All of us now are aware of what Bitcoin, Ethereum, and other crypto projects can do and how they are disrupting the finance sector globally.
With cryptocurrencies already among us for over 13 years, there are other challenges that need to be solved that are plaguing the existing blockchain networks, like Ethereum, Bitcoin.
To overcome these challenges various crypto projects like Bitcoin Lighting, Polygon have been developed to specifically solve issues such as scalability, transaction speed, and so on.
What is Layer 2 Blockchain
Layer 2 is a blockchain platform that is built on top of existing blockchain networks that solves transaction speed and scaling difficulties faced by the major cryptocurrency networks today.
Let me explain with an example. When Karl Mercedes built his first car in Germany in the early 1900s, it was only for the rich, who could afford it. But during the same period in North America, Henry Ford built his Model T car that was affordable to everyone.
The same way Layer 2 is solving scalability and transaction problems on Bitcoin with Layer 2 protocol, Bitcoin Lighting, and Polygon on Ethereum Network.
You can say it is an upgraded version of the blockchain network. This can be built by the same team like any other team that wants to make blockchain networks more adaptable by masses.
As blockchain works on an open architecture, anyone that can solve problems faced by a network can build a Layer 2 blockchain.
Another example is Ethereum, which is a leading blockchain network that can currently process only 15 to 20 transactions per second, and this costs users to pay higher gas fees to process their transactions at the earliest.
If you compare with PayPal or Visa which offer several thousand transactions per second, Ethereum doesn’t stand a chance to compete.
However, after getting a Layer 2 protocol, transactions happen on a second layer built on the Ethereum network as data processing on the blockchain by running computations off-chain.
Different types of Layer 2 Blockchain
Sidechains are very similar to Layer 2 protocol, they work as an independent network. They do have their own consensus mechanism for adding blocks and validators to verify transactions on their chains. The classic example is a secured blockchain, Polygon built on Ethereum that also has validators to add blocks on their chain.
Plasma Chains is similar to Sidechains, as it has their own consensus algorithm and create blocks of transactions. At a fixed interval, a compressed representation of each block is committed to a smart contract on Ethereum.
This channel is used purely for payment purposes. Users deposit their crypto in a smart contract and then the channel is opened by both parties. As payments are made on Layer 2, once the payment is completed, a ticket is signed on Layer 1, confirming the transaction. Bitcoin Lighting is a classic example that uses Payment Channels.
It is the most time-consuming chain, as in this chain snapshots of their Layer 1 blocks are sent and it takes seven days to verify and confirm the transaction. During this period, the transaction is always on hold, as it checks the availability of funds, and validates them.
Layer 2 only makes the existing blockchain more accessible to the masses, as it identifies pain points in the existing structures and provides solutions to the problems that can help scale to a new level that is not possible in Layer 1.