Layer 2 Solutions: Scaling Blockchain for Faster Transactions

Blockchain technology not only changed how we secure transactions but also changed industries altogether. While blockchain networks can be very slow when scaling, transaction speeds have slowed down heavily with the number of networks scaling. For all the applications that require high throughput and fast processing—such as decentralized finance (DeFi) and NFTs — this is a major barrier today.

The scalability challenges have now been addressed by layer 2 solutions. Layer 2 technologies build on the base blockchain (Layer 1) in forming faster blockchain transactions and less congestion to the main network. Despite deploying these solutions, blockchain resources become more efficient as transaction processing moves off-chain and settlements on-chain.

In this article, we will explore various types of L2 solutions, the benefits they bring to blockchain scalability, as well as their importance for scaling toward faster and more efficient transactions.

What are Layer 2 Solutions?

Layer 2 solutions are blockchain technologies that sit on top of a base layer 1 blockchain to help improve the scalability and efficiency of a network. These solutions work by shifting some of the processing of the transaction to a side chain that is faster than the main blockchain. Instead, Layer 2 provides such a solution by handling most of the activity off the main blockchain and settling the final state back onto the main blockchain, thus maintaining security at speed and reducing latency.

The core goal behind Layer 2 solutions is blockchain scaling. There are more users and more dApps finding blockchain technology for adoption, while Layer 1 networks like Ethereum are struggling to process the increased amount of transactions, and fee inflation is rampant. This is achieved by layer 2 solutions increasing the transaction throughput whilst not affecting the security or decentralization of the underlying blockchain. It enables blockchains to support a much broader number of users and use cases, as well as DeFi platforms and NFT marketplaces while also being both more efficient and lower cost.

Types of Layer 2 Solutions

Developed are many of these solutions to achieve blockchain scaling (or transaction speeds) by moving transactions off of the Layer 1 network via different methods. These solutions are designed to increase efficiency, decrease costs, and make blockchain transactions faster while maintaining security and decentralization. Below are some of the most prominent types of Layer 2 technologies:

• State Channels. With state channels, users can use off-chain multiple transactions between 2 or more parties. Only when the state channel is closed do these transactions get settled on-chain, and this means that the number of transactions processed natively on the blockchain is massively reduced. For microtransactions where many exchanges occur, but need not be written to the blockchain for each, this is a good solution. Some examples are the Lighting Network for Bitcoin and Raiden for Ethereum.
• Rollups. A popular and widely used Layer 2 solution, rollups aggregate (or "roll up") many transactions to form a single batch, which is then sent 'as once' to the Layer 1 blockchain. There are two main types of rollups: Optimistic Rollups(they check the transactions solely if there is a dispute and they assume transactions are valid, improving transaction speed) and ZK-Rollups (Zero-Knowledge Rollups)(the chain result creates these proofs of proof that the transactions are valid off-chain and then sends them to the Layer 1 blockchain. ZK Rollups have better security, much better scalability, and faster settlement times).
• Plasma Chains. Plasma chains are subchild chains linked individually to the main chain (Layer 1). These child chains do the heavy lifting, handling a ton of off-chain transactions and periodically reporting the end state back to the main chain. Layer 1 is congested less so because of an offload of work to Plasma chains, resulting in faster processing times. Plasma is most useful for complex applications that need high throughput like decentralized applications (dApps) and Platforms of Decentralized Finance (DeFi).
• Sidechains. A sidechain is a parallel blockchain that runs alongside the main one. These run on their consensus mechanisms, being linked to the main chain through a two-way peg, providing a two-validity between the chains. Often sidechains are used for certain applications that need distinct rules or have faster transactions that don’t impact the performance of the main chain. In contrast to other Layer 2 solutions, sidechains are not completely dependent on a Layer 1 blockchain’s security, which adds another level of risk.
• Payment Channels. Like state channels, payment channels carry out multiple off-chain transactions that can then be settled on a main chain only when the last transaction occurs. For use cases like micropayments where a high volume of little value transactions happens, layer 1 has tended to be too expensive or slow.

These solutions each address the increasing demand for scalability in blockchain networks. Reduction of load on the main chain allows for faster transactions and lowers transaction costs, which makes decentralized applications open for use by more users. Given the rise in demand for blockchain, Layer 2 solutions will be critical in developing the future of blockchain scalability.

Benefits of Layer 2 Solutions

With scalability being a major concern concerning Layer 1 blockchain, Layer 2 solutions have been key in addressing these inherent shortcomings of Layer 1 chains. However, these solutions come with a few key benefits that increase the performance of the blockchain networks such as faster blockchain transactions and better resource utilization. Here are the major benefits of implementing Layer 2 solutions:

• Scalability. Also, one of the biggest advantages of Layer 2 solutions is blockchain scaling. Such solutions offload a massively significant chunk of transaction processing to secondary layers and increase the number of transactions a blockchain can process per second (TPS). This scalability is important for the growing demand for decentralized applications (dApps), decentralized finance (DeFi) multiprotocol, and NFT ecosystems, which need high throughput to run normally.
• Lower Transaction Fees. For instance, when network congestion occurs as on Layer 1 blockchains like Ethereum, it becomes costly for users to do transactions as gas fees can get incredibly high. These transaction costs can also be significantly reduced by layer 2 solutions, as they will process transactions off-chain at lower fees and bundle multiple transactions into one transaction to settle on the main chain. The most significant use case here is for microtransactions as running them directly on layer 1 would be prohibitively expensive.
• Faster Transactions. They reduce the load on the main blockchain providing much faster blockchain transactions. From facilitating instant payments with state channels to rollups to bundle transactions, Layer 2 technologies bring transaction confirmations second or minute these are often, compared to the much longer times on Layer 1 blockchains when activity is high. The increased speed of transactions mitigates bad user experience and makes Decentralized services more usable each day.
• Improved User Experience. However, these solutions on blockchain have made the blockchain experience more seamless and user-friendly by offering faster and cheaper transactions. This provides apps to be built with lower fees and close to instant transaction finality, resulting in more apps built for more people; more adoption, and more usage. This is important in industries such as gaming, DeFi, and e-commerce; speed and affordability are key to success.
• Increase in Network Efficiency. Such solutions offload transactions from Layer 1 to alleviate network congestion to ensure the main blockchain is functioning more efficiently. It helps enhance the overall performance of the blockchain community in the sense that they can scale up to handle the growing user base securely and with decentralized keys. This should enable more sustainable blockchain infrastructure, since Layer 1 networks remain less congested, and consume less energy.

Finally, Layer 2 solutions provide competitiveness over the blockchain network, having usability benefits in terms of improved scalability, speed, and cost efficiency. The ability for blockchain platforms to process more transactions, lower fees, and complete transactions faster all benefits from their adoption of these technologies, which helps foster the widespread adoption of decentralized technologiedecentralizedustries. Given how quickly blockchain is growing, it's going to be imperative that Layer 2 exists to guarantee that these networks remain scalable and so on.

Use Cases of Layer 2 Solutions in the real world

These solutions have been implemented by the industry to make various industries scalable and efficient enough to run practical blockchain applications. These solutions contribute to the scaling of the blockchain by fastening blockchain transactions as well as reducing congestion in decentralized technologies. Here are some of the most impactful use cases of Layer 2 technologies:

Decentred Finance (DeFi) Platforms

Layer 1 blockchains including Ethereum have also been a major bottleneck because of DeFi platforms, ironically growing exponentially, as the high fees and slow transaction processing times came in. DeFi scaling solutions used layer 2 solutions to reduce the fees and transaction time on the DeFi platforms. Rollups and sidechains allow decentralized exchange (DEX), lending, and liquidity pool-type DeFi applications to transact more TPS at a better price, opening participation to users around the world.

Gaming and NFTs

These solutions are helping the gaming and NFT sectors as well. Because it’s not making sense for the number of in-game transactions that occur from players in blockchain-based games, layer 1 like confirmation time and fees just doesn’t cut it. Faster blockchain transactions are possible through Layer 2 technologies like state channels and rollups, where players can interact with each other in real-time and at cheap costs. Layer 2 solutions are, for many NFTs, used to settle trades and ownership transfers at scale without the prohibitive costs of Layer 1.

Cross-Border Payments

Layer 2 solution is one of the most promising use cases for cross-border payments where conventional banking is slow and expensive. However blockchain provides a decentralized option, but Layer 1 networks are still subject to delays, and high transaction fees. Layer 2 scaling technologies allow cross-border payment platforms to circumvent the limitations of cross-border payments by providing near-instant, low-cost transfer between countries thus bringing down the frictions faced by businesses and individuals immensely relying on remittances.

Blockchain Applications in Enterprise

They enable scalability to facilitate the mass processing of transactions for companies using blockchain for supply chain management, data security, and other types of commercial usage. Layer 1 blockchains struggle to process large amounts of data in real-time, and enterprises often need to do that. Layer 2 tech integration bridges the gap between ease of use, speed, and cost efficiency of blockchain scaling; allowing businesses to grow without the tradeoffs in performance or security.

Streaming Services and Micropayments

Another important use case for these solutions is micropayments, or transactions of small value regularly. Fast, low-cost payments are needed to make content streaming platforms, pay-for-use platforms or even decentralized advertising platforms work. All of this means there are new business models in crowdsourced work, such as music and video streaming, and it makes it possible for instant micropayments with minimal fees using Layer 2 such as payment channels.

Finally, Layer 2 solutions are driving the practicality and scalability of the blockchain across a diverse set of industries. As speeds and fees regain relevance in DeFi, gaming, payments, and even enterprise applications, these solutions democratize faster blockchain transactions and lower fees making decentralized technologies more accessible to users, businesses, and everyone. Following the success of the Layer 1 space, we can expect to see even wider adoption of the blockchain in different fields.

Layer 2 Solutions – Challenges and Risks

Layer 2 solutions, among which there are many, are crucial improvements to solve some of the blockchain scaling issues and help faster transactions, while at the same time introducing their own set of risks and challenges. To achieve the highest potential from layer two technologies, it’s important to understand, detect, and address these challenges to ensure that the security and capability of the broader blockchain ecosystem are not compromised.

Security Concerns

This solutions space has seen security as the single biggest risk in the last decade. While these off-chain processes can lead to an increase in potential vulnerabilities, the notion is that transactions occur off-chain and are then settled to the main chain. To run these solutions, smart contracts that control these solutions need to be rigorously tested and audited. Some sidechain Layer 2 solutions aren't as secure as Layer 1 blockchains, and as such the security model is weaker and users in those spaces can sometimes remain exposed to attacks that are attacker-friendly.

Implementation Complexity

L2 solutions can be difficult for developers and businesses to implement due to their technical complexity. Building integrations between L2 protocols and existing L1 infrastructures is very technical, and it’s not always easy to migrate to L2. In this case, applications that involve smart contracts can be a source of additional complexity and points of failure developers have to consider. Therefore developers need to handle Layer 1 and Layer 2 have to communicate with each other seamlessly.

Adoption and Usability

L2 solutions also face the challenge of widespread adoption. They come with obvious benefits when it comes to scalability and speed, but many blockchain projects and developers have been slow to adopt Layer 2 technology because of the complexity of implementation and their inability to interoperate with existing Layer 1 protocols. Furthermore, the experience for users can become more complex as they have to move assets between Layer 1 and Layer 2 environments, which can confuse new users and scare them from participating in these solutions.

Interoperability

Layer 2 solutions need to be interoperable with both Layer 1 blockchains and other solutions for them to reach their true potential. Many Layer 2 implementations today are designed for a particular blockchain, which results in assets and data moved on one Layer 2 network not being easily portable onto another. Interoperability between Layer 1 and several Layer 2 solutions is crucial to building a coherent blockchain ecosystem that can efficiently scale across many different apps and platforms.

Centralization Risks

Such solutions have the potential of also unintentionally introducing centralization risks. For example, in some Layer 2 over Layer 1 environments including sidechains and centralized rollup operators, there could be a single entity or a few validators in control. This takes away a benefit of blockchain–its decentralized nature–and puts the network further at risk for (among other things) censorship or single points of failure. Gaining the right balance between scalability and decentralization is a key challenge in Layer 2 development.

Finally, although these Solutions substantially enhance the blockchain scaling and transaction speed, they face challenges that require to be settled. For the scaling capabilities of Layer 2 to be adopted beyond the current enthusiasts, there are security concerns, the complexity of integration, how quickly users will embrace them, how interoperable they are, and how centralizing, at all scales, they are. While going through these challenges will be, as these challenges are overcome, Layer 2 solutions will become more and more important in driving future blockchain networks’ growth and scalability.

Conclusion

As we move towards autonomous organizations through the development of DAO, traditional hierarchical governance is destroyed and replaced with a decentralized and transparent alternative. DAOs give power to decentralized governance which means we no longer need intermediaries or central authorities to make the decisions – it's much more democratic and efficient. These organizations are not just redefining blockchain and DeFi but are bringing an entirely new narrative to governance in all industries.

But there are challenges (security risks, scalability challenges, regulatory uncertainty) that need to be overcome as DAOs will be a powerful shift towards more inclusive, and community-driven models. As development in this space progresses, DAO will start to have an increasingly important role in global governance, corporate management, and the association of many fields.

Overall, DAOs’ continued growth and evolution will unlock even more of the decentralized governance potential for people around the world and new ways for them to contribute to shaping the organizations and systems that matter to them.