Blockchain layer 2 enablement: Addressing blockchain’s limitations

• Author:
• Author name

  Quantumrun Foresight
• July 14, 2023

Insight highlights

Layer 1 networks form the base infrastructure of a blockchain, focusing on decentralization and security but often lack scalability. As such, layer 2 solutions function as off-chain mechanisms, reducing scaling and data bottlenecks, enhancing transaction speeds, reducing costs, and enabling more complex blockchain applications. The widespread adoption of this technology may lead to the democratization of financial systems, increased demand for blockchain-related skills, enhanced data control, political transparency, growth of decentralized social media, and the need for global blockchain regulations.

 Blockchain layer 2 enablement context

Layer 1 networks form the fundamental infrastructure of a blockchain, defining the ecosystem's core rules and finalizing transactions. Examples include Ethereum, Bitcoin, and Solana. The emphasis of layer 1 blockchains is typically on decentralization and security, both of which are essential features of a robust network maintained by a global network of developers and participants like validators. 

However, these platforms often lack scalability. To address the scalability issues and the Blockchain Trilemma – the challenge to balance security, decentralization, and scalability – developers have introduced layer 2 solutions, such as Ethereum's rollups and Bitcoin's lightning network. Layer 2 refers to off-chain solutions, separate blockchains built atop layer 1 networks to reduce scaling and data bottlenecks. 

Layer 2 solutions can be likened to prep stations in a restaurant kitchen, focusing on different tasks efficiently, enhancing overall productivity. Payment platforms like Visa and Ethereum use similar strategies, grouping multiple transactions for more efficient processing. Examples of layer 2 solutions on Ethereum include Arbitrum, Optimism, Loopring, and zkSync. 

Layer 2's importance is underscored by its ability to extend the capacity of layer 1 networks like Ethereum, reducing transaction costs and increasing transaction speed. However, given the relatively early stage of this technology, there are inherent risks and differing levels of unreliable trust premises compared to conducting transactions on the mainnet. 

Disruptive impact

As layer 2 solutions mature and evolve, they will likely facilitate a much higher volume of transactions, making blockchain technologies more accessible and appealing to a broader audience. This development could stimulate the widespread adoption of blockchain technologies in various sectors, ranging from finance and supply chain management to gaming and social networking. The capacity to process transactions at high speeds and lower costs will position blockchains to compete more effectively with conventional financial systems and digital services.

Moreover, layer 2 solutions could usher in an era of more sophisticated and complex blockchain applications. By handling transactions off-chain and freeing up resources on the main blockchain, developers could build more complex, feature-rich applications that provide greater value to end-users. This trend could open up new possibilities for decentralized applications (dApps), DeFi (decentralized finance) services, and NFTs (non-fungible tokens). 

Finally, layer 2 solutions could significantly enhance the sustainability and resilience of blockchain networks. The capacity to offload transactions to layer 2 platforms can mitigate congestion on the main network, improving the stability and reliability of the system. In addition, by bundling transactions and settling them on the mainnet periodically, layer 2 solutions could potentially reduce the energy consumption of blockchains, addressing one of the main criticisms of this technology. 

Implications of blockchain layer 2 enablement

Wider implications of blockchain layer 2 enablement may include: 

• A greater acceptance and wider adoption of blockchain technologies in various industries, including finance, healthcare, and logistics. 
• Reduced costs associated with transaction processing, especially in cross-border transactions and remittances. This feature can increase financial inclusion by making transactions more affordable for individuals and businesses, particularly in developing countries.
• A more democratized financial system as more people gain access to decentralized financial services, reducing dependence on traditional banks and financial intermediaries.
• Increased demand for blockchain experts, developers, and consultants. This trend could lead to increased job opportunities in the blockchain field and a need for educational programs to support this demand.
• More control over personal data as blockchain's inherent decentralization can give users the power to decide who can access and use their information.
• A new level of transparency to political systems. By using blockchain for voting or public finance, governments could significantly reduce fraud and corruption, increasing trust in governmental operations.
• A significant rise in decentralized social media platforms leading to more censorship-resistant and privacy-preserving spaces. 
• Governments developing and implementing new regulations to ensure consumer protection, proper taxation, and prevention of illicit activities. This effort could lead to more standardized, global rules for blockchain technology.

Questions to consider

If you've experienced using layer 2 blockchain, what improvements have you noticed?
How else can a more user-friendly and sustainable blockchain system improve adoption?