The blockchain trilemma, a problem wherein it’s difficult for blockchain networks to be secure, fast, and decentralized, all at the same time, has yet to be fully solved. But, we do have solutions that can be used to somewhat solve these issues in the form of blockchain layer-2s (L2s).
Perhaps you’re already using them to save on transaction fees while having increased speeds, but if not, you’re in the right place to learn. We’ll discuss what L2s are, their benefits, and some of the most popular Layer-2s that you can get started using today.
What’s a Layer-2 (L2)?
A layer-2 is a second blockchain layer that’s built upon the blockchain’s base framework. On a second layer, blockchain transactions and processes can take place independently of the base layer (main chain), while still maintaining the security of that layer. These are generally referred to as off-chain transactions.
The main goal that L2s are aiming to solve are transaction speeds and scaling difficulties that are seen with Bitcoin and Ethereum, which can only process 7 and 15 transactions per second, respectively. Bitcoin’s layer-2, the Lightning Network, allows the blockchain to process up to 1 million transactions per second, with room to scale higher. Ethereum has multiple L2s. We’ll look at both the Lightning Network and other L2s later in this piece. Let’s more clearly define their benefits first.
Perhaps the most attractive aspect of using a layer-2 in lieu of the base blockchain layer is the almost complete absence of transaction costs comparatively. What would normally cost you $20 on Ethereum can suddenly cost under $2 on an Ethereum L2. Similarly, Bitcoin transactions are practically free when sent using the Lightning Network. Whether you’re looking to just send funds to a friend, add liquidity to a decentralized exchange, or make a swap, you’ll face much lower fees when doing so on a layer-2.
Not only are your transaction fees reduced by a significant amount when using an L2, but the transaction speed is also faster than if you used the base layer. This means it’s both cheaper and faster to use a L2 compared to the main layer, leading one to wonder why you’d even bother using the main layer. The answer is that you don’t need to, but there are still some risks when it comes to using cryptocurrency bridges that you should keep in mind.
As mentioned earlier, a layer-2 is able to have faster transaction speeds and lower transaction fees, but with the same security of the main blockchain layer. This is because with L2s, the transactions still have to be finalized on the main blockchain layer, meaning they maintain that layer’s security.
The Bitcoin Lightning Network is built on top of Bitcoin’s base layer. It uses smart contracts and bidirectional payment channels (nodes) to essentially remove the need for block confirmations (transaction settlement). This means that transactions are instant, with the only limitation being the number of channels that are currently available on the network. As long as you and your recipient are both using the Lightning Network, the transaction will be instant and the fee will essentially be zero.
In addition, the more nodes that are open, the faster the network, as it can route payments through any open channel. The Lightning Network can handle 1,000,000 transactions per second and they are instantly sent with almost no fee.
Polygon, formerly known as Matic Network, is the most popular L2 built on top of Ethereum. Transactions on Polygon are done on child chains, which keeps the majority of traffic off of the Ethereum parent chain. This means there are faster and cheaper transactions on the Polygon network compared to Ethereum. MATIC is the asset that powers the Polygon L2, meaning transaction fees are paid in MATIC rather than ETH.
Polygon is compatible with almost all of the same decentralized applications (Dapps) that Ethereum is, including Uniswap and OpenSea, Ethereum’s most popular decentralized exchange and NFT marketplace, respectively. You can interact with these Dapps using Polygon rather than Ethereum for both faster transaction speeds and lower fees.
Arbitrum is another Ethereum L2 scaling solution that is a competitor to Polygon. Instead of child chains, it uses optimistic rollups to achieve its goal of improving speed, scalability and cost-efficiency on Ethereum. Arbitrum benefits from the security and compatibility of Ethereum’s main layer but has higher transaction throughput and lower fees. As with Polygon, that’s made possible because most of the computation and storage load is happening off-chain.
Arbitrum’s native token is called ARB and it is used for governance. Unlike Polygon, on Arbitrum, ARB is only used for governance and not for transaction fees. This means that on Arbitrum, fees are paid in ETH or any other ERC-20 asset which the Arbitrum platform supports. Arbitrum fees are usually about 80% less than if you use the Ethereum layer.
Optimism (OP) is yet another L2 blockchain built on top of Ethereum. Like Arbitrum, Optimism benefits from the security of the Ethereum base layer and helps to scale the Ethereum ecosystem by using optimistic rollups, rather than child chains. That means transactions are recorded in a trustless manner on Optimism but ultimately secured on Ethereum. This is similar to how Arbitrum works, and results in the same higher transaction throughput but lower fees.
As with Arbitrum, OP is a governance token, meaning fees are paid in ETH or any other ERC-20 the Optimism platform supports. For reference, the average fee for swapping assets on Uniswap on the Ethereum base layer is over $20, whereas when you use Optimism it’s under $2.
There are a variety of layer-2s that you can get started using today. Unless you enjoy spending more money for simple transactions and waiting longer, there’s really no reason not to. As these L2s become more popular it will only increase their viability as global networks for peer-to-peer transactions, especially the Lightning Network. It will be interesting to see how long adoption takes.