What are Layer-Two Blockchain Solutions and How Do They Work?

Layer-two blockchain solutions have moved from being a fad to being perhaps the future of the entire blockchain industry. These solutions have brought innovation to one of the primary problems that face the blockchain industry - ineffective scaling. Now, blockchain can potentially be a technology for the world.

What are Layer-Two Blockchain Solutions and How Do They Work?

However, it is worth understanding what layer-two solutions are and what they could mean for the blockchain space going forward.

What Exactly are Layer-Two Solutions?

Over the years, blockchain technology has grown in adoption. It is estimated that the industry will be valued at $394.6 billion in 2028 - up from just $6 billion in 2021. From governments to private institutions, many organizations have been looking to capitalize on the benefit of the blockchain.

However, some applications have failed, where others have done relatively well. Despite this, more players are hoping to enjoy the benefits of the blockchain.

With such growing numbers, blockchains have developed issues with scaling. Root blockchains like Ethereum can only process about 20 transactions per second, making them ill-equipped to handle optimal load from users. There are several other issues, including sub-optimal privacy and exorbitant gas fees.

While root blockchains can theoretically solve some of these issues, the solutions will most likely come at the expense of decentralization.

Layer-two solutions essentially provide a way to improve blockchains' ability to scale while staying private and maintaining their cost-effective operation. Often referred to as an "off-chain" solution, layer-two blockchain technology aims to scale a blockchain's transaction capacity while ensuring the retention of the protocol's decentralization benefits.

As many know, improving blockchains' scalability will make room for greater mainstream adoption.

Layer-1 and Layer-2

In essence, a layer-two blockchain solution is built on top of an underlying blockchain - known as layer-one. The former helps to improve the latter's performance, mainly focusing on scalability and decentralization.

Take Bitcoin and the Lightning Network, for example. Bitcoin has its blockchain, making it the layer-one technology. The Lightning Network is built on top of the Bitcoin blockchain to make BBitcoin-based transactions faster and cheaper. So, it is the layer-two solution.

How Layer-Two Blockchain Solutions Work

In a nutshell, layer-2 blockchain solutions process data to reduce the burden on the layer-1 blockchains. By cutting load from the layer-1 platforms, layer-2 solutions help handle a more significant transaction load.

As explained earlier, blockchains like Bitcoin and Ethereum have significant scaling limitations. Ethereum can only handle about 15 to 20 transactions a second. Compare that to a network like VISA or PayPal, which operate hundreds of transactions in a second.

So, What Really Causes This Processing Lag?

When a blockchain transaction is processed, the decentralized network will need to reach a consensus before it can go through. Nodes on the blockchain will keep a copy of the transaction to validate it. This method ensures that you can avoid problems like double-spending without any input from a middleman.

Blockchain platforms ensure that infrastructures and protocols remain decentralized. They hold all data in a transaction in an immutable manner, securing them without the need for any central authority.

With a layer-two solution, you can significantly cut down on data processing on a blockchain platform by taking computations and running them off-chain. While the layer-one platform remains critical in settling disputes and processing transactions, the layer-two solution reduces the processing load, ensuring that you can do things much faster.

As expected, the primary benefit of layer-two solutions is that they minimize the amount of data that needs to be stored on layer-one platforms. They take transactions off the layer-one platforms while still being anchored to the platforms themselves. This way, they can free up processing space and resources while still ensuring optimal security and decentralization.

Generally, there are two types of layer-two solutions:

State Channels

A state channel is a two-way communication channel that enables participants to interact. These interactions would ideally occur on the blockchain. However, with a state channel, they are moved off the blockchain entirely.

By moving these interactions, a state channel can cut down the waiting line for blockchain transactions. You no longer have to depend on a third party (such as a miner), and you can get things done much faster.

A state channel works like this:

  • A part of the blockchain is sealed off using a smart contract, which the participants already agree upon.
  • Participants can directly interact without making any submissions.
  • When the transaction set is over, the channel's final state is added to the blockchain.

The Bitcoin Lightning Network and Ethereum's Raiden Network are two classic examples of state channel solutions. They execute state channels using Hashed Timelock Contracts, allowing quicker transactions and smart contract implementations respectively in quick time.

Nested Blockchains

A nested blockchain has a relatively straightforward operation:

  • The main blockchain (layer-one) rules the entire system, although its primary function will be to resolve disputes.
  • Several blockchains can sit on the main chain. They will be connected, forming a parent-child chain connection. The parent chain delegates work among the child chains, executing actions and sending results to the parent.

As expected, this structure reduces the load on the main chain. At the same time, it optimizes scalability - potentially on an exponential scale.

All in all, layer-two solutions are an impressive innovation that provides incredible opportunities for blockchains to grow. They provide an opportunity for scaling while maintaining decentralization and privacy.

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