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 Needed
A couple of years in the past, blockchains have been greater than able to dealing with the visitors on their respective networks. The quantity of customers has grown exponentially since then. As extra folks use cryptocurrencies right now, these networks have gotten slowed down with visitors. The visitors on a few of these blockchains results in excessive charges and sluggish processing occasions.
To mitigate congestion, builders created secondary blockchains that work along side the primary blockchain. This expertise is called a Layer 2 protocol. They’ve just about no capability limits, enhance transaction speeds, decrease charges, and make Layer 1 blockchains extra environment friendly.
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The processing of transactions shortly and cheaply is called scaling. Bitcoin and Ethereum have turn into a number of the most infamous Layer 1 blockchains that don’t scale properly. Bitcoin can solely course of about 5 to 7 transactions per second, and Ethereum processes about double that quantity.
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 car can be much like a Layer 1 blockchain that doesn’t scale effectively (Bitcoin or Ethereum.)
Some carriers make the most of airplanes to move mail. They can transport giant 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 vogue, Layer 2 protocols can carry extra transactions after which “ship” them to the Layer 1 blockchain at a later date. The top outcome continues to be the identical, however the method of transport is just a bit completely different.
Rollups, Sidechains, and Channels
There are various strategies that Layer 2 options use to work together with the Layer 1 blockchain they help. Rollups, sidechains, and channels are all examples of Layer 2 methodologies. Every has benefits and drawbacks. The essential factor to recollect is that all of them accomplish the identical aim; enhance 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 honestly 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 moderately 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, sort of like rollups. Opposite to rollups, nonetheless, channels solely document two transactions on the Layer 1 blockchain. If the identical one greenback was despatched backwards and forwards between two folks 20 occasions, rollups would have 20 transactions. With channels, solely the ultimate quantity every consumer possesses is added to the Layer 1. The Lightning Network is taken into account a Layer 2 resolution and is the preferred 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 in every of three defining options that make up a blockchain. The opposite two are decentralization and safety. These three options have turn into often called 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 at the least one in every of these three aspects. As of now, there isn’t any cryptocurrency that is ready to obtain most scalability, safety, and decentralization.
In different phrases, cryptocurrencies decide 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 essential 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 problem. The aforementioned cryptocurrencies can course of hundreds 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.
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 help an unlimited variety of customers and DeFi ecosystems. Different Layer 1’s (Cardano, Avalanche, Solana, and so on.) have begun to seize extra of the market share however they lack a number 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 expensive and sluggish.
