secondary layer while still depending on the underlying chain for security and decentralization, layer 2 solutions lessen these issues. As a result, a blockchain ecosystem that is more user-friendly and scalable and capable of widespread adoption is created.

 

Popular Layer 2 Projects and Tokens

Leading the drive to grow blockchains are a number of Layer 2 projects. These projects have been widely used in the bitcoin industry in addition to providing useful scalability solutions. The following are a few of the most well-known Layer 2 projects and the tokens linked with them:

 

1. Polygon (MATIC)

One of the most popular Layer 2 scaling options for Ethereum is Polygon, formerly known as Matic Network. With the help of this sidechain technology, developers can create dApps with less costs and quicker transaction times. Polygon functions as a framework for creating and joining blockchain networks that are compatible with Ethereum. Through sidechains, which operate concurrently with the Ethereum network but depend on Ethereum's security for finality, it offers scalability.

Token: The Polygon network's native utility token is called MATIC. It is employed for transaction fee payment, governance, and staking. As the platform has gained popularity, the MATIC token has experienced tremendous appreciation, particularly in the DeFi and NFT ecosystems.

Key Features:

 - Quick transactions with low costs.
- Ethereum compatibility, which makes dApp migration simple.
- Support for zk-Rollups and Plasma, among other scaling solutions.

 

2. Optimism (OP)

Optimism is an Ethereum Optimistic Rollup solution that seeks to grow the network without sacrificing its security and decentralization. When there is a disagreement, transactions are only verified by Optimistic Rollups, which operate by presuming they are legitimate. As a result, the base chain experiences less computing strain, enabling quicker and less expensive transactions.

One of the most promising Ethereum Layer 2 solutions is optimism; Synthetix, Uniswap, and Aave are just a few of the significant projects that have already adopted its infrastructure.

Token: Recently, the Optimism platform introduced OP, its native currency that is used for network operations and governance.

Key Features:

- Scalability natural to Ethereum without compromising security.
- Compatibility with Ethereum Virtual Machine (EVM), making it simple for dApps to switch from Ethereum.
- Robust developer network featuring collaborations across key DeFi initiatives.

 

3. Arbitrum (ARB)

Another well-liked Ethereum Optimistic Rollup solution that aims to facilitate quicker and less expensive transactions is called Arbitrum. Like Optimism, Arbitrum significantly increases transaction throughput by grouping transactions and sending them to Ethereum for completion.

Because of its low costs, excellent scalability, and simple interaction with Ethereum, Arbitrum has been warmly appreciated. Developers wishing to scale their Ethereum-based decentralized applications (dApps) turn to this platform since it supports a broad variety of DeFi applications.

Key Features:

- Easy to use for developers, requiring little modification to the code when ported from Ethereum.
- Utilizing Ethereum's foundation layer, it is both decentralized and safe.
- Strong uptake in DeFi initiatives.

 

4. Loopring (LRC)

A Layer 2 protocol called Loopring is dedicated to scaling decentralized exchanges, or DEXs. It leverages zk-Rollups to provide inexpensive, quick trading on Ethereum without sacrificing security. zk-Rollups allow you to package transactions off-chain and send a cryptographic proof to Ethereum that verifies the transactions without disclosing any private information.

Because Loopring addresses many of the drawbacks of conventional Ethereum-based DEXs and enables high throughput and low cost trading, it has gained popularity in the decentralized trading sector.

Token: The Loopring protocol's native token is called LRC. Within the Loopring ecosystem, it is utilized for governance, staking, and liquidity provision.

Key Features:

- Consider scalability when developing decentralized exchanges.
- zk-Rollup technology guarantees effectiveness and secrecy.
- High transaction volume in comparison to DEXs for standard Ethereum.

 

5. Immutable X (IMX)

A Layer 2 scaling solution created especially for NFTs on Ethereum is called Immutable X. An important benefit of Immutable X over other Ethereum-based NFT platforms is that it does not charge gas fees for the minting, buying, selling, or trading of NFTs through the usage of zk-Rollups.

The platform has acquired popularity in the NFT market, especially in the gaming industry where users must swiftly and affordably complete numerous small transactions.

Token: Immutable X's native token, IMX, is utilized for staking, transaction fee payments, and governance inside the ecosystem.

Key Features:

- Pay attention to the NFT ecosystem and facilitate NFT trading among users at a low gas cost.
– Immediate finality of transactions with zk-Rollup technology.
- partnered on a number of well-known NFT projects, such as TikTok and Gods Unchained.

 

Conclusion

Layer 2 solutions are critical to blockchain technology's development. These initiatives provide a workable route to scalability by offloading transactions from the main chain while still depending on Layer 1 security. Layer 2 initiatives like Polygon, Optimism, Arbitrum, Loopring, and Immutable X are essential to the creation of decentralized platforms and apps and will only become more significant as the blockchain industry expands.

Layer 2 solutions guarantee that blockchain networks stay effective, economical, and able to handle widespread adoption without sacrificing security or decentralization in light of the growth of DeFi, NFTs, and decentralized exchanges.