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Layer 2 networks are transforming the blockchain industry, particularly the Ethereum-based DeFi ecosystem. These networks run on top of current blockchains, increasing their scalability and efficiency. It is essential for the Ethereum-based DeFi ecosystem, which demands fast and low-cost transactions. By exploiting Layer 2 networks, the blockchain industry can overcome some fundamental constraints of current blockchain technology, paving the path for broader adoption and more inventive applications.
Every technology is modified in response to changing user expectations. Consider our cell phone: it began with LAN phones, progressed to cell phones, and is now smartphones. So, it is with every technology – its revolution is determined by consumer demand. And the blockchain business is not immune. In other words, the requirements and some specific characteristics needed by beginners and enthusiasts on the blockchain network served as the foundation for discovering a level 2 protocol for the blockchain network.
If you look closely at the DeFi ecosystem, you'll see that it's undergoing considerable and ongoing transformation due to the integration of Layer 2 (L2) network technologies. It's all because of Ethereum, the world's largest blockchain platform. Such unique transformations are feasible thanks to this platform: Better DeFi ecosystem, increased scalability, lower transaction costs, and empowerment of brokers and users.
Layer 2 network solutions are secondary frameworks or protocols built on top of a primary blockchain network (known as Layer 1). According to all indications, Layer 2 solutions attempt to improve the scalability and efficiency of the blockchain network by processing specific transactions or computations without jeopardizing the security and decentralization of the underlying Layer 1 network. While there are several ways in which layer two solutions have impacted the blockchain industry, here are two critical revolutionary impacts:
1. Layer 2 solutions are primarily intended to alleviate the shortcomings of Layer 1 blockchains: sluggish transaction processing and excessive cost. L2 solutions can certainly boost throughput and cut costs by taking some transactions off-chain.
2. By implementing Layer 2 technologies, DeFi brokers can provide their customers with a more cost-effective and accessible trading experience. Users can happily engage in DeFi protocols without being hampered by high fees or lengthy confirmation waits. All because of L2 solutions.
Cryptopolitan simplified them further, as follows:
1. State Channels: This allows players to execute a series of transactions off-chain, with just the initial and final states recorded on the layer 1 blockchain. It reduces the amount of on-chain transactions and improves scalability.
2. Sidechains are independent blockchains that are compatible with the primary layer 1 blockchain. They allow users to perform transactions and execute smart contracts on the sidechain without disrupting the Layer 1 blockchain.
3. Plasma: Plasma is a Layer 2 solution that speeds up transaction processing by combining several transactions into a single batch and submitting the result to the main chain for verification. In a nutshell, Plasma is a framework that generates a child chain (hierarchical chain) and attaches it to the parent chain (primary chain).
4. Rollups are Layer 2 structures that group and summarize many transactions to the parent chain (main chain). They are divided into two types:
According to blockspaces, these Ethereum Layer 2 solutions enable users to execute smart contracts off-chain instead of broadcasting each transaction to the whole network. OR are protected by Ethereum Layer 1 because every transaction ultimately settles on Ethereum. However, OR has limitations, one of which is that Rollups believes transactions are genuine and imposes a seven-day verification challenge before allowing users to withdraw funds to the Ethereum main chain. Arbitrum and Optimism are two Layer 2 initiatives under Optimistic Rollups.
This type of Rollup uses Zero Knowledge Proofs (ZK Proofs) to validate the correctness of over a thousand transactions in a batch before posting minimal summary data to the parent chain. A ZK Proof enables one person (the prover) to demonstrate to another (the verifier) that a statement is true without disclosing any information. Starknet by Starkware, Polygon Zk EVM, and ZKSync are examples of ZK-Rollups blockchains.
