Understanding Layer Two Protocols: Blockchain’s Scaling Solution

Date Published

01/17/2022

In the first post in this series, we learned about layer one protocols and about application layers in general – the masking solutions responsible for hiding a system’s underlying operations in order to make it easier to use and understand for the end user.

In the context of blockchain, layers help establish protocols that define how a given network operates and how users within that network interact. Layer one protocols specifically refer to a system associated with the base or underlying architecture of a blockchain network, establishing rules and parameters such as consensus algorithm, and block time.

Now, we will go a step further to explore layer two protocols and how they fit into the equation as a means of scaling the growth and efficiencies of blockchain networks.

What are layer two protocols?

Also known as second-layer solutions or off-chain blockchain protocols, layer two protocols aim to handle transaction processing on behalf of the base network.

In most cases, layer two protocols are designed to solve the native platform’s scalability limitations and operational difficulties, typically striving to increase transactions speeds on major blockchain networks.

None of the existing layer one protocols have yet to scale to the level that suits global usage without having to compromise on other blockchain attributes like decentralization and security. Because of this, many developers have begun exploring the idea of layer two solutions.

Examples of layer two protocols

To help further illustrate the concept and application of layer two protocols, here are a few examples that look to provide increased throughput on blockchain systems.

State channels

State channels allow users to directly conduct operations with one another on a layer separate from the main blockchain (hence the term “off-chain”). State channels only report results to the blockchain when the channel closes.

Among the most notable layer two protocols that make use of state channels is the Lightning Network, which is a payment channel that operates on top of the Bitcoin blockchain to process multiple small transactions off-chain, in turn decongesting the main chain and freeing it up for larger transactions.

The Lightning Network can handle millions of transactions per second cheaply and efficiently. The concept is similar to that of a bar tab, where it is more efficient to wait till the end of the night to close out than to do so every time you order a beverage.

Plasma

Another good example of a layer two protocol is Plasma – a scaling solution for the Ethereum blockchain that seeks to drastically increase the efficiency of the network (or any other blockchain) by taking the bulk of the processing duties off the main chain.

Plasma provides a generalized framework that supports the creation of other child chains or side chains powered by Ethereum. It uses Merkle Trees and smart contracts to essentially create stripped-down versions of the Ethereum network.

These child chains are designed to run a customized smart contract that makes it possible for users to employ the Plasma structure in a way that best serves their unique needs. By leveraging the security provided by the main chain, Plasma is able to deploy a multitude of different child chains that would be working in a predetermined way toward specific goals, helping the main Ethereum blockchain become less congested.

Optimistic Rollup (OR)

Optimistic Rollup is considered to be the successor of Plasma and is an off-chain technology built to enhance Ethereum’s smart contracts and DApp ecosystem through scaling. The funds transacted on ORs are stored in a smart contract on Ethereum, where users deposit funds, aggregators sign up, and fraud proofs are committed.

Optimistic Rollups will allow Ethereum to scale up to 200-2,000 transactions per second compared to its current rate of only 10-20 per second, representing a dramatic increase in the throughput of the network.

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Date Published

01/17/2022

Author

First Scribe

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