In the first post of this series, we talked about Layer One Protocols and learned about application layers in general – the masking solutions that are responsible for hiding the underlying operations of a system to make it easier for the end user to use and understand.
In the context of blockchain, layers help establish protocols that define how a particular network works and how users interact within that network. Layer-one protocols refer specifically to a system that is connected to the base or underlying architecture of a blockchain network and sets rules and parameters such as consensus algorithm and block time.
Now, we're going to take it a step further to explore Layer 2 protocols and how they fit into the equation to scale the growth and efficiency of blockchain networks.
What are Layer 2 protocols?
Layer 2 protocols, also known as second-layer solutions or off-chain blockchain protocols, aim to handle transaction processing on behalf of the base network.
In most cases, Layer 2 protocols are designed to solve the scalability limitations and operational difficulties of the native platform, usually striving to increase transaction speed on large blockchain networks.
None of the existing layer-one protocols have yet to scale to the level equivalent to global usage without compromising on other blockchain attributes such as decentralization and security. For this reason, many developers have begun to explore the idea of layer 2 solutions.
Examples of Layer 2 protocols
To further illustrate the concept and application of Layer 2 protocols, here are some examples that are designed to provide increased throughput for blockchain systems.
State channels
State channels allow users to perform operations directly with each other on a layer separate from the main blockchain (hence the term "off-chain"). Government channels report results to the blockchain only when the channel is closed.
Among the most notable Layer 2 protocols that use government channels is the Lightning Network, a payment channel that works on the Bitcoin blockchain to process multiple small off-chain transactions, which in turn relieves the main chain and frees it up for larger transactions.
The Lightning Network can handle millions of transactions per second cost-effectively and efficiently. The concept is similar to that of a bar tab, where it's more efficient to wait until the end of the night to close than to do it every time you order a drink.
Plasma
Another good example of a Layer 2 protocol is Plasma - a scaling solution for the Ethereum blockchain that aims to dramatically increase the efficiency of the network (or any other blockchain) by removing the majority of processing tasks from the main chain.
Plasma offers a generalized framework that supports the creation of other children's chains or side chains powered by Ethereum. It uses Merkle Trees and smart contracts to create essentially stripped-down versions of the Ethereum network.
These children's chains are designed to operate a bespoke smart contract that allows users to deploy the plasma structure in a way that best suits their individual needs. By leveraging the security of the main chain, Plasma is able to deploy a variety of different child chains that would work towards specific goals in a predetermined way, reducing the congestion on the main Ethereum blockchain.
Optimistisches Rollup (OR)
Optimistic Rollup Considered the successor to Plasma, it is an off-chain technology designed to enhance Ethereum's smart contracts and DApp ecosystem through scaling. The funds settled on ORs are stored in a smart contract on Ethereum, where users deposit funds, aggregators sign up, and fraud evidence is committed.
Optimistic rollups will allow Ethereum to scale up to 200-2,000 transactions per second compared to its current rate of just 10-20 per second, which is a dramatic increase in the network's throughput.