To understand what we mean by layer two solutions and how it differs from layer one solutions, we need to know more about the blockchain technology which makes the backbone of any digital currency. Decentralisation, reliable interactions, trusted levels of security, and permanent record-keeping are just a few of the many advantages that blockchain technology offers.
In simple words, it forms a system that helps record information in a way that makes it impossible to hack or steal. It records transactions of cryptocurrency with permanent cryptographic signatures known as a hash. Created in the form of several blocks that tamper with even a single block in a specific chain (usually by hackers), the entire blockchain system would be set into alarm and it will be evident that something is wrong. Various digital currencies are gradually growing every day with new blocks being added to them.
One of the major problems faced by blockchain is its scaling issue. Like every system, even blockchain has an upper limit and scaling issues arise when the volume of data travelling through the blockchain reaches a limit because of the blockchain's limited capacities. The basic objective of scalability is to boost transactions and speed up transactions without compromising security or decentralisation. A global network of nodes is required to accept, distribute, and validate each transaction.
Blockchain developers are striving to increase the scope of what a blockchain can manage in order to address these issues. What we can do is increase the number of transactions and increase the transaction speed to make it more smooth. One solution to this problem is to use layer 2 scaling solutions.
A specific group of Ethereum scaling solutions is referred to as Layer 2 or L2 together. It is a separate blockchain that takes responsibility for the security of Ethereum. "Rollups" on Ethereum and the Lightning Network on top of Bitcoin are two examples of layer 2 developments. To dwell further, we need to know how it differs from Layer one blockchains.
The basic blockchains such as Bitcoin are the layer 1 blockchains. They are the foundation on which layer 2 solutions are built. A stark difference between them is that layer 1 is able to improve only the basic protocols of the blockchain system whereas Layer 2 solutions inherit their security-providing abilities directly from the main chain without the need of any sidechain.
Layer 2 is a separate blockchain that mainly extends Ethereum. Rollups, a preferred layer 2 solutions can be used to reduce the gas fees tremendously as compared to layer 1.
There are 2 common types of layer 2 solutions that are currently employed by a vast majority of protocols
Due to the off-chain data storage, the layer 2 scaling solution using Zero knowledge rollups operates more effectively than layer 1. Compared to layer 1 blockchains, smart contract-related important data isn't as frequently requested thus saving a lot of valuable time and energy.
Optimistic rollups are considered optimistic in that the validity of transactions is presumed, although this assumption can be contested if necessary. A fault proof is run in the event that a wrong transaction is suspected.
The popularity of Ethereum and the demand for its use have significantly increased gas prices. As a result, scaling solutions are now more necessary than ever and Layer 2 solutions play an important role in this. They help in reducing the gas fees as well as making numerous transactions secure, smooth, and fast. They improve the user experience with less fess, and fast transactions and thus are very important to the crypto market.
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