What are Layer 2s and Why Are They Important?

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If you have been in the blockchain space for a time, you may probably come across the term “Layer 2”. Blockchains such as Bitcoin Ethereum are often called “Layer 1” since they conduct every transaction on the network. Meanwhile, Layer 2 is the structure that is built on top of the blockchain, which mainly helps resolve the scalability problem. In this article, we are going to explore what layer 2s are and why they are important to the blockchain.

What Are Layer 2 Solutions?

Layer 2s are a set of off-chain solutions (separate blockchain) constructed on top of layer 1s (base chain) that reduce bottlenecks with scaling and data. Specifically, layer 2s help scale an application by processing transactions off of the main chain (layer 1) while still keeping the security and decentralization as the main chain. Layer 2 solutions provide a mechanism to scale and speed up transactions. They have the capacity to execute thousands of transactions per second in various circumstances.

To qualify as a layer 2, a network, system, or technology must, among other things, inherit the security of the blockchain it is built up on. The underlying blockchain network must verify and confirm transaction data in some way, as opposed to a different group of nodes. Because sidechains often employ their own consensus procedures and validators and so provide a different set of security assurances than the base layer chain, they are frequently not regarded as layer 2s. Immutable X, Polygon, and Polkadot are some popular examples of Ethereum layer 2 solutions.

Why Are Layer 2s Important?

While layer 1, or the mainnet, of Ethereum operates with decentralization and security as a guiding principle, market growth over time has led to the network's current capacity of little over 1.5 million daily transactions. Furthermore, because the mainnet can only handle 15 transactions per second, data congestion is a common result during moments of heavy network activity. As a result, gas (transaction fees) increase and apps operate slowly, as was most recently observed during the bull market of 2021 and the Yuga Labs Otherside virtual land auction.

Layer 2 extends Ethereum as a distinct blockchain over the layer 1 network to address these problems. It communicates and assists in offloading the significant volume of transactions off the mainnet using smart contracts that integrate and benefit from Ethereum's strong decentralized security mechanism. In essence, Layer 1 deals with decentralization, security, and data availability, whereas Layer 2s deal with transaction scalability.

Normally, layer 1 blockchains include:

A node network to safeguard and verify the network.
A network of block producers
Main blockchain and transaction data
An associated consensus mechanism

While Layer 2s differentiate itself by providing:

Affordable fees: Layer 2s lessen the data burden, which combine several off-chain transactions into a single layer 1 transaction. By settling transactions on the mainnet, they also maintain security and decentralization.
More utility: Layer 2 initiatives may concentrate on enhancing user experience and broadening the range of applications thanks to the benefits of greater transactions per second and cheaper costs.

Layer 1s and Layer 2s are an important combination since they work together to make the network faster and more user friendly.

How do Layer 2s work?

Layer 2 protocols offer a second framework where transactions may be carried out independently of layer 1 transactions. As a result, a substantial portion of the work that would have been done by the main chain can be transferred to the second layer. The information from layer 2 apps is subsequently sent to layer 1 where it is safeguarded in the blockchain ledger and history.

The accessibility of layer 2s varies, much as that of other open or restricted platforms. Some are applicable to a variety of applications, while others are solely tailored to the requirements of a single project. Rollups and sidechains are two of the important elements that layer 2s use.

Layer 2 Rollups

A rollup is a particular layer 2 solution that conducts several transactions outside of layer 1, compiles those transactions into a single compressed piece of data, and then publishes the data back to the mainnet for anybody to evaluate and contest if it appears suspicious. Rollups may therefore inherit Ethereum's security while simultaneously lowering gas costs by a factor of up to 10-100.

Rollups all assist with deposits, withdrawals, and proof verification, however there are slight differences in how rollups, like Optimism and ZK rollups, transmit data back to layer 1.

Optimistic Rollups

Optimistic rollups operate all transactions in parallel with the main Ethereum chain before posting the results back to layer 1. Due to the aggressively low costs, users are encouraged to do transactions on these layer 2s. A suspected fraudulent transaction can be contested and evaluated using fraud proofs. In this case, the rollup will execute the transaction's computation using the state information that is readily available. This indicates that it will take a little bit longer to exit the rollup and withdraw money back to layer 1 than it would for ZK rollups (see below). Users "within" the rollup, however, will continue to get quick transaction confirmation. Generally speaking, optimistic rollups are Ethereum Virtual Machine (EVM) and solidity compatible, allowing for the replication of any layer 1 Ethereum functionality on layer 2. Some examples of Optimistic Rollups are Arbitrum, Optimism and Boba.

ZK Rollups

ZK rollups produce cryptographic proofs to verify the validity of transactions, in contrast to Optimistic rollups. These proofs (posted to layer 1) are known as validity proofs, SNARKs (succinct non-interactive arguments of knowledge), or STARKs (scalable transparent argument of knowledge).

Because ZK rollups keep track of all transfers on layer 2, which are only updated through validity proofs, they are more effective. It is simpler to validate blocks and move ether (ETH), the primary token of the Ethereum blockchain, to layer 1 since ZK rollups don't require the whole transaction data. The ZK rollup contract's validity evidence, which was approved, has already confirmed the legitimacy of the transactions. dYdX, Loopring, and zkSync are some examples of ZK rollups.

Sidechains

As demonstrated by initiatives like XDai and Polygon PoS, a sidechain is a separate, EVM-compatible blockchain that operates in parallel and communicates with the main network via bridges. Since they don't rely on layer 1 security and employ a different consensus method, they are not strictly called layer 2. The chain, however, functions similarly to Ethereum since it mimics the EVM. However, because consumers trust sidechain operators with their money rather than the Ethereum protocol (a proper layer 2), there are higher levels of risk associated with them.

Validiums

Validiums, like StarkWare, don't save the data on layer 1 but employ validity proofs (similar to ZK rollups). Each validity chain can handle about 10,000 transactions per second and can operate in parallel with other chains. There is, however, little support for universal smart contracts due to the need for more specialized languages.

Both sidechains and validiums are blockchains that work with assets through bridges that link to the mainnet, running concurrently with Ethereum. They are not regarded as a legitimate layer 2 like Optimistic or ZK rollups since they do not benefit from security or data provided by Ethereum itself, hence, may possibly pose security and trust issues. Both, however, scale similarly like layer 2s by providing cheap transaction costs and high throughput.

Final Words

In conclusion, various Layer 2 alternatives are now under development with the goal of resolving Ethereum's scalability problems. A few hybrid systems combine several technologies in an effort to increase the network's scalability. These solutions, along with others, will probably be needed to scale the network in conjunction with Ethereum 2.0 if Ethereum realizes its full potential and turns into a global trust layer. The Ethereum ecosystem may undergo major change in the future as new applications weigh the advantages and disadvantages of operating on Layer 2.

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Orochi Network is a cutting-edge zkOS (An operating system based on zero-knowledge proof) designed to tackle the challenges of computation limitation, data correctness, and data availability in the Web3 industry. With the well-rounded solutions for Web3 Applications, Orochi Network omits the current performance-related barriers and makes ways for more comprehensive dApps hence, becoming the backbone of Web3's infrastructure landscape.