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Layer 2 Blockchain And Scaling Solutions

By Tokenize Xchange
November 22, 2022

The unexpected rush of new users and a surge in the activity of cryptocurrencies put pressure on the networks’ capacity to process and confirm transactions, which in turn caused challenges. To deal with these problems, Ethereum has offered Layer 2 solutions. These enable the network to carry out transactions more quickly and at lower costs. In this writing, Tokenize Xchange – Digital Asset Exchange Platform will explain the term Layer 2 and discuss its applications.

layer 2 blockchain and scaling solutions

Understanding Layer 2

A Layer 2 refers to a supplementary framework or protocol based on a Layer 1 blockchain. Its objective is to address the various transaction-related problems that frequently plague large networks like Ethereum. When the volume of data passing via a blockchain reaches a threshold, scalability challenges arise, which results from the blockchain’s lack of sufficient processing power.

Blockchain programmers are attempting to enhance the capabilities of their platforms so that they can handle more transactions with shorter processing times. Implementing layer 2 protocols is one of the best ways to accomplish this. People will find it simpler to access the different services provided by blockchain technology as a result.

Problems that current blockchains have to face with

The blockchain trilemma is a theory that indicates the interaction of three objectives including security, scalability, and decentralization of a being blockchain. According to that, it is impossible to maintain all three properties at a specific period of time. A blockchain commonly can perform two out of three of those. This is also known as the blockchain trilemma or the scalability trilemma.

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According to Vitalik Buterin, founder of Ethereum, in the developing stage, developers need to choose one side of the triangle. This works for likely all the blockchains,  even the top ones such as Bitcoin and Ethereum. There is no way to achieve all three objectives because this trilemma is so deeply ingrained in blockchain technology.

The industry has found a new solution to confront this problem. These solutions interact with the underlying, or “Layer 1” blockchains to help solve some of the problems related to scalability.

Types of Layer 2 Scaling Solutions

Sidechain

Sidechains are separate blockchain networks that have their own validators. Smart contracts play a very important role in linking the sidechain and the main chain as well as validating the sidechain network. Assets can be transferred from the main chain to the sidechain and reversely.

With sidechains, private parties are not necessary for transaction participation. Additionally, because sidechain transactions are often added to the blockchain, security incidents affecting the mainchain or other sidechains won’t have an impact on how the sidechain runs. A sidechain’s establishment can take a long time because it often requires a large infrastructure.

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State Channel

A State channel is a communication channel for the parties that are related to a transaction. The parties interact with the off-chain transaction channel and encrypt a portion of the transaction information that belongs to the Layer 1 blockchain. Typically, a pre-negotiated or multi-signature smart contract is required to be signed. Without immediately sending the transaction data to the underlying distributed ledger or main chain, the parties subsequently carry out the transaction or collection of off-chain transactions.

The final status of the channel is transferred to the main chain for validation purposes every time a transaction in the set has been processed. This method boosts the transaction process and expands the network’s total capacity. The Liquid Network, Bitcoin Lightning, and the Raiden Network are a few instances of state channels. State channels must give up some of their decentralization to increase their scalability.

Roll up

Rollups are regular smart contracts that operate as a relay between the mainchain and Layer 2, where computations take place. Before posting the verified transactions to the mainchain, the process of rolling transactions into a single block is referred to as “rollup.”

These protocols transfer transaction activity to a sidechain while storing transaction data on the mainchain. However, while the mainchain and sidechain may work together, they can operate independently and keep in touch. As a result of the removal of computationally demanding procedures from the mainchain and the resulting decrease in congestion, blockchain networks become more scalable.

Some projects that are using Rollup technology to solve the congestion of the Ethereum network include Optimism, Arbitrum, and zkSync. While Optimism and Arbitrum use Optimism Rollup technology, zkSync uses its own technology called zkRollup. All three projects are proving to be quite effective because they can process the transaction quickly with low transaction fees.

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Conclusion

It is obvious that the cryptocurrency industry requires effective Layer 2 solutions, which can interact with the fundamental blockchain architecture and provide better usability at scale. Keep following Tokenize Xchange – Singapore Crypto Trading Platform for more informative articles of blockchain technology. 

Disclaimer

Cryptocurrencies are subjected to high market risk and volatility despite high growth potential. Users are strongly advised to do their research and invest at their own risk.