What are Layer 2's?

In the world of blockchain technology, there are many different layers. Each layer has its own unique functions and purposes. In this blog post, we will discuss what layer 2's are and their importance in the blockchain ecosystem.

What Are Layer 2's In Blockchain?

Layer 2's are technology that builds on top of the underlying blockchain to increase its efficiency, scalability, and utility. To understand layer 2's it can be helpful to use a layer 1 blockchain as an example and explain how protocols built on top of them (layer 2's) function to increase its capabilities.

Ethereum is a blockchain-based platform that enables users to build decentralized applications (dApps). In Ethereum, the network is secured by miners using computing power, which requires fees called “gas” to be paid for each transaction. Ethereum is the largest layer-1 blockchain according to TVL.

The main purpose of layer 2 solutions is to decrease gas fees by reducing the number of transactions that need to be processed through Ethereum’s blockchain. To do this, layer 2 solutions use secondary networks or side chains that act as extensions of Ethereum's main chain. These side chains are connected to Ethereum via two-way pegging, where one asset on Ethereum can be exchanged for another asset on the sidechain and vice versa.

Layer 2 solutions are becoming increasingly popular as Ethereum gas fees continue to rise. By allowing users to offload transactions from Ethereum's main chain, layer 2 solutions can considerably reduce gas fees and contribute to an increase in the overall throughput of Ethereum’s blockchain. This makes Ethereum more accessible for everyday applications such as gaming, payments, and DeFi protocols.

Polygon is a Layer 2 solution that utilizes Ethereum as its underlying layer 1 blockchain. Thus, rather than competing directly with Ethereum, Polygon enhances Ethereum’s capabilities by allowing Ethereum users to save on gas fees and transact faster.

Understanding Arbitrum Bridge

Arbitrum is built to scale Ethereum while providing you with the security model of Ethereum and 10x lower costs. In layman's terms, Arbitrum is a Rollup that allows for optimistic updates. By storing data off of Ethereum, Arbitrum can reduce gas costs while still providing a secure environment. Arbitrum Bridge is the fastest L2. Arbitrum also has the highest TVL (Total Value Locked) as an L2 network and has about 50% market share. JPEGz, our NFT index token, will be launching on Arbitrum in Q1 2023. 

What Are Optimism Roll-Ups?

Optimistic rollups are contracts that compile numerous off-chain transactions into one “Rollup.” This Rollup is then sent to the main Ethereum chain, where a single transaction can be used to execute all of the transactions stored in the Rollup. This reduces the amount of data that needs to be sent to the Ethereum chain, which in turn lowers gas fees and increases the speed of transactions.

The Importance of Layer-2's For Blockchains

If blockchain technology were to reach its full potential in terms of adoption, scalability, and efficiency must be improved. Layer-2 solutions provide a means to do this without sacrificing security while also providing users with lower fees, faster transactions, and more accessible applications. As blockchain technology continues to evolve, layer 2's will likely play an integral role in its growth.

Without layer 2's, users would be disincentivized to participate in blockchain networks. For example, if it costs more ETH in dollar terms to make a simple payment than it does to use credit cards, then users would naturally gravitate towards the latter. Layer 2's thus essential in making blockchain networks more accessible and attractive to users.

We live in a fast-paced world. Waiting for a confirmation of a transaction for hours can also frustrate users, and this is something that layer 2 solutions can help alleviate. Layer 2 enables faster transactions without sacrificing the security or integrity of the data on blockchains. This makes them an attractive option for those who need quick confirmations.

Ultimately, layer 2's are essential to scaling blockchains up to the point where they can be used for mainstream applications such as payments, gaming, and Defi protocols. As more people enter into blockchain ecosystems, congestion will become inevitable. This is because, with more users, there's more demand for resources and more transactions to be processed. Layer 2 solutions are the best way to address this potential bottleneck while still providing users with the security and integrity they require.

Cryptex Finance & Layer 2’s

As a supporter of scaling the Ethereum Network, in order to propel DeFi, Cryptex Finance has launched products on Optimism, such as the ability to mint TCAP, for more information on how to mint TCAP on Optimism, click here.

Coming Q1 2023, users will be able to bridge their CTX and mint our new product, JPEGz on Arbitrum, the cheapest and fastest Layer 2 on Ethereum. More information will be coming soon, but until then, click here for our announcement video. 

Building On Top Rather Than Starting From Scratch

Developers would rather build on top of a layer that already exists rather than start from scratch. Layer 2 solutions provide developers with the necessary tools to expand their projects without worrying about the underlying infrastructure. This increases efficiency and allows developers to focus more on building their applications instead of worrying about the technology underneath.

The troubles of redeveloping a dApp on a faster underlying layer-1 blockchain would be eliminated if developers could just switch to a layer-2 solution. This would save them time, money, and resources that can be used for other things such as marketing and development. Layer-2 solutions are also essential for developers as they can provide a wide range of features and benefits that would be difficult to replicate in layer-1.

Cryptex is built on top of Arbitrum which shows how layer-2 protocols can help create a more diverse and efficient ecosystem within a blockchain. This enabled the developers to focus on providing a quality service rather than rebuilding an entire blockchain to facilitate its needs.

Conclusion

Layer 2's are a critical part of the blockchain ecosystem, enabling increased scalability, efficiency, and utility for Ethereum’s blockchain technology. 

As Ethereum gas fees continue to climb, layer 2 solutions provide a way for users to avoid high transaction costs by offloading their transactions onto secondary networks or side chains connected to Ethereum. As Ethereum continues to gain popularity, layer 2 solutions such as Polygon offer users a way to save on gas fees and transact faster.

Ethereum is not the only blockchain that can utilize a layer 2 protocol. However, it is the most popular platform for layer 2 solutions as the blockchain itself has underlying issues that can be resolved through an additional layer.

Understanding the different layers within the blockchain industry is vital to making informed decisions when it comes to using a particular blockchain. So, if you're interested in cryptocurrencies, and blockchain technology or have plans to develop a dApp, it's important to understand the difference between these layers.

DISCLAIMER: Any views expressed in this post represent the sole analysis of Cryptex, (“Cryptex”) whose opinions are based solely on publicly available information. No representation or warranty, express or implied, is made as to the accuracy or completeness of any information contained herein. Cryptex expressly disclaims any and all liability based, in whole or in part, on such information, any errors therein or omissions therefrom. Cryptex also reserves the right to modify or change its views or conclusions at any time in the future without notice. Cryptex is an open-source, fully decentralized protocol. Cryptex is NOT an ICO. No sale has been solicited. The information contained in this post DOES NOT recommend the use of any Cryptex token, nor is it an offer to sell, a solicitation, or an offer to buy any Cryptex tokenized asset. Furthermore, CTX token rewards governing the protocol are granted by Cryptex to system providers with a value of ZERO. Always do your own research. The information contained in this post is not intended to be, nor should it be construed or used as, investment advice. No representation, recommendation, or warranty, express or implied, is made as to the future performance or functionality of any Cryptex token. Any unaffiliated use of this document, or the contents herein, is strictly prohibited without the prior written consent of Cryptex.