Layer 2 Solution for Bitcoin and Ethereum

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There is an “impossible triangle” problem in the blockchain industry, that is, the security, scalability and decentralization. People can only achieve the other two by sacrificing the third one. In order to “solve” this impossible triangle, people have thought out many solutions, including the Layer 2.

Now, let’s make a brief introduction to Layer 2.


How Does Layer 2 Work?

Layer 2 technology is often referred to as an “off-chain” solution which mainly aims to extend the performance of blockchain while preserve the decentralization advantages of distributed protocols.

In order to build a good blockchain ecosystem, we need to do something in the architecture to balance the need for security, decentralization and scalability. The Layer 2 platform and protocol can handle data in a way of reducing the burden on the base layer (root chain) and enhance the scalability of the entire blockchain network by transferring part of the data processing from the main chain to Layer 2.

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Taking Ethereum as an example, the Layer 2 technology system is a system connecting to Ethereum which adopts Ethereum as the base layer for security and final determinism. In other words, we will add smart contracts to the main blockchain protocols instead of changing the Ethereum base so that these protocols can interact with offline activities.

Layer 2 can reduce the data processing on the blockchain on a large scale by running off-chain calculations. For any possible disputes, the base layer (root chain) is still the final arbiter.


Layer 2 Technology of Bitcoin and Ethereum

The “Lightning Network” is a “Layer 2” payment protocol running based on bitcoin, which enables fast transactions among all the participating nodes. The intention behind is as follows: not every transaction has to be conducted on the chain.

Thus, the Lightning Network adds another layer to the bitcoin blockchain which enables a payment channel to be established between any two clients on the additional layer. The transactions in these channels are immediacy with very low costs.

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Like the bitcoin Lightning Network, people have proposed different solutions to solve the scalability problem of Ethereum, including Casper, Plasma and sharding. Among them, Plasma adopts the smart protocol at Layer 2 on the main blockchain to achieve the security based on the underlying Ethereum blockchain.

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Plasma allows chain to exist in another chain so that the scalability can grow exponentially. It creates “sub-blockchains” attached to the “main” Ethereum blockchain while all these sub-chains can also repeatedly create their own sub-chains in sequence.

The validity of sub-chain is submitted and stored on the main chain, so that we can perform many complicated operations at the sub-chain level and run the complete applications with thousands of users by minimal interaction with Ethereum main chain (only in case of dispute, it will have a lot of interactions with main chain).


What does Layer 2 mean for the development of blockchain industry?

The blockchain is evolving into a multi-layered system. Layer 2 can help us create “available” blockchain system to be extended to other industries.

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Vitalik Buterin, the founder of Ethereum, made a calculation for us and he mentioned in the AMA:

If you add 100x from Sharding and 100x from Plasma, these two together basically give you a 10,000x scalability gain.

This means the blockchain will be powerful enough to cope with most applications which people are trying to handle.


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