In other words, Rootstock boasts compatibility with the entire ecosystem of Ethereum dApps. The purpose of a Layer 2 solution is to reduce the load on Layer 1 by bypassing its technical limitations while taking advantage of its strengths. Thus Bitcoin Layer 2s are networks that run on top of the main blockchain, primarily to increase its capacity to process transactions, but they can also increase usability in some other ways.

Both Layer 1 and Layer 2 scaling solutions help preserve the integrity of the underlying blockchain, while improving the ability to handle far more transactions. But there are inherent risks that can compromise the security of a particular blockchain—or even the integrity of the overall project. With Ethereum’s 8th birthday coming up on July 30th, Web3 has certainly come a long way. As the space has grown, however, the technology’s scaling limitations have become harder to ignore. Any regular cryptocurrency user will, inevitably, find themselves faced with high fees and slow transaction confirmations at some time. Layer 2 systems, called “L2s,” have emerged to address this scalability bottleneck, offering users cheaper and faster transactions while maintaining strong security guarantees.

Then, before a new block is added to the chain, it must be checked against the entire history of the network. The L1’s consensus mechanism ensures that all the nodes in the network will eventually agree on the state of the whole system system (for example, how much ETH a given user owns at a particular point in time). Right now, the Bitcoin network’s L1 can handle about 7 transactions per second; Ethereum can handle at most a few dozen. This limit (which is quite low, all things considered) creates competition for block space. Ethereum L2s are designed to do just that by solving the parent network’s scalability challenges.

1. If (and only if) something invalid has occurred (like, say, a user trying to spend funds that aren’t rightfully theirs), a fraud proof can prevent that invalid action from finalizing.
2. The purpose of a Layer 2 solution is to reduce the load on Layer 1 by bypassing its technical limitations while taking advantage of its strengths.
3. Lighting Network is predominately used for simple payments, although Lightning channels could also, in principle, be leveraged for some more limited smart-contract-like functionality.
4. In this method, users create end-to-end encrypted ‘channels’ to send and receive payments.
5. There are certain limitations to this style of network, namely the inability to increase the network capacity without code changes or additional solutions.

For a receiver to detect transmission errors, the sender must add redundant information as an error detection code to the frame sent. When the receiver obtains a frame it verifies whether the received error detection code matches a recomputed error detection code. The uppermost sublayer, LLC, multiplexes protocols running at the top of the data link layer, and optionally provides flow control, acknowledgment, and error notification. It specifies which mechanisms are to be used for addressing stations over the transmission medium and for controlling the data exchanged between the originator and recipient machines.

Most L2s can be used with the same wallet software a user would use, like Metamask for Ethereum. For all major Ethereum L2s, fees are paid in the underlying chain’s currency ether. Generally speaking, a user will be able to do similar things on L2 that they would on L1, namely, sending and receiving payments and interacting with smart contract applications. To use an L2, a user deposits their L1 funds (like, say ether) into the L2 system via what’s known as a “bridge.” With their funds on L2, the user can transact. L2s utilize the underlying blockchain, but only minimally, which translates to L2 users paying lower fees.

Layer 1 Scalability Challenges​

The data link layer, or layer 2, is the second layer of the seven-layer OSI model of computer networking. Because sidechains are independent, the security guarantees provided by the Ethereum L1 are not automatically applied to the protocol in the same way that it is for a payment or state channel. Optimistic rollups submit transaction data use functional programming in python to the Ethereum network and leverage a dispute resolution system for detecting fraudulent transactions to ensure that all submitted transactions are valid. Like a payments channel, fees are only incurred to open and close the channel, and any transactions that occur between users within the channel are essentially instantaneous and free.

In contrast, ZK rollups produce a single cryptographic proof called “validity proof,” which attests to the validity of the transactions bundled together. There are several types of layer 2 blockchains, but some of the most how bitcoin investors and brokers are shaping the crypto market popular are; sicdechains and rollups. These differ slightly in their execution, and it impacts how the entire network works. Layer 2 blockchains are so-called because they sit as a second layer on top of a base mainnet.

In those cases, higher-level protocols must provide flow control, error checking, acknowledgments, and retransmission. A rollup is a technique used to transfer value between L2 networks and the Ethereum mainnet. With rollups, transactions from layer 2 networks are periodically batched together and transmitted back to the base layer 1 network, where they are validated by the layer 1 node as a single transaction. Unlike payment or state channels, Sidechains are independent blockchains with their own set of validator nodes.

The system stays efficient by only sending the channel’s opening and closing balances to the Bitcoin network. A sidechain is an independent blockchain with its own consensus mechanisms that connect to Layer 1 via a two-way bridge. This bridge is vital as it is what allows the who established exchange market for cryptocurrency transfer of assets between chains. Due to effectively being its blockchain, a sidechain can support other Layer 2 solutions on top of it. Keeping the nuts and bolts of low-value transactions off-chain means users can trasfer assets quickly and with minimal network costs.

Optimism is a great example of a chain that uses optimistic rollups to scale Ethereum. In short, it allows for faster and cheaper transactions than its parent blockchain. Polygon is popular with lots of DeFi projects and NFTs as it reduces the cost of deploying smart contracts significantly.

A developer might adopt a sidechain over a payment or state channel if they need even more flexibility and control over their underlying infrastructure. They enable participants to conduct more complex operations than sending simple payments back and forth. Users who leave centralized payment services like Paypal because of their 3% fees are no better off if they have to spend $200+ to make a single transaction on Ethereum.

What Is A Layer 2 Blockchain?

Launched by Offchain Labs, Arbitrum is an optimistic rollup that cuts down the speed and cost of transactions by bundling them and processing them off-chain. Arbitrum manages a total of  40,000 TPS, with transactions costing around two cents on average. Additionally, Arbitrum’s compatibility with Ethereum Virtual Machines (EVMs) helps Ethereum developers launch their dApps on Arbitrum without too many modifications to the code. Using the earlier analogy, the assistant carries the paperwork (transactions) to their desk, processes them, and compresses a big pile of paperwork into a single file. The assistant then sends that file, instead of the whole pile, back to the boss (Ethereum).

What Is A Crypto Layer 2 And How Does It Work?

The Bitcoin blockchain can process a maximum of 7 transactions per second, which might seem pretty fast. But by comparison, the Visa network can process an enormous 24,000 transactions per second – this is why it is able to function as a global payments system. Looking at these two networks side by side, it is clear that Bitcoin (and similar layer 1 blockchains like Ethereum and Binance Smart Chain) is simply not capable of being used universally – it doesn’t have the capacity.

While core upgrades like the Merge aim to make transactions faster, Ethereum still needs a scaling solution built to handle the masses. Layer 1 scaling solutions are changes to the blockchain network’s base protocol that improve scalability. Layer 2 scaling solutions instead use off-chain services or networks to make scalability better. A Layer 2 blockchain refers to network protocols that are layered on top of a Layer 1 solution. Layer 2 protocols use the Layer 1 blockchain for network and security infrastructure, but are more flexible in their ability to scale transaction processing and overall throughput on the network.

Layer 0 networks are also optimized for cross-chain interoperability, as it becomes easier for the various L1s connected to a single mainchain to speak with one another. The scalability trilemma is a persistent problem that has plagued blockchain developers ever since the Bitcoin blockchain was launched in 2009. For example, in 2022, Lightning users experienced a unique ‘unattributed payment routing’ failure due to a bug.

Unfortunately, the more popular a blockchain becomes (Bitcoin is a case in point), the more processing power is needed to handle its growing number of transactions. Cryptocurrency blockchain protocols also may limit the number of transactions that can be processed, creating a bottleneck in the network. Boba is an Optimistic Rollup originally forked from Optimism which is a scaling solution that aims to reduce gas fees, improve transaction throughput, and extend the capabilities of smart contracts. Rollups bundle (or ’roll up’) hundreds of transactions into a single transaction on layer 1. This distributes the L1 transaction fees across everyone in the rollup, making it cheaper for each user. Nevertheless, sidechains like Polygon carry greater security risks because they operate as independent blockchains which have a native token for rewarding their own set of validators.