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Layer-2 Network Problems

July 21, 2023

The crypto industry's development and growth depend heavily on layer-2 scalability solutions, which are essential in improving blockchains and preparing them for a more significant number of dApps and users. However, these solutions have drawbacks, including a lack of interoperability, divided liquidity, increased complexity, and security concerns. If left unaddressed, these issues could undermine the benefits of layer-2 networks, resulting in more problems for the DeFi industry.

Interoperability Struggles

The lack of interoperability between different blockchain networks is one of the biggest crypto issues, which makes it challenging to move crypto assets across blockchains. The situation can become even more complex with the implementation of layer-2 networks, which may further limit communication between chains and networks. As all layer-2 networks are connected to their respective mainnets, it is not easy to transfer assets from one layer-2 network to another blockchain.

Furthermore, dApps from one layer-2 network cannot easily communicate with other dApps from a different layer-2 network, which can make using various dApps on various blockchains even more inconvenient. To address this issue, some projects are developing interoperable layers that can connect different layer-2 solutions through the standardization of frameworks.

Added Complexity

Dealing with multiple layer-1 blockchains can be overwhelming, with the various tasks involved, and layer-2 solutions only add more complexity to the process of using crypto. These solutions could make it even more complicated, increasing the time of moving assets between layers to access DeFi services and requiring more knowledge from users to manage crypto assets successfully and effortlessly.

As mentioned, layer-2 bridges are being developed to address this issue, enabling crypto asset transfer between layer-2 networks. However, this is still a very new concept, so users can only exchange tokens if they go down to the main blockchain.

For instance, if a user has an asset on Ethereum's layer-2 network and wants to move it to another blockchain, the asset should be first transferred from layer-2 back to Ethereum. Then, it should be exchanged via a cross-chain bridge to another blockchain, which can be time-consuming and complicated even for experienced users. Moreover, managing accounts across all layer-2 networks adds to the challenge.

Divided Liquidity

Another concern with layer-2 networks is that they might decrease liquidity available on primary blockchains. In any financial market, including crypto, liquidity is essential in facilitating a fair and relatively quick exchange of assets between buyers and sellers without provoking unnecessary price fluctuations. Since dApps on different L2 chains are not interconnected, their associated liquidity will be divided, too. 

For example, with Ethereum, all liquidity is stored on the main Ethereum blockchain, allowing financial products and tokens to trade seamlessly across all Ethereum dApps, services, and networks. However, as more layer-2 networks are being introduced, liquidity will begin to consolidate on various scaling solutions instead of solely remaining on Ethereum. As a result, it could hinder the smooth operation within the Ethereum ecosystem in the future.

Security Concerns

Finally, there are significant concerns about the security and centralization of layer-2 solutions. These solutions vary in the level of security and privacy they can provide for users and developers, which you can learn more about here. However, these solutions are usually less secure than the main blockchains. Furthermore, the improper implementation of layer-2 solutions could compromise the security and decentralization of the mainnets, ultimately harming the entire ecosystem.

Final Thoughts

Layer-2 solutions have the potential to improve blockchain technologies by enhancing their scalability, speed, and efficiency. However, several issues must be tackled first, such as interoperability, added complexity, divided liquidity, and security concerns. 

Kinetex supports several layer-2 projects such as Arbitrum, Optimism, and zkEra, promoting better interoperability between L1 networks and L2 solutions.

The Kinetex team has been developing cross-chain technologies for a couple of years. Their efforts resulted in the creation of the Kinetex dApp with two modes: Liquidity Aggregation and Flash Trade. The Aggregation mode consolidates liquidity from various protocols into one place, while Flash Trade employs zero-knowledge proofs for direct swaps with market makers.

Kinetex Network: Website | Kinetex dApp