Yellow Capital Blog/Liquidity and Tokenomics/Scaling Solutions: Exploring Layer 2 and Beyond

Scaling Solutions: Exploring Layer 2 and Beyond

Thursday, December 07, 2023

The Need for Scalable Blockchain Solutions

Over this past decade, the world of cryptocurrencies has experienced a phenomenal increase in terms of their acceptance and use in various parts of the world as well. The explosion of popularity has created several new changes and developments. However, it has also highlighted the weaknesses of blockchain technology, especially in scalability. With time, transaction volumes as well as user interaction grows leading to network congestion which results in slow speeds and increased fees.

The Blockchain Trilemma: A Fundamental Challenge

  • The limitations of blockchain scalability stem from the fundamental trilemma of blockchain technology, which states that it is impossible for a blockchain network to achieve all three of the following properties simultaneously:
    Decentralization: These blocks are replicated throughout a network of nodes and, hence, have no central authority.
    Security: Due to the cryptographic consensus mechanism, the blockchain cannot be modified or manipulated thus resisting fraud.
    Scalability: Blockchain can support an increased workload while maintaining performance.
    Traditional layer 1 (L1) blockchain solutions like Bitcoin and Ethereum tend to be highly dependent on decentralization and security at the expense of scalability. With more transactions, L1’s capacity cannot accommodate all that, thus making processing slow to an extent such as a point when the transaction fee is high.

Layer 2 Scaling Solutions: A Paradigm Shift in Blockchain Scalability

  • Layer 2 (L2) scaling solution is one area blockchain is moving to. Through increasing throughput in blockchain networks, L2 schemes can leverage blockchains’ full potential by accommodating ever more decentralized apps and services as demands mount.
    Key Differences:
  • L2 scaling solutions overcome the issues of scalability for L1 blockchains through off-the-chain transactions. are represented by Lightning Network, Arbitrum, Optimism, Polygon, and ZKRollup.
    Increases in the number of transactions, rising fees, evolving technology, and growing attention toward blockchain developers, are all pushing towards L2 adoption.
    User education, interoperability, security, and governance issues associated with L2 adoption.
    The outlook on L2 scaling techniques remains encouraging, with ongoing improvements, greater acceptance, linkage with DAPPs, and support for programmers.

    L2 solutions provide numerous benefits that overcome those of L1 ones like increasing transaction processing speed, decrease in costs, and expansion in capabilities for scaling.
    There are two main types of L2 scaling solutions, namely state channels and off-chain solutions.
    Well-known L2 implementations

Layer 2 Scaling Solutions: A Promising Approach

To deal with the issue of scalability in L1 blockchains, L2 scaling solutions are a potential remedy. Such solutions work on the secondary chains layered above the main blockchain, thus broadening its ability to accommodate additional transactions. L2 solutions involve off-chain processing of transactions. This will improve the transaction throughput, lower the costs associated with the transaction, as well as enhance scalability.

Types of Layer 2 Scaling Solutions

L2 scaling solutions can be broadly categorized into two main types:

State channels: These allow peer-to-peer direct transactions between users without clogging the chain with data. The L1 blockchain only captures the final settlement of the channel. It fits a bill when involved in the payment of small amounts for regular transactions among a few players such as micropayments.

Off-chain solutions: These solutions work outside the blockchain, however, they rely on the L1 chain for verification and security. These consist of the sidechains, subchains that function as independent blockchains and work alongside the main chain, as well, and rollups, where multiple transactions are collected into a single batch and submitted only every so often on the L1 level for verification by validators. Optimistic rollups and Zero-knowledge rollups are other types of rollups. Optimistic rollups assume transactions are valid unless proven otherwise, whereas ZK rollups use cryptographic proofs to prove the validity of transactions without revealing transaction details.

Layer 2 Scaling Solutions

Benefits of Layer 2 Scaling Solutions

L2 scaling solutions offer several advantages over traditional L1 solutions:

Improved transaction throughput: Throughput is increased as L2 solutions process transactions off-chain thereby reducing transaction speeds which is a solution to congestion in blockchains. For example, the lightning network, a state channel solution like Bitcoin, has the potential capacity to handle a million transactions per second (TPS) as against Bitcoin’s seven.

Reduced transaction fees: This makes L2 solution have low transaction fees as compared to L1 since transaction processing is executed outside the blockchain (off-chain). Thus, it benefits users who frequently transact small amounts of money.

Enhanced scalability: L2 solutions significantly increase scalability in terms of handling more users and transactions while maintaining high speed for blockchain networks. This is essential to have mass uptake on blockchain and its capability to accommodate worldwide users’ databases.

Comparison of Layer 1 and Layer 2 Solutions

The following table summarizes the key differences between L1 and L2 solutions:

Layer 1 vs Layer 2 comparison

Notable Layer 2 Scaling Solutions

Several key L2 scaling solutions are appearing in the crypto space, all with distinct benefits and strengths.
Here's a closer look at some of the most notable L2 solutions:

Lightning Network: A Bitcoin blockchain-enabled, state channel solution built for instantaneous and cheap transactions. Lightning network is one of the most popular scalability examples in blockchain and it’s successful. Transaction traffic is minimized because it keeps transaction records outside of the channel except on settlement, which settles into the Bitcoin blockchain. This approach will work best for small transaction volumes that will involve a few parties.

Arbitrum: Optimistic rollups that offload transaction processing off-chain but eventually verify back on-chain in an off-chain solution. Arbitrum has a very high transaction speed and is EVM compatible, thus facilitating easy interaction between existing Ethereum dApps and Arbitrum Dapps. However, optimistic Rollups hold that all transactions are true and subsequently invalidate those they deem faulty rather than performing actual processing or verification on every single transaction as is with traditional rollups.

Optimism: Another Optimistic rollup, a type of off-chain solution using the fastest and most scalable transactions on the Ethereum blockchain. It has an interesting item known as "Fraud Proofs" that enables quicker reconciliation once any given deal is tagged as cheating.

Polygon: A Sidechain solution running alongside Ethereum blockchain provides high transaction throughput and low cost. To have instantaneous transactions and scalability, Polygon uses an asynchronous PoS for consensus.

ZKSync: A Zero-Knowledge Proofs (ZKP) off-chain solution that ensures privacy and scalability for all transactions in the Ethereum chain. ZK Roll-ups aggregates a group of transactions together and uses ZK proofs which allows a non-revealing check of verifiability. It provides privacy as well as scalability, unlike conventional rollups.

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Adoption of Layer 2 Scaling Solutions

L2 scaling solutions are just starting to be used, and their success grows with each new day as more developers and users understand that these tools can solve problems related to scalability for blockchain networks. With time and greater acceptance of maturing L2 solutions, they will greatly foster the uptake of blockchain.

Factors Driving L2 Adoption

Several factors are driving the adoption of L2 scaling solutions:

  • Increasing transaction volumes: With the increasing popularity of the blockage application, especially in DeFi, the number of transactions is constantly increasing, which ultimately leads L2 to be even more essential for keeping up with network performance.
  • ​Rising transaction fees: Increased transaction fees due to congestion on L1 blockchain have forced some users into opting for cheaper solutions provided by L2s.
  • Maturation of L2 technology: Technology has come a long way from the crude and insecure l2 solutions of earlier times.
  • Growing developer interest: The developers now understand the capabilities associated with l2 solutions, and they create apps and frameworks above these protocols.

Challenges and Considerations

Despite their promise, L2 scaling solutions also face certain challenges and considerations:
User education: As such, it is important to educate users on the benefits as well as how to use these L2 solutions so that they attain wide usage.
Interoperability: Interconnectivity within various L2 solutions as well as interdependency with the underlying L1 blockchain must not be compromised for an optimal user interface.
Security: Security must be at its best in L2 solutions otherwise it will cost users money.
Governance: Well-run governance models for the L2 solution are critical in ensuring long-term viability and ability to make decisions as well as for long-term sustainability.

The Future of Layer 2 Scaling Solutions

As time goes by, L2 scaling solutions will become more advanced, changing how we think about blockchains forever. With L2 solutions, blockchain can grow beyond its current limits and pave the way for industry and individual revolutions while setting the platform for a new age of decentralized innovations.

The future of L2 scaling solutions is bright, with significant potential to revolutionize the scalability of blockchain networks:
Continued innovation: Continuously updated L2 solutions by developers have made L2 protocols better, faster, and scalable.
Wider adoption: With time, L2 solutions will develop further, becoming the primary transaction processing layer in the Blockchain system.
Integration with dApps: The integration of L2 solutions with dApps will make it easier for the users by making it easier.
Empowering developers: Developers will now have L2 solutions that can be utilized in building scalable and fast applications concerning the future of blockchain technology.

Transforming Industries with Enhanced Scalability

The transformative impact of L2 scaling solutions is evident across a wide range of industries:

Decentralized Finance (DeFi): By relying on L2 solutions, the DeFi apps will improve speed and reduce costs, thereby promoting broader adoption of these platforms and opening up new financial possibilities.

Non-Fungible Tokens (NFTs): For instance, L2 solutions enable easy minting, selling of, and sending NFTs without compromising on the scalability challenges faced by NFT markets.

Supply Chain Management: L2 solutions are making supply chain management more transparent and impossible to cheat with on the way goods and materials.

Gaming and Entertainment: L2 solutions are disrupting both gaming and entertainment through seamless micro-transactions, leading to new decentralized gaming experiences.

Social Media and Communication: Decentralized social media platforms and messaging applications are giving power back to the user as far as control of data goes, with L2 solutions creating a pathway towards this.

Choosing the Right L2 Solution

Thus, the choice of an L2 solution depends on a certain functionality of the application and the preferences of the user. Factors to consider include:

Transaction type: Off-chain solutions such as roll-up suit very large payments while state channels are appropriate for micropayment and more frequent transactions.

Compatibility: To be able to use existing Ethereum dApps one should implement either Arbitrum or Optimism.

Privacy: Privacy-concerned users can use ZKSync.

Fees: Unlike other L1 solutions, all L2 offer cheaper fee options, but costs can greatly differ across networks and transactions.


Layer 2 scaling solutions are rapidly evolving and transforming the landscape of blockchain technology. By addressing scalability challenges and enhancing transaction throughput, L2 solutions have the potential to unlock the true potential of blockchains and enable widespread adoption across various industries. As L2 solutions mature and become more widely adopted, they are poised to play a crucial role in shaping the future of decentralized finance, gaming, social media, and other blockchain-based applications.

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