What Are Layer 2 Cryptocurrency Protocols?

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Scaling has always been a problem at the core of cryptocurrency’s decentralised nature. Without the underlying infrastructure of centralised payment systems, crypto coins like Bitcoin and Ethereum can only process a handful of transactions every second. By comparison, credit cards can process over five-thousand transactions per second.

Scaling the processing power of blockchains to grow with their userbases is vital to make crypto transactions faster and more practical for all users. Layer 2 protocols are a popular solution to this problem. In addition, by working in conjunction with the blockchain itself, Layer 2 applications make crypto trades more seamless for traders.

However, these protocols have other effects on transactions, and understanding them can help you determine which Layer 2 protocols are suitable for you. While the convenience of Layer 2 can’t be understated, it’s essential to know the difference between popular protocols. Read on to learn how different protocols can benefit your crypto trading.

Layer 2 Protocols Explained

Think of Layer 2 as an additional chain working with the underlying blockchain technology (also called Layer 1) of major coins like Ethereum. In the simplest terms, Layer 2 keeps some of the records that would usually go in Layer 1’s ledger, and the two chains only interact at settlement epochs and when a transaction needs to be verified. By working together, there is less processing burden to slow down transactions on Layer 1.

What makes Layer 2 protocols so versatile is that they don’t make any direct modifications to the blockchain consensus. Instead, they are wholly independent, and as a result, any developer can create and innovate with a new protocol to use whilst trusting Ethereum as a core foundation for settlement. Currently, there are several options available to the public.

The key difference between layer-2 and sidechain solutions lies in the differences in their security mechanisms. While layer-2 generally relies on the security of the main chain, sidechains have their own security properties. 

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Image source: https://twitter.com/MakerGrowth/status/1470796078064844806/photo/1 

Notable Layer 2 and Side Chain Protocols

Below is an overview of five Layer 2 and side chain protocols which work with  Ethereum supporting similar goals in scalability to assist with adoption. Layer 2 protocols are currently in a boom period, with new projects announced and developed regularly. These five, however, have already developed devoted user bases and are excellent entry points for newcomers.

Layer 2 Solutions:

StarkNet

The main focus of StarkNet is scaling Ethereum at a low cost with fewer resources and without sacrificing Ethereum’s security measures. According to developers, their scaling measurements could process three-thousand transactions per second, a record for Layer 2 protocols. Additionally, StarkNet reduces transaction fees.

Optimism

How Layer 2 communicates with Layer 1 determines how a transaction is validated and how quickly it can be processed. Optimism provides a roll-up solution that allows for two thousand transactions per second. Optimism also includes interaction with smart contracts and not just transactions, giving it more utility to a broader userbase.

Optimism also makes cryptocurrency trading more profitable by keeping transaction fees low. Optimism’s fee per transaction is less than one cent. If adopted on a large scale, Optimism could make Ethereum transactions more seamless for everyone.

Arbitrum

Like Optimism, Arbitrum is a roll-up solution that links data between Layer 1 and Layer 2. Doing so reduces congestion in Layer 1 and is used for validation and dispute resolution. Optimism does this by re-executing the Layer 1 transaction and comparing it to what Layer 2 has recorded about the same transaction.

Arbitrum’s developers believed that this resolution process could still be faster. Rather than execute the entire transaction, Arbitrum’s validation process continuously divides the transaction, comparing smaller pieces one at a time. This piece-by-piece process results in significantly less congestion on Layer 1.

Side Chains:

Polygon

Polygon is currently one of the most popular Layer 2 side chains for Ethereum. It provides tools for connecting and even developing Ethereum-backed blockchains. In addition, it boasts a native coin, called Matic.

As a Layer 2 protocol, Polygon has proven itself by providing increased flexibility and security for blockchain transactions.  Polygon has filled a gap left by the delay in ETH 2.0’s deployment. It’s also found numerous partners among cryptocurrency exchanges and applications.

AVAX

With a throughput speed rivalling VISA’s one-thousand and seven-hundred transactions per second, AVAX (Avalanche) has great large-scale business and investment applications. However, what makes the protocol unique is its ability to port any Ethereum decentralised app to AVAX and make use of its resources.

Harmony

The ability of Layer 2 protocols to process transaction requests quickly doesn’t mean your assets will settle in that time. For example, those that use optimistic rollups could force users to wait up to two weeks, while zk rollups can take up to fifteen minutes. However, Harmony’s settlement times can be as low as a few seconds for most transactions.

Aus Merchant Helps You Navigate The Future of Currency

Cryptocurrency traders need to stay current with the ever-changing landscape of Layer 2 and sidechain protocols trying to support Ethereum’s scaling issues. Unfortunately, the Layer 2 and sidechain landscape is rapidly changing, leaving traders behind as they miss the latest innovations.

But with Aus Merchant, you’ll always be one step ahead.

As one of the leading Australian crypto brokers, we help clients navigate the rapidly-changing digital asset marketplace. From executing trades to making investments, managing your portfolio, or making sense of the latest breaking crypto tech and Bitcoin news, our team of experts offers unparalleled guidance with their extensive experience. 

Learn more about us today to take the next step in your crypto trading adventure.

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Mitchell Travers

Mitchell Travers

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