The rapid growth of the cryptocurrency industry has resulted in a significant increase in the number of transactions blockchains need to handle. As a result, network congestion has become a critical issue that affects the speed and cost of transaction execution. Developers have been improving blockchain characteristics to prepare blockchains for an even more increased workload and the emergence of thousands of new projects and millions of new users. Layer-2 solutions are one such approach that can make networks more robust and efficient.
When talking about layer-2 solutions, we usually imagine them sitting on top of existing blockchains, often referred to as mainnets or primary chains. While blockchains act as the foundation layer of the blockchain infrastructure and handle consensus protocols, transaction processing, and maintenance, layer-2 solutions work to improve their characteristics.
Originally, layer-2 solutions were developed to accommodate the increasing demand that surpassed the blockchain's capacity, specifically Ethereum's. However, as the cryptocurrency industry continues to experience exponential growth, new obstacles have emerged that projects can address with layer 2 as well. These challenges involve enhancing blockchain efficiency and minimizing transaction costs.
Some examples of layer-1 blockchains include such well-known chains as Bitcoin, Ethereum, BNB Chain, and Polkadot. Examples of layer-2 solutions include optimistic and zero-knowledge rollups, nested blockchains, state channels, and sidechains.
Let's look at each of them more closely.
Rollups were designed to reduce the Ethereum mainnet load and decrease transaction costs by combining multiple transactions. There are two main types of rollups, which differ in how the transaction data is recorded on a layer-1 blockchain: optimistic and Zk.
Optimistic rollups allow users to move computations off-chain by combining transactions in large batches before submitting them to Ethereum. This solution lessens the amount of data posted on Ethereum, thus enhancing its throughput and latency and reducing fees.
Zero-knowledge rollups (zk-rollups) help to optimize data even more by moving both computations and state storage off-chain. They help to process thousands of transactions in batches before posting minimal data to the mainnet, along with cryptographic validity proofs. You can learn more about Zero-knowledge technology in this post.
Zk-rollups are far more advantageous when prioritizing speed and privacy because they need minimal data to validate transactions. They allow for almost instantaneous transfer of crypto funds from layer-2 to layer-1 chain, making it ideal for financial transactions. However, they are still very complex and non-flexible as a new technology.
Optimistic rollups are a better solution for apps with minimal on-chain activity. They can provide higher security and decentralization since they store transaction data on the layer-1 blockchain, which is harder to manipulate. In addition, such rollups are fully compatible with Ethereum Virtual Machine (EVM) and Solidity, while Zk-rollups still need more time to become more accessible and usable for developers.
A nested blockchain solution consists of multiple interconnected blockchains. The parent blockchain defines the network rules, and the secondary or child chains process transactions and report back to the parent. These chains can be organized into multiple levels. The parent chain only intervenes when there are problems or disputes present. Such an approach significantly reduces the main chain's workload, making the system more scalable and efficient.
State channels, also known as payment channels, are another layer-2 solution that enhances the speed and capacity of transactions. They enable cryptocurrency funds to be deposited into a smart contract on the layer-1 blockchain without requiring validation from layer-1 nodes and secured by a multi-signature or smart contract mechanism. Once a transaction or batch of transactions is completed on the state channel, the final data is recorded on the main blockchain.
Finally, there are sidechains, separate networks connected to the mainnet via a two-way bridge, enabling communication between them. These secondary blockchains have their own consensus protocols that can be customized to meet specific needs such as speed, scalability, or privacy. Moreover, sidechains are one of the more secure solutions as their security issues do not affect the main chain.
Blockchain technology must improve its ability to handle millions of users and transactions to keep up with the growing demand and allow for mass adoption of DeFi products and services. Unfortunately, the layer-1 blockchains are often too slow for optimal growth alongside the crypto industry. Layer-2 solutions can help improve the scalability and speed of blockchains and their cost-efficiency, opening new possibilities for dApp developers and users.
The Kinetex team has been working in the blockchain industry for many years, actively participating in developing cross-chain technologies that can increase interoperability between networks and promote crypto-related technologies. Kinetex supports Arbitrum, Optimism, zkEra, and other layer-2 projects, allowing for a better connection between L1 networks and L2 solutions while using the innovative Kinetex dApp.