Today we’re highlighting one of the key sectors in blockchain technology, and that is Layer 2s. By definition, a Layer 2 is:
“A network, system, chain, or application built on top of a blockchain that extends the capabilities of the underlying base network.”
Layer 2s are a sector in crypto and NOT an inherent one-dimensional technology. They act as an additional service to the specific Layer 1 blockchain they are built on. The idea is to efficiently delegate different tasks and services so the main blockchain can take on more users and activity while remaining fully functional and fast-paced.
Four Benefits Of Layer 2s
1. Scalability – A huge portion of L2s are dedicated to managing transactions diverted from the main blockchain. These Scaling Solutions (often referred to as Rollups) use alternative methods to break down transaction blocks before registering them on the main blockchain in a compressed data package. This frees up a huge amount of block space and increases throughput capacity on the main blockchain.
2. Multi-chain Network – Access assets from other Layer 1 networks through dApps such as NFT platforms, token pools, and DEXs.
3. Decentralization / Security – L2s bring the ability to create an extensive node network, adapt new protocols and technologies, and create stand-alone personalized security measures for their main blockchain, improving the Decentralization and security simultaneously.
4. Low Fees – L2s create very low fees through the combination of off-chain transactions compiled into a single block transaction. This breaks what would have been hundreds of transaction entries into just one single layer transaction record, dramatically reducing the transaction fees.
How L2s Are Connected To An L1 Network
The process of attaching an L2 to a blockchain is not a ‘one size fits all’ scenario.
Generally speaking, most are built on top of the main blockchain. To do this, developers must:
Have planned out what category of L2 they are creating.
Developed and tested fundamentals, making sure they are perfectly in check with the set rules of the main blockchain.
Leverage the blockchains Decentralization and security mapping, often done through blockchain programmable smart contracts.
Write the L2 code and release the project.
An alternative to this is to add a L2 to the network through a bridge or find an application that has features you are looking for.
The Importance Of Layer 2s
Data congestion on big networks (like Ethereum) was one of the biggest issues less than a year ago. Now, L2s redirect the majority of data through their own chains and ease the burden on the main network. Basically, while the L1 blockchain handles the security, data space, and core decentralization of the network, the L2s handle scalability and other secondary features that improve user experience.
Layer 2s provide an adaptable framework for interoperability with other platforms ranging from popular staking platforms to niche developing utilities.
For a while now, platforms with strong Layer 2 infrastructure have been ticking all the boxes, with high transaction rates and unmatched web traffic / activity. The importance of both utility and attention has come together tremendously for blockchains such as Ethereum which has a thriving L2 scene. Multiple Ethereum L2s have single-handedly outperformed most networks – with scaling solutions like Optimism, Polygon, and Arbitrum consistently ranking in the top 5 highest networks for 24H volume and 24H active users.
L2s have a wide range of high-performing platforms, services, products, and apps to offer their users more than any other sector in crypto.
For more Alpha Click Here to check out our research report on layer 2s.