What are Layer 2 Blockchain Solutions?
The end result of this system is that Bob and Alice only need to pay for two on-chain transactions to open and close the payment channel. While the payment channel is open, millions of transfers can be made at zero cost and sub-second speeds directly peer to peer—a classic example of scalability. A good way to conceptualize these two dynamics is to take two examples of existing layer-2 implementations—payment channels and rollups. Ethereum also initially used PoW but has since upgraded to proof-of-stake (PoS) consensus, which requires node operators to lock up a large Ether (ETH) deposit to process transactions.
The data link layer, or layer 2, is the second layer of the seven-layer OSI model of computer networking. This is what it means to inherit the decentralization and security guarantees of the underlying blockchain. Once the payment channel is set up, Alice and Bob are free to gamecredits mining calculator transact off-chain via signed messages without submitting transactions to the underlying blockchain.
Layer 2 blockchains are crucial for the continued growth and success of the Ethereum network — boosting scalability by lowering fees & increasing transaction throughput. Layer 2 protocols do this by offloading some of the computational work from the Layer 1 blockchain (Ethereum), alleviating network congestion & improving performance. Each Layer 2 blockchain offers a unique technological solution and tries to overcome the shortcomings of other Layer 2 networks. For instance, optimistic rollups are easier to build and offer solid short to mid-term scalability.
Yes, Layer 2 blockchains reduce gas fees by reducing the burden of transactions on the Layer 1 chain and de-congesting the network. Ethereum is undergoing several upgrades to make the network more scalable on its own. For instance, the Merge upgraded Ethereum to a Proof-of-Stake blockchain, creating the foundation for sharding. The next upgrade (Surge) will introduce sharding to find optimum ways of storing calldata from Layer 2 networks. This will eventually help Ethereum to scale to over 100,000 transactions per second.
- There needs to be enforcement of the truth, much like a judge makes a decision after evidence is provided and the jury have reached a verdict.
- Instead of just node-to-node communication, we can now do network-to-network communication.
- Users compete for space on the blockchain by bidding against each other via transaction fees.
Alice can pay Bob, and vice versa, at zero cost and lightning-fast latencies. Layer-2 networks are where fast execution of transactions and computations occur. Side chains are independent blockchain networks with their own set of validators that allow transactions to be processed in parallel. This vastly increases the transaction-processing power of a blockchain, but you must trust the integrity of the side chain network and the bridge network that connects it to the main blockchain. A Layer 1 blockchain is the base architecture for a decentralized cryptocurrency network.
Boba Network
The adjudication process of the underlying smart contract is precisely what makes payment channels a layer 2. An easy way to think about this is to look at it from a “proof” perspective. Once the payment channel is opened, both Bob and Alice must cryptographically sign every transaction they make and store a copy of the other’s signature.
What is the OSI Model?
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. Zero-knowledge rollups use validity proofs where transactions are computed off-chain, and then compressed data is supplied to Ethereum Mainnet as a proof of their validity. Layer 2 blockchains settle their transactions on Ethereum Mainnet, allowing users to benefit from the security of the Ethereum network. Layer 2 (L2) is a collective term to describe a specific set of Ethereum scaling solutions. A layer 2 is a separate blockchain that extends Ethereum and inherits the security guarantees of Ethereum.
In this way, the L1 acts as the ultimate judge, enforcing the L2’s rules when necessary. At any point, the proper owner of funds on L2 can use the bridge to “withdraw” their funds back to L1. An L2 user shouldn’t have to trust any designated parties to ensure that they have this withdrawal guarantee; in other words, fund security comes from the base layer blockchain itself. Both optimistic and zero-knowledge rollups bundle (or ’roll up’) hundreds of transactions into a single transaction on layer 1. Rollup transactions get executed outside of layer 1 but transaction data gets posted to layer 1. Some layer 1 blockchains report higher throughput and lower transaction fees than Ethereum, but generally with trade-offs elsewhere, for example greater hardware requirements for running nodes.
Why doesn’t Ethereum make its own Layer 2?
So make sure you understand the different blockchains so you can stay ahead of the curve. 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. Arbitrum and Optimism support general purpose smart contracts, similar to Ethereum.
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. Optimistic rollups are ‘optimistic’ in the sense that transactions are assumed to be valid, but can be challenged if necessary. If an invalid transaction is suspected, a fault proof is run to see if this has taken place.
To illustrate, to send 0.1 BTC to your friend, , you’d create a channel with them and fund it with the required amount. And once all the transactions are complete, you can close the channel. The system stays efficient by only sending the channel’s opening and closing balances to the Bitcoin network. For Layer 2 blockchains, cryptographic proofs offer verifiable and tamper-proof evidence that a transaction is true and the proposed state change is valid. The main chain’s smart contract depends on the proof to finalize transactions and settle disputes. Validiums process transactions off-chain and use validity proofs to verify transactions.
For example, Ethereum-based decentralized applications (or dApps) can migrate to its Layer 2 (or L2) chains without major changes to support higher usage volumes while still enjoying Ethereum’s security. To use the Lightning Network, two users can submit an L1 transaction to open up what’s called a “payment channel.” Once they have a Lightning channel open, they can send payments to each other entirely off-chain. When we talk about the blockchain’s “Layer 1,” with the core properties of decentralization and disintermediation, we are referring to blockchain networks like Bitcoin BTC and Ethereum ETH. These systems use distributed ledgers (blockchains) to enable digital asset ownership and transfers without relying on any third parties. Since no trusted third parties are required, anybody can run the L1 software with a personal node, using a personal laptop or Raspberry Pi device. Ethereum Mainnet (layer 1) is only able to process roughly 15 transactions per second.
It builds on the functions of Layer 2 – line discipline, flow control, and error control. Layer 3 transmissions are connectionless, or best effort – they don’t do anything but send the traffic where it’s supposed to go. This is where we send information between and across networks through the use of routers. Instead of just node-to-node communication, we can now do network-to-network communication.
Layer 1 Blockchains vs. Layer 2 Blockchains
For more information on the technology, risks, and trust assumptions of layer 2s, we recommend checking out L2BEAT, which provides a comprehensive risk assessment framework of each project. See how cross-chain solutions enable a new frontier of dApp functionality. Of course, this limited core functionality is one of Bitcoin’s key features, not a bug. This layer is responsible for data formatting, such as character encoding and conversions, and data encryption. Examples of protocols on Layer 5 include Network Basic Input Output System (NetBIOS) and Remote Procedure Call Protocol (RPC), and many others. TCP, a connection-oriented protocol, prioritizes data quality over speed.
Lower fees
We encourage you to do your own research before transferring significant funds to a layer 2. For more information on the technology, risks, and trust assumptions of layer 2s, we recommend checking out L2BEAT(opens in a new tab), which provides a comprehensive risk assessment framework of each project. Just as there is no ‘official’ Ethereum client, there is no ‘official’ Ethereum layer 2.
