What Is a Layer 2 Protocol in Crypto?
April 7, 2022

What Is a Layer 2 Protocol in Crypto?

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Bitcoin and Ethereum coins.
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Bear in mind when having 16 gigabytes of storage in your smartphone was an unimaginable quantity? Simply because the expertise of your smartphone has tailored for present calls for, so have most of the world’s main cryptocurrencies.

Why Layer 2 Is Obligatory

Just a few years in the past, blockchains have been greater than able to dealing with the site visitors on their respective networks. The quantity of customers has grown exponentially since then. As extra individuals use cryptocurrencies right now, these networks have gotten slowed down with site visitors. The site visitors on a few of these blockchains results in excessive charges and gradual processing occasions.

To mitigate congestion, builders created secondary blockchains that work along side the principle blockchain. This expertise is named a Layer 2 protocol. They’ve just about no capability limits, improve transaction speeds, decrease charges, and make Layer 1 blockchains extra environment friendly.

RELATED: What Is a “Blockchain”?

The processing of transactions shortly and cheaply is named scaling. Bitcoin and Ethereum have turn out to be a few of the most infamous Layer 1 blockchains that don’t scale effectively. Bitcoin can solely course of about 5 to 7 transactions per second, and Ethereum processes about double that quantity.

A bottleneck.
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Layer 1 vs. Layer 2: A Actual World Comparability

Let’s think about transactions on a blockchain as items of mail. Carriers that ship mail solely by vehicle could be just like a Layer 1 blockchain that doesn’t scale effectively (Bitcoin or Ethereum.)

Some carriers make the most of airplanes to move mail. They’re able to transport massive quantities of mail and packages throughout lengthy distances successfully. These airplanes carrying mail are the equal of Layer 2 protocols. The mail nonetheless arrives in the identical place, albeit a lot sooner and in a less expensive method.

In the identical trend, Layer 2 protocols can carry extra transactions after which “ship” them to the Layer 1 blockchain at a later date. The top consequence continues to be the identical, however the method of transport is just a bit totally different.

Rollups, Sidechains, and Channels

There are various strategies that Layer 2 options use to work together with the Layer 1 blockchain they assist. Rollups, sidechains, and channels are all examples of Layer 2 methodologies. Every has benefits and drawbacks. The necessary factor to recollect is that all of them accomplish the identical aim; improve transaction speeds and decrease charges for Layer 1’s.

Rollups bundle a number of transactions into one and deposit them again to the Layer 1 blockchain at a later date. They really are a second layer on prime of the Layer 1 blockchain. One of the well-known rollups for Ethereum is Loopring.

In contrast to rollups, sidechains are utterly separate blockchains that join and relay transactions to the Layer 1 community concurrently fairly than ready. Consider a sidechain like a bridge connecting the 2 blockchains. For instance, Polygon is a high-profile sidechain that helps scale Ethereum.

Channels monitor a number of funds between two customers, type of like rollups. Opposite to rollups, nonetheless, channels solely document two transactions on the Layer 1 blockchain. If the identical one greenback was despatched forwards and backwards between two individuals 20 occasions, rollups would have 20 transactions. With channels, solely the ultimate quantity every person possesses is added to the Layer 1. The Lightning Network is taken into account a Layer 2 resolution and is the most well-liked scaling choice for Bitcoin.

The Blockchain Trilemma

So why don’t all Layer 1 blockchains want a Layer 2 resolution? The reply lies in understanding sure limitations of constructing a blockchain.

Scaling is one among three defining options that make up a blockchain. The opposite two are decentralization and safety. These three options have turn out to be often known as the “Blockchain Trilemma,” a time period coined by Ethereum founder Vitalik Buterin. It’s known as a trilemma as a result of there isn’t any blockchain that doesn’t compromise no less than one among these three sides. As of now, there isn’t any cryptocurrency that is ready to obtain most scalability, safety, and decentralization.

In different phrases, cryptocurrencies choose two of three of those options to concentrate on, to the detriment of the third.

An outline of the top 10 cryptocurrencies by market cap right now reveals that some are scalable and safe, some are safe and decentralized, and a few are decentralized and scalable. The necessary factor to notice is that none are capable of obtain a most of all three. There’s all the time a tradeoff of some type.

Cryptocurrencies like Cardano, Avalanche, or Solana are Layer 1’s which have made a reputation for themselves by capitalizing on Bitcoin and Ethereum’s scaling difficulty. The aforementioned cryptocurrencies can course of 1000’s of transactions per second however they sacrifice decentralization or safety. In distinction, Bitcoin and Ethereum are two of probably the most safe and decentralized cryptocurrencies.

The Blockchain Trilemma.
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Layer 2’s for the Lengthy Haul

As of March 2022, Bitcoin and Ethereum made up greater than half of the whole cryptocurrency market cap. These blockchains assist an enormous variety of customers and DeFi ecosystems. Different Layer 1’s (Cardano, Avalanche, Solana, and many others.) have begun to seize extra of the market share however they lack a few of the intrinsic decentralization and safety that make Bitcoin and Ethereum so distinctive.

For customers that worth these traits, Layer 2’s promote utility for these blockchains that might in any other case be pricey and gradual.



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