Blockchain is one of the hottest emerging technologies in recent years, dubbed to disrupt virtually any industry you can think of. While the technology itself is unique and we’ve all heard of benefits such as decentralization and information immutability, blockchain definitely has its challenges.
Apart from user experience and in particular, usability for non-crypto savvy people, scalability of blockchains is arguably the biggest obstacle, at least in technological terms. Bitcoin payments used to take forever to complete. In late 2017, the Ethereum blockchain got congested when one dApp started picking up popularity (yup, that’s the CryptoKitties crash). It’s pretty obvious that there is no mass adoption without network scalability. This is where all the Layer 2 solutions come into play. Heard of the term, but don’t know what it stands for? Have you tried to research but got confused with all the tech slang? Let’s see what it’s all about.
Shameless plug: At LimeChain, we’ve addressed the UX problem of the Ethereum blockchain with LimePay – a user interface allowing dApps to accept credit card payments for all transactions.
What is Layer 2 Blockchain Technology?
Layer 2 is used for all blockchain scalability solutions which are built on a layer below the blockchain’s main net, thus the name. The general idea is to move the transactional load, or at least part of it, off the blockchain network. Now due to the unique structure of each blockchain protocol, there isn’t a single universal scalability solution. Instead, there are a number of solutions out there, each with its own technical nuances. To gain a better understanding, let’s take a look at two of the more established layer 2 solutions – Plasma and State Channels, without getting too technical.
Maybe you’ve heard the mythical word plasma being uttered somewhere in the Ethereum ecosystem. Plasma is a proposed solution (meaning not implemented yet) that creates a network of side chains forming a tree-like structure under the main Ethereum network. Each side chain (powered by a smart contract) interacts independently with the main chain, essentially taking the load of the main network.
State channels is another solution aimed to solve scalability problems, essentially acting as a “private off-chain channel” through which users transact/communicate. State channels work for both payments and any other “state updates” e.g. voting. For example, the Raiden Network is a state channel solution for payments on Ethereum. At LimeChain, we’ve also been actively partnering with Aeternity Blockchain on the development of its blockchain protocol and tooling. Aeternity’s main net uses state channels to allow smart contracts to be executed off-chain.
Disclaimer: Sharding is probably better classified as a Layer 1 solution as it would be implemented directly on the Ethereum blockchain, however, it’s useful to quickly go through it because of its importance. Sharding, supposed to be implemented in Phase 1 of the Ethereum 2.0 update, aims to enable the Ethereum network to process more than 10,000 transactions per second. Currently, each Ethereum transaction is validated by all nodes in the network, which is neither the most efficient, nor the most scalable of solutions. Sharding would essentially break down transactions into “shards”, with a different set of nodes validating each shard. Thus, the computational load of each node will be significantly decreased allowing the network to scale exponentially.
It’s important to note that in addition to scalability, some Layer 2 solutions can also target usability. A great example is meta transactions aiming to take away (first-time) gas fees which are a burden for Ethereum users. Basically, a second layer of relayer nodes verifies and signs transactions, enabling users that do not hold any Ether to interact with the main blockchain. For a deep dive on meta transactions and relayers, check out this article by our blockchain architect George.
Needless to say, all of the solutions discussed so far are a work in progress and could undergo significant changes as we go forward. What’s for certain, it looks like we, as a community, are past the initial discovery phase of blockchains, and now working towards scalability and usability of distributed ledger technologies.