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Demystifying Layer2 Scaling Solutions| Bankless Africa Weekly Newsletter
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Scaling solutions have become a sizzling topic in the blockchain community, and it is for a good reason. As the demand for decentralization, security and scalability in the blockchain ecosystem grows, the limitations of Layer 1 solutions become more apparent, proving that blockchain trilemma truly exists.
Layer 2 scaling solutions promise to solve the underlying scalability issues of Layer 1. But what are Layer 2 really? And how do they work? In this issue, we will demystify the world of Layer 2 scaling solutions and discuss:
KuCoin Rebrand to Halo, and
Aragon and Polygon collab to boost DAO accessibility
Are you ready? let's dive in!
📻 Podcast of the Week
The Bankless Africa Podcast of the Week is “Bitcoin x Africa Banking System | South Africa Explores | and More”
Sats and Gwei bring you the latest crypto news around Africa. Bitcoin is poised to introduce radical changes that could blow up Africa’s 82 billion dollars banking system. Meanwhile, South Africa CBDC is set to explore interoperability and DAO principles in their recent project.
Demystifying Layer2 Scaling Solutions
Welcome to the world of blockchain technology, where innovation is constantly pushing the boundaries of what’s possible. One of the biggest challenges facing the industry today is scalability, the ability to handle large volumes of transactions quickly and efficiently. Layer2 scaling solutions offer a promising path forward, allowing faster and cheaper transactions without sacrificing security or decentralization. Layer2 scaling solutions are designed to address scalability challenges in blockchain networks. In this comprehensive guide, we will explore the benefits and different types of Layer2 scaling solutions and how they work.
The Need for Layer2 Scaling Solutions
The current infrastructure is not designed to handle the growing number of users and transactions. This led to slow processing times and high fees, which can significantly deter users. Layer2 scaling solutions are designed to address these challenges by enabling faster and more efficient transactions.
Layer2 scaling solutions are built on existing blockchain networks, meaning they do not require any changes to the underlying infrastructure. This makes them a cost-effective solution for scaling blockchain networks. Additionally, Layer2 solutions can handle a much larger transaction compared to the base layer. This is achieved by processing transactions off-chain and only submitting them to the blockchain when necessary.
Benefits of Layer2 Scaling Solutions
Firstly, they enable faster and more efficient transactions by processing transactions off-chain. This means that transactions can be processed almost instantly, without high fees. Secondly, Layer2 solutions can handle a much larger transaction compared to the base layer. This means that blockchain networks can be scaled without compromising security or decentralization.
Another benefit of Layer2 solutions is that they are more cost-effective. Since they are built on existing blockchain networks, they do not require any changes to the underlying infrastructure. This means that the cost of implementing Layer2 solutions is significantly lower compared to other scaling solutions.
Types of Layer2 Scaling Solutions
There are several types of Layer2 scaling solutions, each with unique advantages. The most common types of Layer2 solutions are state channels, sidechains, rollups, plasma chains, and validium.
State channels are Layer2 scaling solution that enables off-chain transactions between two parties. This is achieved by opening a channel between the two parties, which allows them to conduct multiple transactions off-chain. The final state of the channel is then submitted to the blockchain, which settles the transactions.
State channels are ideal for applications that require frequent transactions between two parties, such as micropayments or gaming applications. They offer fast and efficient transactions, with low fees. However, they are not suitable for applications that require transactions with multiple parties, as this would require opening multiple channels. Examples of State Channels projects include the Bitcoin lightning network and Raiden network.
Sidechains are a Layer2 scaling solution that enables off-chain transactions. Sidechains are independent blockchain networks that are connected to the main blockchain network. This allows transactions to be processed off-chain, which reduces the load on the main blockchain network.
Sidechains are perfect for applications that require a high volume of transactions, such as decentralized exchanges or trading platforms. They also offer fast and efficient transactions, with low fees. Sidechains require a separate consensus mechanism, which can compromise the security and decentralization of the network. An example of a Sidechains project is Polygon — which operates on its own consensus mechanism with $MATIC as its native token, used to govern and pay transactions fee. It is by far the most popular Ethereum Layer2 scaling solution and can process transactions quickly with cheaper fees.
Ethereum Layer2 Scaling Solutions
Ethereum is one of the most popular blockchain networks, with a large number of decentralized applications built on it. As a result, there has been a lot of interest in Layer2 scaling solutions for Ethereum. Let’s dive into Layer2 scaling solutions for Ethereum.
Rollups are a type of Layer2 scaling solution that executes transactions off-chain by aggregating transactions on-chain. Rollups are most suitable for applications that require frequent transactions and need to maintain a high level of security and decentralization. They also offer fast and efficient transactions, with low fees. They are more complex than other Layer2 solutions, There are two types of Rollups - Optimistic Rollups and ZK Rollups.
Optimistic Rollups (ORs)
Optimistic Rollups are a type of rollup that assumes that transactions are valid unless proven otherwise. ORs also process transactions off-chain, with the final state being submitted to the blockchain. They use fraud-proving methods to identify suspicious and illegitimate transactions. Common examples of ORs projects include Arbitrum, Optimism, and Boba network. Optimism has become one of the most popular Ethereum layer2 scaling solutions that aim to enable cheaper and faster transactions. It is EVM (Ethereum Virtual Machine) compatible. In April 2022, optimism launched a DAO named Optimism Collective to fund public good and govern the protocol. Its native token is called Optimism (OP). Arbitrum is also an Ethereum layer2 scaling solution that uses optimistic Rollups. On March 23, 2023, Arbitrum airdropped its new token ARB to many wallets to empower owners.
Zero-knowledge (ZK) Rollups
ZK Rollups is an off-chain protocol that uses zero-knowledge proofs to verify the validity of transactions. ZK Rollups have more advantages than Optimistic Rollups regarding speed while still maintaining security. Popular networks that employ ZK Rollups scaling technology include Zksync, Loopring - non-custodial exchange and payment protocol, Immutable X, etc.
Plasma (sometimes called child chain) is an Ethereum layer2 scaling solution that enables off-chain transactions by creating a hierarchical structure of sidechains. They offer fast and efficient transactions with low fees and can handle a large number of transactions. However, they are more complex compared to other Layer2 solutions, which can make them more challenging to implement. Plasma chains are ideal for applications that require a high volume of transactions and need to maintain a high level of security and decentralization.
Validium is a scaling solution that enables off-chain transactions by aggregating transactions off-chain, and then submitting them to the main blockchain network. This allows transactions to be processed off-chain while still maintaining the security and decentralization of the network. Validium is similar to ZK Rollups that use zero-knowledge proofs to verify the validity of transactions, it is not vulnerable to cyber-attacks and has no form of delay when withdrawing funds.
Bonus: KuCoin Rebrands to Halo
The decentralized crypto wallet, KuCoin has recently announced a rebrand to an independent wallet known as “Halo Wallet” alongside launching a new SocialFi ecosystem.
🥁 African Adage
Adage: If a problem persists, a solution must be found.
Meaning: A solution is the only way to resolve a problem and that's the intent of layer 2 scaling solutions, to solve the blockchain trilemma.
Q: Layer 1 is to Blockchain Trilemma as Layer 2 is to what?
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Disclaimer: This post does not contain financial advice, only educational information. By reading this article, you agree and affirm the above, as well as that you are not being solicited to make a financial decision, and you in no way are receiving any fiduciary projection, promise, or tacit inference of your ability to achieve financial gains.