What is layer-2 in crypto? What is a layer-2 blockchain?

A blockchain contains three main tiers: keeping safety as the top priority, making sure everything works all the time, and letting everyone participate in how a blockchain works.

However, when many people use a blockchain at the same time, it slows down. That’s where layer-2 comes in, which can be considered an upgrade to layer-1 blockchains. Layer-2 makes blockchains scalable, faster, and less crowded while keeping everything governed and safe. 

In this article, we will discuss what is layer-2 blockchain, the different layers of blockchain, and specifically what are the key differences between layer-1 vs layer-2 blockchains.

What is layer-2 blockchain?

As the name suggests, layer-2 in crypto has come after layer-1 and is built on top of layer-1 to improve its performance and scalability.

The core problem for layer-1 protocols is their high fees and slow transaction speeds, especially during a volatile market and peak usage. Layer-2 blockchains have come up with sidechains, state channels, and rollups, among other solutions that enhance the underlying layer-1 blockchain in terms of faster transaction times and lower fees. 

Understanding the layers of the blockchain 

Layer-1 (L1) also known as the base layer of a blockchain network oversees fundamental functions that include consensus mechanisms such as the Ethereum (ETH) proof-of-stake or Bitcoin’s proof-of-work and transaction settlements, among other key functions. Despite, decentralization and security being a top aspect of L1s, bottlenecks like poor transaction speeds and expensive fees sometimes plague them.

Layer-2 (L2) blockchains are built right on top of layer-1 blockchains to address the underlying problems. Layer-2 blockchains use techniques like rollups, sidechains, and state channels, which in turn, reduce the transactional load and enable quicker and less expensive transactions without sacrificing security.

L2 blockchains have come a long way and solved many problems in L1 and the overall blockchain ecosystem, however, additional optimization is required to enhance interoperability, user experience, and particular application features. This is where layer-3 (L3) blockchains come into the picture.

L3 blockchains are specialized in creating specific protocols for applications in web3 sectors including but not limited to NFTs, DeFi, and gaming. In simpler words, L3 blockchains facilitate cross-chain functionality across different blockchains so that any end-user can access multiple blockchains at a single time, which improves accessibility and interoperability. 

These three blockchain layers described above, combine to create a complete stack that guarantees blockchain technology’s future scalability, security, and accessibility.

Layer-1 vs layer-2 blockchain

Layer-1 and layer-2 blockchains differ primarily in their functions inside the blockchain ecosystem. Consensus mechanisms and autonomy are at the core of layer-1 blockchains. Bitcoin and Ethereum are two of the popular layer-1 blockchains that are autonomous in how they operate as they record and verify transactions on-chain. However, as mentioned before, when there is significant volatility in the market, layer-1 blockchains experience critical scalability issues which have a direct impact on spiking fees and delaying transactions.

Layer-2 blockchains are developed on top of layer-1 protocols with a specific mission in check, which is to improve the scalability and performance of L1 blockchains over time. There are many techniques that L2 blockchains use to make L1s efficient, but the most common ones are the combining of several transactions into one, and processing transactions off-chain that directly lowers the protocol’s workload without much negative impacts.

Rollups, state channels, and sidechains are some of the many solutions L2 blockchains offer that combine to allow for quicker and less expensive transactions and reduce congestion on the underlying L1 protocols.

In the long run, both layer-1 and layer-2, team up to produce an effective system: layer-1 offers the security and decentralized consensus that form the basis, while layer-2 enhances scalability and user experience, making blockchain technology more viable for common use cases like gaming and decentralized finance (DeFi).

List of layer-2 blockchains

There are over 100 layer-2 blockchains with more blockchains developing now and then. Here we will mention the top three layer-2 blockchains so far:

Polygon (POL)

Polygon is a layer-2 blockchain, also referred to as ‘sidechain’, which is a scaling solution operating on the Ethereum blockchain. Cryptocurrency projects use Polygon to enhance the scalability, flexibility, and autonomy of their platform. POL (previously known as MATIC) is the native token of Polygon and is used for governance and network transaction fees on the Polygon blockchain.

Optimism (OP) 

Optimism is a layer-2 blockchain that uses optimistic rollups to scale the Ethereum ecosystem. This layer-2 platform runs on a community-driven governance model to benefit the ecosystem in the long run.

The Optimistic Rollup protocol is at the center of Optimism, as it helps take the load off Ethereum by executing transaction data outside Ethereum and then periodically posting it onto the Ethereum blockchain. This whole process helps in reducing transaction costs and enhances the performance of the Ethereum blockchain and more projects can build on Ethereum by using the Optimisim L2 blockchain.

Arbitrum (ARB)

Arbirtum is a layer-2 blockchain that also uses optimistic rollup for storing off-chain data which reduces the traffic on the Ethereum blockchain. It offers web3 apps and smart contracts that offer lower and faster transactions as compared to using Ethereum alone as a blockchain.

Benefits and challenges

By now you have understood why layer-2 blockchains are a critical part of the entire web3 ecosystem. However, it doesn’t mean they do not face any challenges. In this section, we will briefly discuss the benefits and challenges offered by layer-2 blockchains. 

Benefits:

Scalability 

Processing transactions off-chain is the key feature of L2 blockchains which has a direct impact on increasing scalability, as the congestion on the underlying L1 blockchain is significantly reduced. 

Lower Transaction Costs 

New users and projects are attracted to shift from web2 to web3 because layer-2 blockchains reduce transaction costs dramatically thanks to it off-chain transaction processing feature described above. 

Faster Transactions 

When transactions are processed off-chain, not only is the fee reduced, but also the time it takes to get from point A to point B. L2 blockchain bundles multiple transactions together which makes their speed faster and in turn ensures improved user experience while maintaining security as well. 

Challenges:

Security Dependencies 

L2 blockchains do not share the autonomy and high level of security as compared to the layer-1 blockchains. There are still vulnerabilities and failures associated with L2 blockchains that are being resolved by blockchain developers. 

Complexity and Adoption 

Not everyone can integrate their layer-2 project into the layer-1 protocols as it may require specific infrastructure knowledge of both L1 and L2 blockchains. This means that many users and new projects may face a steep learning curve to adopt this layer-2 technology. 

Interoperability Issues 

Performance and fast transactions are a big benefit of layer-2 blockchains, however, the interoperability issues is still there. This issue is resolved by the introduction of L3 blockchains which enhance cross-chain functionality across different blockchains as explained in section 2 of this article.

The future of layer-2 blockchains

Layer-2 blockchains in crypto will continue to solve the scalability issues that are currently being faced by layer-1 blockchains, such as Bitcoin and Ethereum. With an increasing number of adoption for decentralized technology, cost-efficient blockchain technology is going to be the top requirement and this is where layer-2 blockchains can manage this incoming traffic without compromising on decentralization or security.

It is also expected that interoperability between layer-1 and layer-2 blockchain will continue to be improved. This will help in creating a unified ecosystem that will provide more accessibility to assets and data across all blockchains. In simpler words, user experiences such as blockchain wallet integrations, transaction throughput, and other key metrics that determine blockchain performance will be enhanced, which in turn will encourage mass adoption.

Other important expectations from layer-2 blockchains are that the innovation sector which includes rollups, zk-proofs, etc. will continue to advance as new cryptocurrency startups continue to build on this blockchain technology. It is also possible that the layer-2 blockchain solution may overshadow other blockchain layers and become the future of a decentralized economy.