Blockchain, which forms the basis of cryptocurrency trading, is an unparalleled and excellent technology, but on the other hand, it has an unavoidable “trilemma” due to its structure.
“Scalability”, “Distribution” and “Security”. The trilemma is that if you try to satisfy any two of these three elements, you will inevitably sacrifice the remaining one element. The trilemma has become a very big issue in the crypto-asset community, and we have not yet reached a fundamental solution. However, there is a technology that is expected to be a clue to the solution.
That is “Layer 2 (Layer Second) of the blockchain”. This time, we will delve into difference between layer 1 and layer 2 of the blockchain and how Layer 2 approaches solving the trilemma, along with specific types and the meaning of Layer 1.
LAYER 1 AND SCALABILITY ISSUES
All crypto projects run on the blockchain. Each distributed node is connected by P2P, and transactions can be made without going through a centralized client-server.
As typified by Bitcoin and Ethereum, each transaction is stored in a database by a miner and registered as a block. Bitcoin takes about 10 minutes to create one block. Since the processing power of miners and the capacity of each block are limited, if transactions are concentrated, it will take time to process and delay remittances. In addition, as the number of transactions increases, mining fees will rise as miners prioritize transactions with better financial conditions. This delay in processing and soaring fees are called the “scalability problem”. Slow processing increases the risk of users losing money on transactions, and high fees make it unsuitable for micropayments and a barrier to entry into the project.
Projects that have established a solid position as public blockchains, such as Bitcoin and Ethereum, are guaranteed “decentralization” that anyone can participate in and “security” that can withstand cyber-attacks. However, on the other hand, giving priority to these will cause a “trilemma” in which processing speed will decrease and fees will rise.
In particular, the recent surge in Ethereum-based NFT and DeFi markets has brought the scalability issue to the fore in a more serious way, with the dramatic increase in transactions.
Therefore, in Layer 1, solving the trilemma and building a more accurate system is a major issue.
WHAT IS LAYER 2 OF THE BLOCKCHAIN?
“Layer 2 (second layer)” was developed to solve the above-mentioned trilemma of layer 1, especially the scalability problem.
“Layer 2 of the blockchain” accomplishes transactions off-chain other than blockchain. During the transaction process, once the calculation processing necessary for block generation is performed outside the main layer 1, only the final transaction result is returned to the blockchain and recorded. By following this process, it is possible to process a huge amount of data and perform high-speed processing while reducing the load on Layer 1.
Layer 2 of the blockchain has multiple patterns and is not specific to anyone. Roles also vary from being part of Layer 1 to handling most of it.
TYPES OF LAYER 2 OF THE BLOCKCHAIN
The main Layer 2 of the blockchain includes “Lightning Network”, “Leiden Network”, “Plasma”, etc. Let’s talk about each.
The “Lightning Network” is the major Layer 2 technology used in Bitcoin.
It is based on the method of launching a channel in a one-to-one pair called a “payment channel” outside the layer 1 blockchain. One node and another node deposit a fixed amount of currency (meaning a security deposit), and transactions can be made only within that range.
For example, let’s say that Party A and Party B bring 3 BTC each to launch a payment channel. If Party A sends 2 BTC to Party B, the transaction will be completed with Party A owning 1 BTC and Party B owning 5 BTC. At this time, transactions are made possible by using a signature format technology called multisig, which manages cryptographic assets with each private key. You can trade as many times as you want within the range of the deposited currency amount.
Payment channels can only be traded between two parties, but by passing through multiple nodes like a rosary (= lightning channel), even those who are not connected to the channel can send money at high speed and low cost.
The Lightning Network is Layer 2 used in Bitcoin, but the technology used as Ethereum’s Layer 2 with the same mechanism is the “Leiden Network”. You can set up a payment channel between two parties outside of the layer 1 blockchain and trade as many times as you want within the amount of currency you deposit.
If Party A establishes a channel with Party B and Party B establishes a channel separately from Party B, Party A will be able to send money through Party B even if the channel is not directly connected to Party B. No transaction will be concluded without mutual consent. If only the final results of transactions made on the Leiden Network are returned to Layer 1 and recorded, transactions can continue at high speed and low cost without burdening Layer 1.
Both “Lightning Network” and “Raiden Network” are off-chain Layer 2. It is characterized by operating completely separate from the layer 1 blockchain.
But Ethereum’s Layer 2 also has an on-chain variant which is called plasma. If Layer 1 is the “parent”, the blockchains are connected hierarchically in the form of “child chains” and “grandchild chains”. The number of chains can be increased as needed, and each role can be assigned to lighten the load on Layer 1 while achieving high-speed and low-cost transactions. Another major feature is that smart contracts can be implemented on all secondary blockchains other than Layer 1.
A smart contract is a mechanism unique to Ethereum that is programmed to automatically conduct transactions according to preset rules. Speaking of crypto assets, it is generally used for trading and settlement, but Ethereum is a peculiar blockchain that can operate various functions other than these as applications using smart contracts.
This innovation has led to the explosive popularity of groundbreaking Ethereum-based services such as NFT and DeFi, and in 2021, the price of Ethereum jumped hundreds of times in just a few months. If the Ethereum economy boils further, the scalability problem will become even more serious due to the increase in the number of transactions. Therefore, it can be said that the presence of Plasma, which can greatly reduce the load on layer 1 with the same blockchain technology, will become more and more important.
A trilemma that stands in the way of numerous cryptocurrency projects. Among them, the scalability problem is very annoying for well-known public blockchains such as Bitcoin and Ethereum.
However, by utilizing Layer 2, transactions can be processed quickly and at a low cost without burdening Layer 1. Layer 2 must be a great ally for the blockchain ecosystem if it clears the issues of security vulnerabilities and the invisibility of off-chain transactions.