Will the summer of 2022 be that of layers 2, after DeFi in 2020 and NFTs in 2021?

Remember last summer… Were you thinking about your summer vacation? The warm sand, the sparkling sun, the gentle waves that lay languidly at your feet… Forget all that! Summer 2022 will be the summer of layers 2! In this article, find out why 2022 may be the year that will see the boom in layers 2.

The summer of 2020 was the summer of DeFi

Two trends have significantly marked the last two summers in the cryptocurrency sector. In 2020, decentralized finance (DeFi) began to rise to prominence with protocols such as Curve, Compound, and Earion driving the total value locked (TVL) of DeFi to exceed $10 billion. As a reminder, the total value locked (TVL), corresponds to the funds that are blocked in the various protocols of the sector. It is an indicator of the health of the field of decentralized finance, and of investor interest. DeFI is a way to exchange, buy and sell with few intermediaries (banks, brokers, stock exchanges) and therefore in theory, to avoid blocked funds or unforeseen fees at the base or any other action which would impact the finances of fund owners.

The summer of 2021 was that of the NFTs

In 2021, it is the turn of NFTs to attract media attention. Projects such as Cryptopunks and the Bored Ape Yacht Club (BAYC) have reached multi-billion dollar valuations. Based on current trends and predictions, many believe that the summer of 2022 will be remembered as the summer of layer 2… But why?

What is a layer 2?

Let’s start with a simple definition. What is a layer 2? It is a technology that adds a second level (hence its name) to a blockchain, to ease its operation. In this article, you can find out everything you need to know about layer 2. Let’s get back to business… Why is this “second layer” so exciting to the crypto community? Quite simply, because the essential blockchains (Bitcoin or Ethereum) are not perfect. For example, over the past few years, Ethereum has experienced transaction congestion issues. Some saturation… Simple tasks like sending tokens or a decentralized exchange can exceed fifty dollars and take hours. Faced with this observation, new, faster blockchains have been inaugurated.

New blockchains have been created in the hope that they will become “better” than Ethereum and Bitcoin blockchains

As a result, a number of new networks have been created in an attempt to solve this scaling problem and make smart contracts useful for everyone. Some of these blockchains include Binance Smart Chain, Avalanche, Phantom, and Solana. These solutions have succeeded in making transactions faster and cheaper. They have therefore attracted many Ethereum users.

However, these blockchains fail to compete with Ethereum and Bitcoin networks.

These new blockchains have sometimes sacrificed centralization and security for their speed. This is the famous trilemma… The blockchain trilemma is a term evoking the impossibility that different networks encounter in acquiring security, scalability and decentralization at the same time. When you improve one of these three criteria, you inevitably lose efficiency for the others. At best, we can have two of these three criteria. Furthermore, even though these blockchains have reached several billion dollars in total value, they have never been able to dethrone the Ethereum and Bitcoin networks. These guarantee a very high level of security. For example, Binance’s Smart Chain has only 21 validators, compared to more than two hundred thousand on Ethereum. As for the Solana network, although it is very fast and inexpensive, it breaks down very frequently.

Layers 2 were born from a change of premise: improving Ethereum and Bitcoin blockchains rather than wanting to replace them

Layers 2 solutions aim to maintain the level of security and decentralization while increasing the speed of transactions. Concretely, they relieve the blockchain of certain operations. These operations are processed at a higher level in order to save the resources of the base chain. They can also be used to reduce transaction costs. Thus, layer 2 is a technology that improves the efficiency (speed or cost) of certain blockchains while maintaining a high level of security.

An example of layer 2: the incredible Lightning Network on the Bitcoin network

The Lightning Network on the Bitcoin network is a good illustration of the success of layer 2 technology. It is indeed booming. It increases the capacity of the Bitcoin network. Technically, it is a network of payment channels in which all hosts are connected peer to peer in a decentralized way. This results in a net-like structure, where each node can receive, send, and relay transactions.

What does the Lightning Network do?

First, this new “sub” network gives the possibility of paying on the blockchain ultra-fast without worrying about block confirmation times. Safety is ensured by smart contracts of the blockchain, avoiding creating a multitude of transactions to make individual payments. Second, payment speed improves with the Lightning Network. This network has the capacity to handle millions if not billions of transactions per second. This capability far exceeds existing payment networks, such as Visa or Mastercard. Third, the Lightning Network enables low-cost transactions. Thus, by achieving exceptionally low fees, Bitcoin enables new use cases such as instant micropayments, such as in El Salvador. To summarize simply, the Lightning Network makes it possible to increase the speed and the number of transactions on the Bitcoin blockchain while reducing their cost. But that’s not all… Following its fundraising of 70 million dollars, Lightning Labs announced the launch of their new protocol named Taro. This protocol transforms the Lightning Network into a multi-asset network. This transformation will make it possible to transfer and issue stablecoins and NFTs on the Bitcoin network at very low cost. Thus, NFTs and stablecoins will soon land on the Bitcoin network thanks to this incredible second layer solution!

When the summer of DeFi started, there was only $1 billion locked up in the DeFi protocol, and a few months later that number jumped to $10 billion. The same phenomenon could occur with layers 2. Layer 2 technology offers many advantages and improvements for existing networks. Benefits that will probably attract more and more users. This summer could well be the gunshot signaling a boom in this technology.

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Gregory Morat

Student passionate about entrepreneurship and fascinated by the technologies behind cryptos! Yes, I am convinced that the two are intimately linked: blockchain and NFTs are revolutionizing many sectors and presenting unprecedented opportunities.

We would love to give thanks to the author of this write-up for this amazing material

Will the summer of 2022 be that of layers 2, after DeFi in 2020 and NFTs in 2021?

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