What is Layer 2

The emergence of blockchain in 2009 marked the beginning of a new stage in technological development, but along with revolutionary possibilities came serious limitations. The main ones are related to the scalability of the first generations of cryptocurrency networks. First-level blockchain platforms (so-called Layer 1 or L1), such as Bitcoin and Ethereum, provide a high level of security and decentralisation, but have extremely low throughput. For example, the Bitcoin network can only process about seven transactions per second, and Ethereum can handle a maximum of 15–30 transactions, while the Visa payment system reaches tens of thousands of TPS.

To solve the performance problem and make blockchain use mainstream, Layer 2 (L2) solutions were developed. These protocols are add-ons to the base blockchains, allowing for significantly increased transaction processing speeds and reduced costs while maintaining the reliability of the underlying infrastructure. Next, we will look at the principles of how Layer 2 networks work, their areas of application, and the most well-known projects in the Layer 2 field.

What are Layer 1 and Layer 2

The term Layer 1 refers to the basic infrastructure of the blockchain platform itself. Well-known examples include systems such as Bitcoin and Ethereum. Each such platform has its own specific protocols for confirming and recording transactions.

Although these basic layers form the foundation of most modern cryptocurrencies and decentralised applications (DApps), they often face scalability limitations. This manifests itself in the form of high transaction fees and reduced overall network performance, especially during periods of high load.

Thus, while first-layer blockchains offer a high degree of reliability and decentralisation, the architecture itself imposes significant limitations on performance, hindering the widespread adoption of the technology.

The solution to this problem came in the form of second-layer networks, developed on top of existing first-layer platforms to improve efficiency and eliminate scalability limitations. Examples of such solutions include the Lightning Network for Bitcoin transactions and Plasma for Ethereum.

These additional layers work as follows: part of the computational load is transferred outside the main blockchain, freeing up resources to speed up payment processing and reduce costs. This significantly speeds up transactions and reduces fees.

However, it is important to note that increased speed and reduced costs sometimes come with minor compromises in terms of security and decentralisation. Nevertheless, the advantages of second-layer solutions usually outweigh these minor drawbacks, providing significant gains in convenience and cost-effectiveness for users.

 

How do Layer 2 solutions work?

Imagine the first-level blockchain as a small family business where the owner handles many functions on their own. But as the number of customers grows, the owner is forced to delegate responsibilities to other employees, which significantly improves the efficiency of the entire organisation. Similarly, the first-level blockchain gradually redistributes its load thanks to second-level technologies.

Key components and mechanisms of a L2 network:

• Data aggregation. One of the key features of Layer 2 is the aggregation of many small transactions into single packets. This method allows an entire group of transactions to be sent at once, minimising the load on the main chain (Layer 1). This approach significantly increases the throughput of the network, making it more efficient.
• Off-chain processing. Most transactions passing through Layer 2 are carried out outside the main blockchain network. This means that only the final results of a large number of transactions are recorded back into the main chain, which reduces resource requirements and speeds up the verification process.
• Improved performance. Using various methods such as sharding (dividing the database into segments), optimised data processing algorithms, and specialised security measures, Layer 2 addresses critical bottlenecks in network scale and performance.
• Security and integrity. Although processing takes place outside the main chain, the connection to the base layer is maintained, ensuring data integrity and protocol compliance. Security mechanisms such as proof-of-stake or proof-of-work continue to function in Layer 2 networks.

These features and principles of l2beat crypto provide a significant increase in performance, allowing main networks to support hundreds of thousands of transactions per second, instead of tens or hundreds.

Popular L2 solutions on different platforms

L2 solutions are used by most large blockchain networks, as the increase in the number of clients and transactions requires optimisation to maintain structural integrity. This article presents popular L2 solutions for Bitcoin and Ethereum networks.

Bitcoin-based

One of the most well-known second-layer solutions for Bitcoin is the Lightning Network, an open payment system that uses payment channels to speed up transaction processing. In addition to it, there are:

• Stacks. Allows you to create smart contracts and applications directly on the Bitcoin network while maintaining its reliability and stability.
• Liquid Network. Offers fast and secure exchange of information and tokens through an alternative version of BTC.
• Rootstock. A platform for developing smart contracts and applications that supports cryptocurrency standards and guarantees a high level of decentralisation.

Ethereum-based

Second-layer solutions for Ethereum are often associated with their own monetisation, which simplifies the investment process.

Here are some popular examples:

• Polygon (MATIC). One of the most successful second-layer solutions, offering incredibly low fees and huge throughput. It has an impressive market capitalisation ($1.6 billion) and an active developer community.
• Optimism (OP). Provides enhanced security for Ethereum while speeding up and simplifying transactions. Its innovative OP Stack technology eliminates the need for bridges, giving you complete freedom to move tokens within your own environment. Its market cap is approaching $1 billion.
• Arbitrum (ARB). This platform combines multiple transactions into a single operation, reducing costs and enhancing scalability. It supports token transfers between its networks and the main Ethereum network. Market capitalisation: $1.628 billion.
  

  These projects demonstrate enormous potential and serve as examples of successful interaction between different levels of the blockchain, shaping the future of the cryptocurrency industry. The total capitalisation of all crypto projects with L2 solutions exceeds $12.3 billion.

  Why Layer 2 projects are attractive to investors

  Let's take a look at why investing in L2 projects can be profitable and what attracts experienced investors.

  Solving the scalability problem

  Scalability is one of the main challenges facing first-level blockchains such as Ethereum. High demand for network usage leads to delays and increased transaction fees.

  Second-layer solutions allow transactions to be carried out outside the main network, effectively relieving pressure on the main chain and improving the efficiency of the entire system.

  Such technologies make cryptocurrency transactions faster and cheaper, making them more attractive to a wide range of users and developers. The widespread adoption of Layer 2 will make digital assets accessible for everyday use.

  Innovative opportunities

  Beyond scalability, Layer 2 projects offer significant growth potential. New applications and services are becoming possible thanks to improved infrastructure. Layer 2 solutions are driving the development of areas such as DeFi (decentralised finance), NFTs (non-fungible tokens) and gaming platforms.

  In addition, the availability of cross-chain bridges improves the interaction between different blockchains, increasing the overall space of possibilities and stimulating the creation of new services and products.

  Early entry into promising projects

  For investors, early investments in Layer 2 projects provide a unique opportunity to acquire assets that could potentially skyrocket in value once these technologies become mainstream. The ability to get in early paves the way for potentially high returns, given the growing popularity and demand for such solutions.

  Conclusion

  Layer 2 solutions represent an important evolutionary step in the development of blockchain technology. Their goal is to ensure optimal performance and expand the functionality of core networks, removing barriers to the mass adoption of cryptocurrencies and decentralised applications.

  Investors see great potential in L2 projects, as they can contribute significantly to the development of the industry and bring substantial financial returns. It is important to remember, however, that any investment involves risks, so it is recommended to thoroughly research the selected project before making any investment decisions.

  Frequently asked questions

  What is Layer 2?

  Layer 2 is an additional solution that runs on top of the main blockchain to improve its scalability, speed, and transaction processing efficiency.

  Why are Layer 2 solutions needed?

  The main reason is to solve the scalability problem.

  Without Layer 2, large blockchains such as Bitcoin and Ethereum experience difficulties with the number of transactions processed, leading to high fees and slow processing.

  What are the different types of Layer 2 solutions?

  The most common types are: State Channels (e.g. Lightning Network), Sidechains (e.g. Liquid Network), Rollups (e.g., Optimistic Rollup and ZK-Rollup).

  Are Layer 2 solutions secure?

  Yes, most Layer 2 solutions use proven security methods, including transaction authenticity proofs and regular synchronisation with the main blockchain.

  Can Layer 2 solutions affect cryptocurrency prices?

  If Layer 2 solutions prove successful and widely adopted, they could help reduce transaction prices and increase overall interest in cryptocurrencies, which could theoretically strengthen the price of the relevant assets.

  Is it possible to lose money when using Layer 2?

  There is a risk of losing funds in any investment or transaction involving cryptocurrencies.

  Users should carefully research their chosen solution and follow expert recommendations on security.

  Do you need technical knowledge to use Layer 2?

  No, most users will not need technical knowledge, as most wallets and platforms automatically support Layer 2 solutions.