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What is a layer 2 blockchain?

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What is a layer 2 blockchain?


layer 2 is a collective term used to describe blockchain scaling solutions. They are merely an extension of the base layer. They inherit the features of the layer 1 blockchain and build on them to improve the efficiency of the network.

What is a layer 2 blockchain?
As layer 1 blockchains, Bitcoin and Ethereum, have always been plagued by the 'Blockchain Trilemma'. This means that, one of three features (scalability, decentralisation & security) needs to be sacrificed for the blockchain to function efficiently.
For instance, on the Bitcoin and Ethereum Blockchains, scalability is traded for security and decentralisation. So, while data is stored in a secured distributed ledger, these blockchains suffer in terms of transaction speeds, especially as the number of users on the network increases.
Bitcoin has a transaction per second (TPS) speed of 7, whereas Ethereum has a TPS of 15. These are extremely slow compared to other payment services like Visa, which has a TPS of 45,000. Developers have turned to layer 2 solutions to address this gulf in processing speeds.
layer 2 is a collective term used to describe blockchain scaling solutions. These solutions are built on top of the layer 1 blockchain and help improve the network's scalability and transaction processing speed. They are merely an extension of the base layer. They inherit the features of the layer 1 blockchain and build on them to improve the efficiency of the network.
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Let's dive in deeper to understand the meaning of layer 2 solutions and how they work.
layer 1 Blockchains:
To understand how layer 2 blockchains work, we must first look at layer 1 Blockchains.
layer 1 is the foundation for any crypto ecosystem. It contains the consensus mechanism protocols by which the blockchain transactions are verified and added to the ledger. For instance, the Bitcoin and Ethereum blockchains employ the Proof-of-work consensus mechanism. Whereas Solana, Avalanche, Luna and many more use the proof-of-stake consensus mechanism.
Any decentralised apps or finance projects built on top of a layer 1 blockchain inherit the benefits and limitations of the underlying protocol. For instance, projects built on the Ethereum network enjoy the benefits of security and decentralisation. However, they also suffer from slow transaction speeds and high gas fees when there is congestion on the network.
This is the reason why Ethereum is moving to the Proof-of-stake consensus mechanism. The transition should increase transaction speed considerably.
Another effective means of improving the scalability of a layer 1 blockchain is sharding, where the blockchain is broken into smaller, faster, more manageable parts. This helps the network improve performance and reduce query response time.
However, even these solutions do not completely solve all the issues of a layer 1 blockchain. For instance, Ethereum might be converting to PoS, but it has taken years to develop and implement the solution. In such cases, the next best alternative is to build another layer on the top of a layer 1 blockchain. This additional layer is known as a layer 2 solution.
layer 2 Blockchains:
While L2 scaling solutions build upon layer 1, they do so without tampering with the features that make the base layer decentralised and secure. They lower the burden of the mainchain by acting as an auxiliary framework for processing transaction data. They process transactional data 'off the chain' and return it to the mainchain for storage. This ensures better TPS speeds and lower transaction fees. It also provides scalability, allowing the layer 1 blockchain to work efficiently even with a constant influx of users.
layer 2 blockchains generally employ a data rollup to speed up the transaction verification process. Here, several transactions are verified, rolled-up into batches and sent to layer 1 for storage. However, different layer 2 solutions use different rollup techniques. In this regard, two of the most prominent methods are optimistic rollups and zero-knowledge (ZK) rollups.
Zero-knowledge solutions process transaction data, roll it up into batches and then offload these batches to the main layer for storage. They also generate cryptographic receipts to confirm the authenticity of transaction data without leaking any information about the transactors, hence the name zero-knowledge.
Optimistic rollups also work similarly; however, they do not generate receipts to prove data validity. Instead, they optimistically assume that all data is correct and employ a waiting period during which transactions can be verified by network participants. If any data is found to be incorrect, the transaction can be reversed. However, if all the data seems valid, it is then added to the ledger.
Scalability is the stumbling block of blockchains. It has prevented the likes of Bitcoin and Ethereum from reaching their full potential. Thankfully, layer 2 blockchains have evolved to fight this challenge head-on. They ensure that the future of blockchain technology is scalable.
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