Do layer-1 blockchains solve scaling problems in blockchain networks?
Back in 2009, when the idea of blockchain technology was first presented to the world with Bitcoin (BTC), the primary focus was on providing a decentralized and secure distributed database technology that can cater to transparent transaction ability.
It was necessary to create a native token for the purpose of facilitating payment for transactions on the network, which eventually led to the creation of popular cryptocurrencies such as bitcoin.
However, as the blockchain ecosystem continued to expand at an exponential rate, it brought to light the fundamental problem of slow transaction speeds as well as the inherent inability to scale provided by layer-1 blockchains.
A layer-1 blockchain is the base protocol that is then used in conjunction with third-party layer-2 protocols. This type of blockchain is also known as a mainnet, primary chain, or L1 blockchain. Examples of layer-1 blockchains include Bitcoin and Ethereum.
The proof-of-work (PoW) consensus mechanism used by layer-1 blockchains is the primary cause of the major problem with blockchain network scalability. PoW consensus mechanisms call for an excessive amount of computational resources to be used in order to construct each block of transaction data that is added to the network.
In addition, the number of transactions that a layer-1 blockchain is capable of processing is inversely proportional to the amount of time that is necessary to finish them, which results in an increase in the transaction fees or gas fees that are charged on such networks.
Because layer-1 blockchains process and finalize transactions on their own blockchains, any changes to the underlying protocol have the potential to disrupt the blockchain’s functioning. This makes the task of changing the consensus mechanism a risky proposition that should be avoided if at all possible.
Proof-of-work (PoW) is currently the consensus mechanism for Ethereum, which is another layer-1 blockchain. Ethereum intends to switch to a proof-of-stake (PoS) model in the near future in an effort to circumvent this scalability issue. Despite the fact that this will lower the amount of computational power needed and improve the blockchain’s energy efficiency, it will still require layer-1 scaling solutions such as sharding in order to eventually reach the maximum capacity of 100,000 transactions per second.
Sharding is the more popular of the two solutions for scaling at layer 1, and it involves first breaking transactions down into smaller data sets, and then using a processing algorithm that is split horizontally in order to process the smaller data sets in parallel.
However, because in a PoS consensus model the power to validate transactions is delegated to the stakeholders with the most influence, this does result in a form of centralization that needs to be addressed, particularly in the context of financial applications.
What is a blockchain layer-2 network, and why is it required?
There is no question that despite the scalability and speed handicaps of layer-1 blockchains, the rising popularity of these blockchains and the ample liquidity that has resulted from this has led to the birth of layer-2 blockchain solutions such as the Ethereum-based Polygon blockchain or the Bitcoin-based Lightning Network. Both of these solutions are examples of distributed ledger technologies.
These solutions for layer-2 blockchains, also known as L2 blockchains, make it possible to process thousands of low-value transactions after they have been validated on parallel blockchains. The records of these transactions are then transferred to the main blockchain, also known as the mainnet, to ensure that they are recorded in an unchangeable manner.
The term “layer-2 solutions” was first coined as a collective term to describe a particular set of Ethereum scaling solutions. These solutions were designed to cater to demand that was greater than the blockchain’s capacity of 1 million transactions per day.
Today, these secondary blockchains are expanding use cases to provide a more superior end-user experience by virtue of higher transactions per second, lower gas fees, and the assurance that all transactions, once completed, are irreversibly recorded on the mainnet. This is made possible by a combination of factors, including higher transaction throughput, lower fees, and the latter.
L2 blockchain solutions effectively shift the transactional burden onto their parallel network, thereby reducing the amount of congestion on the mainnet. This is accomplished by ensuring that the mainnet handles critical aspects of decentralization, data availability, and security.
This resolves the scaling issue that has plagued layer-1 blockchains such as Bitcoin and Ethereum, and it also ensures that robust decentralized security standards are available to a wide variety of decentralized applications (DApps), which are becoming increasingly widespread today.
Rollups on Ethereum as a potential scaling solution for layer 2
Rollups, so called because they “roll up” multiple transactions into a single mainnet transaction, are layer-2 scaling solutions that, in the end, inherit the security that Ethereum provides. Rollups get their name from the term “roll-up.”
The manner in which the final transaction data is recorded on the layer-1 blockchain differentiates between the two types of these transactions, which are further classified.
The first solution is optimistic rollups, consisting of blockchains that operate independently from the main chain to circumvent the costly computation that Ethereum requires. They provide security by essentially presuming that all transactions that have been posted are legitimate and by having the capability to run fault proofs in the event that an invalid transaction is suspected.
The second kind of Rollups is called zero-knowledge Rollups, or zk-Rollups for short. These Rollups use validity proofs to compute transactions off-chain, and then they compress hundreds of transactions before posting cryptographic validity proofs on the Ethereum mainnet.
The primary distinction between the two types is that zero-knowledge Rollups require only the validity proof to validate a block, whereas Optimistic Rollups need all of the transaction data in order to do so. This makes the process of validating a block on zero-knowledge Rollups much quicker.
Zk-rollups offer almost nonexistent delays in the transfer of cryptocurrency funds from layer-2 to layer-1 chain, which makes them more appropriate for use cases involving financial transactions. This can be seen with the widely used layer-2 cryptocurrency network Polygon.
On the other hand, Optimistic Rollups provide an increased level of security and decentralization due to the fact that transaction data is stored on the layer-1 blockchain. These rollups are better suited for applications that involve a minimal amount of activity on the chain.
They also have full compatibility with the Ethereum Virtual Machine (EVM) and Solidity, which makes it possible to do everything on an optimistic rollup that is possible on the Ethereum blockchain. They also have full Ethereum Virtual Machine (EVM) compatibility.
Demystifying additional common L2 scaling solutions
Sidechains are independent blockchains that run in parallel with the Ethereum mainnet and are connected to each other via a bridge that can go in either direction. These sidechains each have their own consensus mechanisms that allow them to function autonomously from the mainnet.
They provide developers with the same experience as the Ethereum mainnet and the ability to deploy their decentralized applications (DApps) on these sidechains in a manner that is relatively straightforward.
On the other hand, sidechains do not technically qualify as layer-2 blockchains because they incorporate a lower level of decentralization into their protocol. This is due to the fact that sidechains use a separate consensus mechanism.
Another example of a type of bi-directional blockchain is a State channel, which is also known as a payment channel. In this type of blockchain, cryptocurrency funds are deposited in a smart contract that is stored on the layer-1 blockchain, and signed tickets are produced on the layer-1 blockchain.
Popular examples include the Lightning Network, which enables users to conduct transactions quickly off-chain and then records the final data back to the Bitcoin mainnet at a later time. This feature is available on both the Bitcoin mainnet and the Ethereum mainnet.
Another state channel compatible with the Ethereum blockchain and enables users to execute smart contracts through them is the Raiden Network.
Plasma chains are tethered to the Ethereum mainnet and employ fraud proofs that are analogous to optimistic rollups to verify the legitimacy of transactions in the event a dispute arises. In circumstances in which transactions are conducted between arbitrary users at high speeds and with lower gas fees, they are more preferred.
On the other hand, withdrawal from these blockchains takes several days to complete to provide for arbitration claims and involves an additional cost in capital in situations where liquidity is sought for fungible assets.
Again, nested blockchains are comparable to plasma chains, but they feature interconnected secondary chains that operate on top of the layer-1 blockchain.
Nestled blockchains can be thought of as having a parent-child relationship with the secondary or child chains they use to distribute work. Nestled blockchains rely on the underlying mainnet to set parameters for the overall network web.
Validiums are eerily similar to zero-knowledge rollups in the sense that they are not vulnerable to cyberattacks and enjoy no delays when withdrawing funds off of these blockchains. This similarity comes about as a result of the fact that validiums share the same characteristics as zero-knowledge rollups. However, they call for a significant amount of computational power, and the applications in which they are used do not lend themselves to cost-effectiveness.
The difference between layer-1 and layer-2 blockchains
Layer-1 scaling solutions, which include making changes to the consensus protocol and sharding, are attempting to make blockchains like Bitcoin and Ethereum more scalable. Despite this, these solutions are still in the process of being developed, and multiple projects are currently working on bringing user-friendly solutions to market.
Scalability trilemma is a term that was coined by Ethereum founder Vitalik Buterin. It refers to an unsolved problem in networks that are based on distributed ledger technology in which every node that validates transactions cannot simultaneously achieve decentralization, security, and scalability. Both methods, on the other hand, are attempting to solve this problem. Scalability trilemma is a term that was coined by Ethereum founder Vitalik Buterin.
Layer-2 solutions are already facilitating transaction speeds and fees that are ideal for scaling the blockchain ecosystem in order to unleash the full potential of this ground-breaking technology; however, the jury is still out on how successful these could be. This is despite the fact that the jury is still out on whether or not these will be successful.
Numerous decentralized applications (DApps) are already implementing these solutions to deliver experiences that were not possible in the past in the realms of gaming, decentralized finance (DeFi), and the metaverse. In addition, these solutions are revolutionizing conventional industries such as finance, corporate governance, auditing, and many more.
In spite of the benefits, the process by which these blockchains validate transactions needs to be evaluated based on the use case, and the risk of validators on the layer-2 blockchain engaging in a fraudulent activity needs to be carefully investigated.
Having said that, new layer-2 scaling solutions are continuously being developed, and this field will continue to attract a lot of attention, praise, and criticism in the years to come.
Prospects for L2 blockchains in the future
Developments in both L1 and L2 blockchains will be driven by a focus on scalability, fast transaction speeds, and low gas fees as blockchain technology continues to see rising adoption in the real world. It is expected that L2 blockchains that are linked to L1 blockchains, such as Ethereum, will feel the effects of these L1 blockchains’ forthcoming significant updates, which may include modifications to the consensus mechanism and the introduction of new methods, such as sharding.
Inadvertently, L2 blockchains will be able to provide even quicker transaction times and reduce costs to a level not previously seen before. In conjunction with the rapid increase in the number of L2 blockchains, these benefits will undoubtedly fuel the development of new applications, particularly in the DeFi market.
In addition, users will be able to enjoy the benefits of higher blockchain interoperability and open up new avenues with regard to areas such as the trading of digital assets as a result of more bridges being built between the various L2 blockchain platforms. This will occur because of the fact that more bridges are being built between the platforms.
As a result, L2 scaling solutions will play a crucial part in the promotion of a multichain world, and this will place the onus on developers to ensure that growth is sustained without making any compromises on the tenets of security, decentralization, and scalability that blockchains are recognized for.
In order to bring to market L2 scaling solutions and DApps that will assist the world in transitioning to a decentralized economy, the entire cryptocurrency industry as a whole will need to band together, remain constantly innovative, and work in close collaboration with one another.
