Layer-2 Blockchain Solutions: Empowering the Web3 Ecosystem to Mainstream Adoption!

Blockchain technology has been orchestrating wonders since its inception years ago despite being on its way to mainstream adoption. Yet, problems exist within this evolving technology as network congestion has become commonplace. Solutions have come up addressing this issue in the form of layer-2 blockchain solutions that tap into some of layer-1 networks’ features. Numerous layer-2 solutions have been launched on existing networks to address this pressing issue. They are set to change how the global Web3 ecosystem will evolve from hereon. This guide from us focuses on layer-2 scaling solutions that provide a way for layer-1 blockchains to scale up.

Looking Deep into Layer-2 Blockchain Solutions

What are Layer-2 Blockchain Solutions?

Layer-2 blockchain solutions are sub-networks that help in increasing the scalability of main blockchain (Layer-1) networks. These are basically built upon existing blockchains that serve as the foundation for the current Web3 market. They offer enhanced scalability to the main network without compromising its security and robustness. A market report from L2Beats reflects that a total value locked (TVL) across layer-2 networks amounts to $10.37 billion.

With these solutions, the Web3 market can gain momentum toward its mission of achieving widespread adoption among the global population. Why? Because they aim to (and have achieved) enhance the transaction throughput of leading blockchains, which has been a checkmate for businesses wanting to build a huge community. After all, no business owner would want to have their users wait for long times and pay hefty costs just to process their trading transactions.

What Layer-2 Networks Do

Layer-2 networks act as a ramp promoting scalability to layer-1 blockchains that often encounter congestion and higher transaction costs. These networks employ various techniques to make the process smooth and efficient, which we will see further down this guide. But primarily, they aim to make blockchain technology accessible to everyone by reducing transaction costs and quickening block speeds.

They also emphasize making the user experience inside the blockchain space friendlier using Web2-like interfaces and easy-to-understand operational flows. From the outside, layer-2 solutions aim to make using blockchain-based apps look as easy as any other platform.

Current Trends in the Layer-2 Ecosystem

As more layer-2 solutions come into existence, each of them comes with a unique point that dictates the trends. Most solutions tend to focus on Ethereum and Bitcoin as they have been cited to have huge problems related to scalability.

A trend observed in the current age is providing interoperability between various layer-2 blockchains as more subnetworks evolve inside existing layer-1 blockchains. Also, offering easier user experiences in the form of intuitive and accessible wallets and other applications is another trend gaining momentum. Other trends include building business-specific layer-2 blockchains (or “appchains”) and increasing scalability to realize enterprise-grade applications.

Current Trends in the Layer-2 Ecosystem

For a long time, in this guide, we have been discussing about layer-1 and layer-2 solutions. While we have seen layer-2 solutions in detail, we have not explored layer-1 blockchains yet. A layer-1 blockchain serves as the foundational decentralized digital ledger that stores data in distributed nodes.

Bitcoin, Ethereum, Solana, Avalanche, BNB Chain, and Cardano are popular examples of layer-1 blockchains. Each of these networks has its own virtual ecosystems within which various applications coexist. Most of them have the ability to host smart contracts that allow crypto tokens and NFTs to be created alongside their own native crypto coins.

Comparing Layer-1 and Layer-2

Although layer-1 and layer-2 networks coexist, they differ vastly in terms of what they focus on and how they work. The points below show how they differ:

• Layer-1 blockchains focus on offering data immutability and security, while layer-2 blockchains focus on scalability and throughput speeds.
• Layer-1 networks prioritize decentralization, while layer-2 solutions focus on being flexible to support various business applications.
• Despite having a higher level of safety, layer-1 solutions come with certain limitations, while layer-2 networks do not have any, nor do they compromise with layer-1 blockchains’ provisions.

Working of Layer-2 Scaling Solutions

Layer-2 scaling solutions ramp up the capacity of layer-1 blockchains using several processes. While doing so, they ensure that none of the layer-1 network’s capabilities are hampered despite staying on top of these blockchains. Irrespective of how they process transactions, they have their own native crypto coins that should be used to pay for transactions. We will see the different processes utilized by layer-2 blockchain solutions in the below sections.

Off-Chain Processing

With NFT-based rewards, businesses have the leverage to plan for the long term in contrast to conventional loyalty programs. NFT-based loyalty platforms also offer increased security, scalability, and control to users by tapping into blockchain technology. Several global brands have already tapped into Web3 technology for their loyalty programs, some of which we will see below in a later section.

Secondary Protocols

Secondary protocols tap into additional programs built upon layer-1 blockchains in an attempt to enhance processing performance and lower associated costs. They have sophisticated smart contracts that tap into the main network’s robustness and security alongside custom-made solutions designed to boost transaction throughput. During the process, it is ensured that none of the layer-1 network’s capabilities are degraded.

Essential Features of Layer-2 Blockchains

• Scalability

  Scalability enables layer-2 blockchain solutions to offer higher transaction throughput compared to existing layer-1 blockchain networks using specialized programs.

• Cheap Costs

  Layer-2 networks often process transactions at a fraction of the cost incurred in layer-1 networks due to their usage of extra technological entities.

• High Speeds

  Transaction validations are registered at a faster pace in layer-2 blockchains as they use scalable provisions to ramp up throughput.

• Interoperability

  Layer-2 scaling networks work interoperably across numerous layer-1 and layer-2 blockchains, making it easy for people to access the vast digital ecosystem.

• Military-Grade Security

  These blockchains are secured by the underlying layer-1 networks alongside special solutions that safeguard the actual layer-2 programs to ensure an optimal digital environment for users.

Pivotal Elements of Layer-2 Networks

• Smart Contracts

  Sophisticated smart contracts in layer-2 networks empower all their functionalities, such as enforcing on-chain rules and validating transactions outside the blockchain using decentralized entities.

• Validators/Relayers

  Validators or relayers (differs per network) are individuals who verify each transaction made off-chain before grouping them and registering them on the main blockchain.

• Fraud Proofs

  Fraud proofs offer a way for the network to challenge the validity of transactions processed outside the blockchain, eliminating the possibility of breaches from malicious actors.

• Interoperability

  Layer-2 scaling networks work interoperably across numerous layer-1 and layer-2 blockchains, making it easy for people to access the vast digital ecosystem.

• Commit Chains

  Commit chains register a version of the entire layer-2 network on the main blockchain they are based on to ensure high-level data integrity and traceability.

Types of Layer-2 Blockchain Solutions

State Channels

State channels tap into both on-chain and off-chain transactions to register data on the blockchain. The usual process is as follows: A user conducts an initial transaction; they then execute multiple off-chain transactions; finally, they update the data on the blockchain by settling a final transaction.

This type of layer-2 scaling solution offers a distinctive advantage – transaction fees will only be levied twice: one while initializing the transaction and one while closing the transaction. They are also instantaneous as the channels can only be accessed by the persons connected by the two-way communication channel. Utilizing off-chain transactions also enhances privacy, as only the opening and closing processes are registered publicly.

Zero-Knowledge (ZK) Rollups

Zero-Knowledge (ZK) rollups are the latest innovation to hit the layer-2 ecosystem running. They use a cryptographic proof system known as Zero-Knowledge Succinct Non-Interactive Argument of Knowledge (zk-SNARKS) to validate transactions without revealing specific information. They use off-chain protocols to process transactions that help in storing compressed data on-chain. Hence, gas costs are kept minimal.

Such a sophisticated mechanism offers extraordinary levels of safety and integrity to data as the exact data present in the transactions would not be revealed to the public. Zero-knowledge proofs have become sensational in recent times as Ethereum encountered unbearable congestion rates and spiked gas.

Optimistic Rollups

Optimistic rollups have gained momentum in recent times as they focused on quickening the Ethereum network’s functional efficiency. These work partly similar to zero-knowledge rollups by processing transactions off-chain. Where they shine apart is that they assume all transactions are honest without the need for an external entity to verify them.

But that does not mean all transactions (even the dangerous ones) go undetected. There will be verification if a transaction encounters a challenge from anyone in the community within a predefined period of time. Since they are compatible with existing smart contracts written for Ethereum, businesses planning to migrate to such networks can achieve it easily.

Plasma

Plasma utilizes a series of smart contracts branching out from the Ethereum mainnet to process transactions independently and submit periodic reports to the main network. A protocol called Merkle Tree is used in the process to store data securely on Plasma layer-2 networks. Their presence inside the Ethereum network allows funds to be transferred from these sub-networks to the Ethereum mainnet, which promotes security and data accessibility.

These sub-networks can process thousands of transactions at a time, effectively decongesting Ethereum’s main blockchain creating an integrated environment for everyday digital businesses to thrive. This also leads to block confirmation times becoming smaller and faster.

Examples of Layer-2 Networks on Popular Blockchains

• Bitcoin Lightning Network

  The Lightning Network serves as a layer-2 scaling solution to the Bitcoin blockchain by offering the capability to create smart contracts and process transactions quickly.

• Polygon (Formerly Matic Network)

  Polygon uses a multi-chain EVM-compatible solution to process transactions and create interoperable and scalable applications.

• Starkware

  Ethereum-based Starkware operates on zk-STARK, an advanced cryptographic protocol that enhances scalability and privacy for transactions

• Optimism

  Optimism taps into the concept of optimistic rollups on Ethereum to provide almost-instantaneous transaction confirmations and smart contract executions.

• Arbitrum

  Arbitrum also uses optimistic rollups with a variation where users need to trust at least one validator to ensure the system operates correctly.

• Aztec

  Aztec uses zk-SNARKS to primarily boost privacy on the Ethereum network by verifying data without exposing all details.

• POA Network

  The POA Network uses the Proof-of-Authority (PoA) protocol inside Ethereum to process transactions using known validators, speeding up transactions.

• Loopring Network

  The Loopring Network uses zk-Rollups to process transactions inside its namesake DEX by batching multiple trades into a single transaction, reducing gas fees.

• SKALE Network

  The SKALE Network aids Ethereum-based DApps to become scalable using modular sidechains that are custom-built per business requirements.

• ZKSync

  ZKSync uses zk-Rollups to process multiple transactions under one batch while focusing on private and scalable solutions for users and developers alike.

How Can Layer-2 Scaling Solutions Elevate Your Venture?

If you are enthusiastic about setting up a blockchain-based business, utilizing layer-2 blockchain solutions might provide you the much-needed kickstart. These networks benefit businesses in multiple ways, ranging from reduced expenses for processing transactions to flexible provisions to fit unique business requirements.

Apart from this, layer-2 blockchains offer enhanced prospects for decentralization, security, flexibility, and innovation. Some of these are inherited from underlying layer-1 networks, while others are custom-built for specific blockchains. From a business perspective, layer-2 blockchains can offer a leeway to bypass the hectic centerstage networks while continuing to enjoy the benefits they offer.