What Is A Layer 2 (L2)?
Layer 2 refers to a secondary network built on top of an existing blockchain (Layer 1), often to improve its scalability and efficiency. They an already existing blockchain rapidly process more transactions at a lower cost by handling operations off-chain, at the same time inheriting the security provided by the underlying Layer 1 network.
Why Do We Need Layer 2s?
Most Layer 1 blockchains have limitations, ranging from high transaction fees, slow processing times, and limited overall efficiency. However, attempts to singlehandedly address these challenges often led to other issues, such as centralization, weakened security, and so on. This dilemma brought the innovation of Layer 2 solutions, which aim to tackle the technical constraints of parent Layer 1 networks, such as Ethereum and Bitcoin. There are also specific decentralized applications that are very performance / blockspace intensive and want to have their own chain instead of using a shared network. Here are reasons why Layer 2 blockchains are important in the cryptocurrency space.
Scalability
A Layer 1 network, like Ethereum, can only process a limited number of transactions at a given time. However, Layer 2 networks, such as Arbitrum, Optimism, and zkSync, enhance Ethereum’s scalability by processing transactions off-chain or through other mechanisms like rollups.
Reduced Congestion
Layer 2 networks offer faster transaction times by handling transactions off the parent chain, rolling up a bundle of transactions into a single fraud proof that is published on the Layer 1. As more users transact on Layer 2s instead of the base Layer 1, they help minimize congestion on the Layer 1 network.
Lower Transaction Costs
Increased network traffic — especially during peak usage periods — often leads to higher transaction fees on most popular blockchains. Layer 2 solutions help to lower transaction costs by enhancing network efficiency and minimizing congestion.
Read here if you’re interested to find out more about Layer 2s and its latest happenings!