Layer-2: definition and operation of blockchain sub-layers

For structural reasons, more and more blockchains use layer-2 to develop their applications. In fact, the Arbitrum, Optimism, Polygon and Lightning Network networks are becoming more and more important.

What is a layer-2 for a cryptocurrency?

Layer-2s are sub-layers or networks parallel to blockchains, capable of supporting more transactions. In the Bitcoinit is Lightning Network or Omni while Ethereum has Polygon, Loopring or Arbitrum.

Their presence allows transactions to be executed outside the main chain, layer-1. To be definitively validated and thus benefit from the security and immutable nature of the main networks, they are then transferred en bloc to layer-1 and thus finalized.

This relieves the burden on major blockchains, such as Bitcoin or Ethereum. The maximum number of transactions that can be included in a block varies according to the blockchains: around seven transactions per second for Bitcoin, around thirty for Ethereum. Compared to the maximum capacity of 65,000 transactions per second claimed by the Visa network, it does not seem like much, but the advantage of blockchains is to guarantee the immutability of transactions once carried out when payments made on a traditional banking network can be reversed several days after issuance. However, the current capacity of blockchains cannot handle all the payment flows in the world.

In order to support more users, without betraying the fundamental qualities of blockchains, developers have therefore created layer-2.

The relevant analogy would be to imagine a pyramid whose foundation would be the blockchain and the upper floors a layer-2. It is not uncommon to also hear that the Bitcoin network acts as a savings account and its layer-2 Lightning Network as a current account.

Technically, specificities distinguish these different layer-2s, starting with the existence or not of a native token: the Lightning Network token replicates the value of Bitcoin while Polygon has a token different from ether, Matic . Loopring has its LRC. Arbitrum does not have a full-fledged token and uses ether. For this reason, the user must be vigilant and ensure that he is using the correct token corresponding to the chosen network; indeed, the use of a layer-2 requires some precautions to ensure not to lose tokens.

For Bitcoin, some wallets facilitate the transition between the main network and the layer-2 Lightning Network: this is particularly the case with Blue Wallet, Breez or Wallet of Satoshiwallets for download from the official website of their developers.

For Ethereum, it will be necessary to integrate with Metamask (the most popular wallet) mostly manually settings secondary networks (the RPCs). Among the most reliable sources, the site chain list informs about the appropriate configurations.

What are the applications of layer-2?

Thanks to their ability to absorb a significant number of transactions (Bitcoin’s Lightning Network claims a capacity of 1 million transactions per second, Arbitrum around 40,000 per second), Layer-2s are not only effective as a payment network but also to host applications, commonly known as dApps (decentralized applications).

Video games (Axie Infinity, God’s Unchained, Light Nite, Immortal Game, etc.), trading (dYdX, Uniswap, Sovryn, etc.), finance (Curve, Synthetix) are all applications that benefit from the capacity and low cost of use of these networks.

In 2021, Microsoft launched its own layer-2 on Bitcoin, IONa decentralized identity management network.

What is a layer-1?

Layer-1 is therefore the main blockchain on which the other sub-layers are based: for example, Bitcoin is a layer-1. Ethereum is a layer-1 and it is in particular due to the increasing execution of smart contracts on its layer-1 that transaction fees regularly explode, sometimes reaching a hundred dollars to use an application. Switching applications like Uniswap or Synthetix to layer-2 therefore decongests the network and reduces costs.

What is a layer-3?

Layer-3s are a third layer level but if layer-2s are versatile networks, capable of supporting different types of use, layer-3s are often thought of as specific applications, capable of interacting or communicating with other applications on the same network. A type of architecture that is found more on the Solana or Avalanche networks. In 2022, the team Impervious however announced the release of Impervious Browser, a layer-3 built on the layer-2 Lightning Network.

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Layer-2: definition and operation of blockchain sub-layers

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