Bitcoin and Ethereum cannot process thousands of transactions per second (TPS) and this is a serious problem for their long-term growth. These networks will need to be able to process more transactions per second (TPS) before they can be adopted on a larger scale. What is the scalability problem? And how can Layer 2 networks fix it? Let’s see.
The blockchain scaling problem is serious
Although security and decentralization are an essential part of Ethereum’s layer 1 (or mainnet), the network has seen its market popularity grow over the years, resulting in a daily transaction volume of 1.5 million. Data congestion is often caused by high levels of network activity. The mainnet can only process approximately 15 transactions per second. This causes gas (transaction charges) to rise, which in turn slows down the performance of applications during 2021’s bull market.
A Layer 2 Scalability Solution was created to improve the network’s efficiency and process improvement.
What are blockchain layers and how do they work?
First, let’s define layer 1. A layer 1 network, also known as the base layer or the underlying infrastructure, is what we need to understand. It is also known as the “mainnet” or the “main network”. It not only defines the core rules for the ecosystem but can also validate transactions and conclude them.
Layer 1 blockchains are often built with a strong emphasis on security and decentralization. They are also maintained by a wide, global network that includes validators and developers.
Read more: A Beginner’s Guide To Blockchain Technology
These platforms lack any oversight or central authority, so the technology must have an inherent level of security to protect users against scams and attacks. Because of this high priority in the design and the enormous resources required to maintain an ecosystem that functions, these platforms have often been lacking scalability.
Layer 1 scaling solutions may include consensus protocol improvements. You might see the terms Proof of Work (PoW) and Proof of Stake (PoS) more frequently.
Layer 2 solutions are a good choice if a network requires a higher number of transactions per second, or lower fees (or both).
What is layer 2?
Layer 2 is a collection of off-chain solutions (separate Blockchains) that are built on top of layer 1. These solve bottlenecks in scaling and data. Similar ideas are used by payment platforms such as Visa. Visa instead of managing micro-transactions daily from vendors like Starbucks, which could clog the network in minutes and cause chaos, Visa groups them into batches that can be settled in the bank system at regular intervals. The banks store and sort the transactions through their settlement layer. In this case, Visa would then be layer 2, along with the wider network of institutions, governments, and other entities that keep track of transactions and set the rules for the financial industry as layer 1.
A blockchain network should be capable of handling unlimited transactions per second. This is called throughput, or TPS. If we take a quick look at the current state of crypto networks, it is clear that processing infinite transactions is not a possibility.
Bitcoin’s main chain can operate at around 3-7 TPS, which is a lot less than Visa’s roughly 20,000 TPS. The flip side is that Bitcoin’s network is undoubtedly more secure because it is decentralized. Every transaction must be approved by, mined and distributed, and verified by multiple nodes and a blockchain infrastructure’s data keeper.
Many Layer 2 scaling solutions were created to increase speed and efficiency while maintaining network integrity. These solutions include:
Sidechains can be seen in projects such as Polygon PoS. They are independent, EVM-compatible, and run parallel to the mainnet, interfacing with it through bridges. They are technically not considered layer 2 because they have a different consensus mechanism and are not protected by layer 1. The chain functions the same way as Ethereum because it models EVM. Sidechain operators are more at risk than Ethereum protocol or a proper layer because they trust users with funds.
Rollups are a layer 2 solution that executes many transactions without the need for layer 1. It compresses the data into one piece and then uploads it back to the mainnet so anyone can review the data and make a dispute if they feel suspicious. Rollups can not only use the security of Ethereum but also lower gas fees up to 10-100x.
Optimistic rollups run in parallel to Ethereum’s main Ethereum chain. They process all transactions and then send the data back to layer 1. Because of the low fees, users are encouraged to transact on these layer 2. Fraud proofs can be used to prove that a transaction was not fraudulent. The rollup will use the state data to calculate the transaction. This is a slight delay compared to ZK rollups, which are explained below. But, rollup users “inside” will still get fast transaction confirmation.
Optimistic rollups can be used to replicate any activity in layer 1 Ethereum in layer 2.
ZK rollups produce cryptographic proofs that verify the authenticity of transactions, in contrast to Optimistic rollups. These proofs are posted to layer 1 and are known as validity proofs, SNARK (succinct-interactive argument or knowledge), or STARKs.
ZK rollups work better because they keep track of all transfers on layer 2. These transfers are only updated through validity proofs. ZK rollups do not require all transaction data. This makes it easier to validate blocks, and then transfer ether (ETH), which is the main token on the Ethereum blockchain, from layer 1. Validity proof has already confirmed the authenticity of transactions. They do not support full EVM and require more computations to run applications that have little on-chain activity.
Bitcoin Lightning Network
The Bitcoin Lightning Network is a decentralized network that allows users to make micropayments at lower prices and instantaneously makes high-volume micropayments. This payment protocol is one of the most popular Bitcoin transactions that are quick and simple.
Furthermore Layer 2
Layer 2 of Blockchain’s network offers many great benefits for its users and the network that it supports. Layer 2 is designed to reduce the load on various crypto networks including Ethereum and Bitcoin.
More people will be able to experience the incredible potential of digital coins as more roads open to crypto transactions. It is not surprising that we will soon see other networks offer faster, cheaper, and more convenient crypto transactions.