Layer 2 protocols improve transaction speed and efficiency off the main chain through innovative technologies like Rollups, Plasma chains, and sidechains. Learn how these leading Layer 2 networks offer a more scalable and accessible blockchain experience.

Since Bitcoin debuted in 2008 as a decentralized payment network, blockchain technology has evolved significantly to support applications like DeFi, GameFi, NFTs, the Metaverse, and Web3. As blockchain enters mainstream adoption, scalability challenges become crucial.

While foundational Layer 1 networks like Ethereum and Bitcoin are essential, they face throughput limitations, lagging behind traditional systems in transaction processing speed. For context, the Bitcoin network processes about 7 transactions per second (TPS), and as of 2023, Ethereum’s Layer 1 manages around 15 TPS, far below traditional systems like Visa, which can handle about 1,700 TPS.

This guide delves into Layer 2 solutions, exploring how these L2 protocols enhance existing blockchains, offering innovative answers to the blockchain trilemma of scalability, security, and decentralization. Discover the most promising Layer 2 projects of 2024 and their impact on the future of blockchain.

What are Layer 2 Protocols in Crypto?

Layer 2 blockchains represent a series of scaling solutions crucial for enhancing the performance and scalability of Layer 1 blockchains like Ethereum. These Layer 2 protocols operate on top of the main blockchain, significantly reducing congestion, lowering transaction costs, and increasing throughput.

Imagine a highway where traffic flows smoothly, transactions pass at lightning speed, and fees are almost negligible. This is the world of Layer 2 protocols in crypto—fast lanes built on top of Layer 1 blockchains like Ethereum to enhance performance and scalability.

How Do Layer 2 Networks Work?

At the core of Layer 2 networks is the principle of off-chain transaction processing, eventually consolidating these transactions into a single aggregated transaction on the main chain. This approach significantly alleviates network congestion, reduces processing time, and lowers transaction costs.

Layer 2 protocols act as dedicated traffic management systems, moving transactions off the main blockchain and processing them separately. This offloading greatly reduces congestion on the main blockchain, leading to faster transaction speeds, lower fees, and increased throughput.

Key Advantages of Layer 2 Scaling Solutions

1. Unlocking dApp and DeFi Growth: Layer 2 protocols make decentralized applications (dApps) and DeFi platforms more affordable, faster and smoother to use, opening up a world of possibilities.
2. Improving User and Trader Profitability: Traders and investors benefit from significantly reduced transaction fees, particularly in DeFi activities like liquidity mining and trading, directly enhancing their profits.
3. Paving the Way for Mass Adoption: Layer 2 networks are key catalysts for mainstream blockchain adoption. By making blockchain technology more accessible and user-friendly, Layer 2 scaling solutions are driving its expansion into various industries beyond finance, from gaming to supply chain management.

Layer 1, Layer 2, and Layer 3 Scaling Solutions

Let’s look at blockchain scalability from a vertical perspective. Here’s a breakdown of the different layers that will drive the future of blockchain, from basic fundamentals to professional heights:

Layer 1: the cornerstone of blockchain

Think of Layer 1 as the main highway—it’s the core blockchain itself, like Bitcoin or Ethereum, where fundamental operations like consensus mechanisms, security, and smart contract execution take place.

Challenge: As traffic on this highway increases, it can become congested, leading to slower transaction speeds and higher fees.

Layer 2: The Fast Lane

Layer 2 solutions are ingenious answers to Layer 1 congestion. They are like carpool lanes or overpasses, moving transactions to auxiliary networks for processing.

Benefits: This offloading results in faster transaction processing, lower fees, and greater scalability.

Layer 3: Dedicated Bridges

Layer 3 networks go a step further, building specialized bridges on top of Layer 2 to enhance efficiency and customization for dApps (decentralized applications). Think of them as complex overpasses designed for specific tasks, such as:

• Advanced off-chain computation
• Seamless dApp interaction
• Streamlined cross-chain communication

Layer 2 solutions aim to alleviate scalability challenges of Layer 1 blockchains. In these networks, transactions are processed off-chain or via auxiliary frameworks, reducing congestion and fees on the main blockchain. Renowned Layer 2 protocols are noted for their efficiency and scalability.

Choosing the Right Layer

Selecting the appropriate layer depends entirely on your needs:

• Need a solid foundation for your blockchain journey? Stick with Layer 1.
• Prioritizing speed and cost efficiency? Layer 2 is your go-to.
• Looking for specialized solutions for complex dApps? Explore the possibilities of Layer 3.

Different Types of Layer 2 Solutions

Layer 2 solutions act as fast lanes for transactions, bypassing the traffic congestion and congestion on Layer 1 blockchain networks. Let’s dive into the different types of Layer 2 solutions that are reshaping the blockchain landscape:

Optimistic Rollup: The “Assume Good Faith” Approach

Optimistic Rollup uses an optimistic approach to transaction processing, assuming everything is valid unless proven otherwise. This simplifies verification and reduces costs. Think of them as friendly neighborhood watch groups that keep a close eye on any suspicious activity while allowing most transactions to proceed smoothly.

Key features of Optimistic Rollup include:

• Faster transactions and lower costs
• Balance between efficiency and security
• Popular among Ethereum Layer 2 projects

Zero-knowledge Rollups (zk Rollups): The Privacy Champion

Zk Rollups prioritize privacy and efficiency by bundling transactions into a single proof that hides personal details. Imagine a magician who could make an entire deck of cards disappear into a sleeve - that’s zk Rollups in action!

Key features of ZK Rollups include:

• Enhanced privacy and scalability
• Minimal computational pressure on the blockchain
• Popular among DeFi and NFT applications

Ethereum Plasma Chains: Dedicated Sidechains

Plasma Chain acts as a dedicated sidechain connected to the Ethereum mainnet, providing a unique approach to scalability. Think of these Ethereum layer 2 networks as satellite cities connected to major metropolitan areas, each with its own infrastructure to handle specific tasks.

The main features of Plasma Chain include:

• Significantly faster transactions with lower fees
• Different approach compared to rollup-based solutions

Validium: Harmony of Security and Efficiency

Validium balances security and efficiency by moving transactions off-chain for validation while ensuring security through cryptographic proofs. It’s like having a trusted bouncer in a club who checks IDs off-chain to ensure only legitimate transactions get into the blockchain dance floor.

Key features of the Validium Layer 2 scaling solution include:

• Enhance scalability without compromising security
• Ideal for applications where speed and throughput are priorities

Top Layer-2 Networks to Watch

Layer 2 solutions are critical to increasing the transaction throughput and efficiency of blockchain networks. We highlight some of the top layer 2 blockchain protocols that represent the cutting edge of blockchain scalability and efficiency.

1. Arbitrum

Throughput: 2,000-4,000 TPS

TVL: $10.7 billion

Market Cap: $2.37 billion+

Technology: Optimistic Rollup

Arbitrum, built on Optimistic Rollups, offers a peak throughput of 4,000 TPS, processing transactions 10 times faster than the Ethereum mainnet and reducing Gas costs by up to 95%. As of January 2024, Arbitrum holds over 51% of the market share in Ethereum Layer 2 networks by TVL.

Arbitrum provides a developer-friendly environment with familiar tools and simplified deployment processes. It is committed to decentralization and is transitioning towards a community-driven future. Its ecosystem includes a growing number of DeFi protocols, NFT marketplaces, and gaming platforms.

The native token ARB is used for transaction fees, staking, and network governance. Like any L2 solution, Arbitrum’s security relies on the Ethereum mainnet, and recent launches carry inherent risks compared to more mature L2 solutions. However, with a strong development team and active community, Arbitrum continues to grow and position itself as a major competitor in the L2 space.

2. Optimism

Throughput: 2,000 TPS

TVL: $5.5 billion

Market Cap: Over $3 billion

Technology: Optimistic Rollup

Optimism leverages Optimistic Rollups to provide Ethereum’s security and reliability without scalability issues. It offers a peak throughput of 4,000 TPS, processing transactions 26 times faster than the Ethereum mainnet and reducing Gas costs by up to 90%.

Optimism aims to be an autonomous community and hosts a growing number of DeFi protocols, NFT marketplaces, and DAOs. It provides a developer-friendly environment with familiar tools and a collaborative community.

The native token OP is used for transaction fees, staking, and network governance. Optimism’s dependence on the Ethereum mainnet carries inherent risks, and its decentralization process requires ongoing monitoring. Nonetheless, with a talented team and active community, Optimism is continuously refining its technology and expanding its ecosystem, positioning itself as a leader in the L2 space.

3. Lightning Network

Throughput: Up to 1 million TPS

TVL: $198 million+

Market Cap: Not applicable

Technology: Bidirectional Payment Channels, Smart Contracts

The Lightning Network is paving the way for faster, cheaper, and easier Bitcoin transactions. Operating off-chain, it enables instant, low-cost Bitcoin micropayments while leveraging Bitcoin’s underlying security. This Bitcoin Layer 2 scaling solution offers near-instant transaction confirmations, making it ideal for everyday use and real-time applications. Transaction fees are significantly reduced, and scalability issues are addressed through off-chain operations.

However, it also presents some challenges, such as technical complexity for newcomers, limited adoption compared to the mainnet, and potential security vulnerabilities. Users can leverage the network for micro-payments, everyday transactions, and access to various dApps. It’s important to weigh the technical complexity, adoption rate, and potential security risks against the benefits of instant, inexpensive transactions and the network’s future potential.

The Lightning Network is Bitcoin’s Layer 2 scaling solution that uses bidirectional payment channels and smart contracts to achieve faster, cheaper off-chain transactions. It harnesses the power of the Bitcoin blockchain while conducting off-chain transactions to enable rapid micropayments and improve scalability.

4. Polygon

Throughput: 65,000 TPS

TVL: $4 billion

Market Cap: Over $7.5 billion

Technology: zk Rollup

Polygon is a multi-chain ecosystem offering various Layer 2 solutions to scale Ethereum, facilitate faster transactions, and reduce gas fees. It utilizes multiple technologies, including zkRollups for high-speed, privacy-focused transactions and Proof-of-Stake consensus mechanisms for sidechains like Mumbai. The native token, MATIC, is used for gas fees, staking, and network governance.

Polygon boasts a throughput of over 65,000 TPS, significantly outperforming the Ethereum mainnet. Its low transaction fees make it ideal for DeFi applications, NFT marketplaces, and general blockchain interactions.

Polygon also provides seamless connectivity with other chains like Ethereum and BNB Chain. It features a thriving DeFi scene, with leading protocols such as Aave, SushiSwap, and Curve, and is popular among NFT enthusiasts, with major marketplaces like OpenSea and Rarible integrating its solutions. Its developer-friendly tools attract innovative projects and foster a vibrant community. As of January 2024, Polygon’s DeFi TVL is among the highest in Layer 2 networks, exceeding $845 million.

5. Base - Coinbase Layer 2 Network

Throughput: 2,000 TPS

TVL: $729 million

Market Cap: Not applicable

Technology: Optimistic Rollup

Coinbase’s Base is a Layer 2 protocol designed to enhance Ethereum’s capabilities by increasing transaction speed and reducing fees. Utilizing the OP Stack and Optimistic Rollups, Base aims for a throughput of 2,000 TPS and near-instant transactions. It also aims to cut Ethereum’s gas costs by up to 95%, making it more suitable for DeFi and NFT activities.

Base leverages Ethereum’s security while processing transactions off-chain, ensuring asset security. It is developer-friendly, offering familiar tools and simplified deployment processes. With Coinbase’s support, Base benefits from its security expertise and large user base.

Base is still evolving, but its focus on speed, cost-efficiency, and developer-friendliness makes it a Layer 2 solution to watch closely. As it builds its ecosystem and decentralizes, Base could become an important bridge between Ethereum’s current state and its scalable future.

6. Dymension

Throughput: 20,000 TPS

TVL: 10.42 million DYM

Market Cap: Not applicable

Technology: RollApps

Dymension is a modular blockchain ecosystem composed of dedicated blockchains or RollApps built on a secure settlement layer. As the first Layer 2 network in the Cosmos ecosystem, Dymension separates functions like consensus, execution, and data availability, allowing each RollApp to optimize its performance and security. Dymension uses built-in rollups to permanently embed its validity into the Dymension Hub, enhancing trust across the network. It also supports interoperability with other blockchains through the Inter-Blockchain Communication (IBC) protocol.

Developers can customize RollApps based on specific needs, choosing suitable consensus mechanisms, smart contracts, and data solutions. The combination of built-in rollups and Dymension Hub security ensures a robust and transparent ecosystem. Dymension’s modular design allows for the scaling of individual RollApps without impacting the entire network.

The native token DYM is used for gas fees, governance, and staking. Developers can build and deploy RollApps, while users can participate in DeFi protocols, NFT marketplaces, and other dApps within the Dymension ecosystem. However, Dymension is still in development, and its modular and diverse features may be complex for newcomers.

7. Coti

Throughput: 100,000 TPS

TVL: $28.98 million

Market Cap: $72.1 million

Technology: zk Rollup

Coti originally served as a Layer 2 scaling solution for Cardano and is now transitioning to become a privacy-focused Layer 2 network for Ethereum. This shift aims to leverage Ethereum’s security and interoperability to provide faster, more affordable transactions while maintaining privacy. The COTI token is primarily used for transaction fees, staking, governance, merchant processing, and as part of the trust scoring mechanism within the Coti network. Existing COTI tokens will migrate to the new Ethereum L2 network.

Coti is transitioning from a Directed Acyclic Graph (DAG) consensus to Ethereum Virtual Machine (EVM) compatible architecture. Its privacy features, including zero-knowledge circuits, will remain core to its Ethereum version to ensure transaction data confidentiality. Coti aims to significantly enhance transaction throughput using Ethereum Layer 2 technology.

This transition provides developers familiar with Ethereum tools the opportunity to build privacy-focused dApps on Coti. It integrates with Ethereum and other blockchains through the Inter-Blockchain Communication (IBC) protocol, expanding Coti’s reach. However, this transition requires careful adaptation and development efforts.

8. Manta Network

Throughput: 4,000 TPS

TVL: $951 million

Market Cap: $565 million

Technology: zk Rollup

Manta Network is a privacy-focused Ethereum ecosystem that offers anonymous transactions and confidential smart contracts. It features two modules: Manta Pacific (an EVM-compatible Layer 2 solution for efficient transactions) and Manta Atlantic (which uses zkSBT for private identity management). Zero-knowledge cryptography is at the heart of Manta, ensuring transaction validity without compromising privacy. Additionally, Manta provides universal circuits to help developers easily create privacy-centric DeFi applications.

Beyond privacy, Manta Network is committed to achieving high scalability on Manta Pacific, with a throughput of 4,000 TPS. Its EVM compatibility and robust interoperability through bridges and IBC with Ethereum and other blockchains create a developer-friendly environment.

The native token, MANTA, fuels the network, covering gas fees, staking, and participation in network governance. Manta Network has gained prominence shortly after its launch, and as of January 2024, it has surpassed Base to become the third-largest Ethereum Layer 2 network by TVL.

9. Starknet

Throughput: 2,000-4,000 TPS

TVL: $164 million

Market Cap: Not applicable

Technology: zk Rollup

Starknet utilizes STARK proofs, a type of zero-knowledge proof, to validate off-chain transactions, offering unparalleled speed with a theoretical throughput of millions of transactions per second (TPS). It significantly reduces transaction fees, making everyday blockchain interactions nearly free.

Starknet provides a developer-friendly environment with robust tools and the familiar Cairo programming language. It aims to be a fully decentralized, community-driven network and hosts a rapidly growing ecosystem of innovative dApps covering DeFi, NFTs, gaming, and more.

However, Starknet’s cryptographic nature might be complex for newcomers. Compared to more mature Layer 2 solutions, it has a relatively small user base and is still under active development, requiring users to adapt to upgrades and potential changes.

10. Immutable X（IMX）

Throughput: 9,000 TPS+

TVL: $169 million

Market Cap: $2.51 billion+

Technology: Validium

Immutable X is an L2 network designed specifically for gaming, offering scalability, cost-efficiency, and security to enhance Web3 experiences for players and developers. It leverages ZK-Rollups to achieve over 4,000 TPS with near-instant transactions and minimal fees while maintaining robust security through its Ethereum mainnet foundation. The native token, IMX, powers the network and is used for fees, staking, and governance participation.

Immutable X promises a seamless experience for gamers with fast transactions, true NFT ownership, and game interoperability. Developers benefit from low costs, easy-to-use tools, and a thriving ecosystem of games, marketplaces, and decentralized applications.

Immutable X boasts high throughput, supporting efficient NFT minting, trading, and transfers, with a significant TVL and market share in Ethereum Layer 2 solutions.

The Impact of Ethereum 2.0 on Layer 2 Protocols

Ethereum 2.0 represents a transformative upgrade to the Ethereum blockchain, laying the groundwork for significant advancements in blockchain technology. Its primary goals are to enhance speed, efficiency, and scalability. By January 2024, Danksharding (particularly Proto-Danksharding) is expected to elevate Ethereum’s throughput to an impressive 100,000 TPS.

This advancement has profound implications for Layer-2 networks:

• Driving Layer-2 Scalability and Efficiency: Say goodbye to slow and costly transactions. Danksharding optimizes Layer 2 efficiency, making it a cost-effective haven for your blockchain activities. This means a network that devours data and processes transactions at scale without breaking the bank.
• Reducing Layer-2 Network Transaction Fees: Proto-Danksharding, the first stage of this magical process, slashes Layer 2 network transaction fees. It’s like finding hidden free gas money! This improvement in affordability opens the door for everyone—from seasoned DeFi whales to curious blockchain newcomers—to experience the power of Layer-2 solutions.
• Seamless Integration Between L1 Ethereum and L2: Proto-Danksharding will enhance Ethereum’s support for Layer 2 rollups and service rollup sequencers. Think smoother integration, tighter communication, and frictionless user experiences. Imagine completing transactions quickly without leaving your favorite Layer 2 application.
• Enhanced User Experience: Faster confirmations, reduced network congestion, and lower gas fees—that’s the promise of Danksharding. Users can look forward to quicker confirmation times, less network congestion, and reduced gas fees, making Ethereum and Layer 2 solutions more user-friendly.

Ethereum 2.0 does not render Layer 2 solutions obsolete; rather, it fosters a symbiotic relationship where Ethereum 2.0 and Layer 2 networks work together to deliver a more efficient and scalable blockchain ecosystem. This complementary relationship is crucial for the future needs of decentralized applications (dApps) and decentralized finance (DeFi).

Conclusion

Layer 2 blockchain protocols have become foundational to enhancing blockchain ecosystems, playing a key role in making transactions faster, more cost-effective, and scalable. By addressing the limitations of Layer-1 protocols, Layer 2 networks mark a transformative phase in the evolution of blockchain technology.

By 2024, Layer 2 solutions are not just a trend but a structural shift. From the thriving Ethereum L2 projects to innovative Bitcoin scaling solutions, these networks are shaping the future of the crypto industry. They pave the way for broader adoption, unlock new opportunities, and demonstrate that blockchain can be fast, affordable, and accessible to everyone.

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