A blockchain network stores transaction data every time someone spends cryptocurrency. When too many transactions happen simultaneously, the network slows down and users have to wait.
This is where Layer 2 comes into play. It is a second framework built on the blockchain that can process transactions at a much higher capacity.
Imagine standing in line for a concert ticket, but there’s only one ticket booth. Layer 2 is the second booth with extra staff that handles most customers from the first one. To understand how Layer 2 works, we first need to get to know Layer 1.
Layer 1 is the base layer of a blockchain network—the ground floor of all transactions. Bitcoin, Ethereum, and Litecoin are all Layer 1 blockchain networks. A Layer 1 network is spread across many individual private networks, often referred to as nodes. These nodes use their computing resources to verify cryptocurrency transactions. Due to reliance on many nodes with varying capacities, a blockchain network cannot handle that many requests simultaneously.
Layer 2 is a protocol that goes on top of Layer 1. It works independently from Layer 1 but is still part of the entire network. That means, if there were any security issues, users could always go back to Layer 1 and double-check on the data. As they work on a separate network, Layer 2 solutions are often called off-chains. A large portion of transactions that go through Layer 1 gets shifted to Layer 2. This results in a shorter wait time and smoothens the traffic flow in Layer 1. Hence, scalability. Layer 2 is built with much higher capacity and processing speed. Most of them operate on their channels and rarely require validation from Layer 1. Some examples include state channels, Ethereum Plasma, and Lightning Network.
Some use-cases like blockchain games make no sense with current transaction times.
It can be unnecessarily expensive to use blockchain applications.
Any updates to scalability should not be at the expense of decentralization or security. Currently, most of the layer 2 project is built on Ethereum’s blockchain
Layer 1 is the term used for the underlying blockchain architecture and changes to it are called Layer 1 solutions. For example, Ethereum could be scaled easily by increasing the block size. This results to an increase in the number of transactions verified per block. However, this would make mining prohibitively expensive—centralizing the network to only the richest miners with the best equipment. This could leave the power of verifying the chain in the hands of few, endangering the network to malicious attacks. The Ethereum community doesn’t want to make this Layer 1 change because it would sacrifice decentralization and thus network security.
Layer 2 is built on top of the network and require no changes to the Layer 1. Layer 2 solutions still leverage the security of the consensus mechanism of the Layer 1 network, but they can drastically speed up transactions. Ethereum’s Layer 1 can handle about 15 transactions per second while some Layer 2 projects can ramp it up to 4,000 transactions per second.
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