What Is Layer 2 In Crypto?

In its development, cryptocurrencies are not merely used for buying and selling transactions and as a medium of exchange. The emergence of Ethereum as the first blockchain to utilize smart contract technology paves the way for further scalability in cryptocurrencies. From there, arises what is called the DeFi sector, GameFi, and NFTs, which increasingly add value to the crypto world.

With the increasing number of Ethereum users, issues begin to arise. The increasing number of transactions results in network congestion, leading to higher gas fees. Efforts must be made to address these issues. Hence, the birth of layer 2 technology to solve scalability and high transaction cost issues.

So, what is layer 2 in crypto? How can it solve the scalability issues of the Ethereum network? This article will comprehensively discuss layer 2 crypto on the Ethereum network.

What Is Layer 2?

Layer 2 (L2) is a separate blockchain built on top of the layer 1 blockchain (Ethereum) to address network scalability issues. Layer 2 crypto technology emerged on the Ethereum network and was created to address the increasing transaction costs of Ethereum and slow transaction processing.

It's worth noting that Ethereum transaction fees have reached $190. So, the function of L2 is to expedite transaction processing, reduce transaction costs, and expand the usability or use cases of the Ethereum network. L2 can reduce the burden of transaction congestion on layer 1 because network users are naturally distributed.

One crucial aspect that is an advantage of layer 2 is that it still utilizes the consensus mechanism and security provided by layer 1 beneath it. Thus, L2 blockchains built on Ethereum still enjoy the high-level security provided by Ethereum. This is one of the main reasons why the Ethereum L2 sector is highly popular.

With the advent of L2, it has spurred the rapid development of the layer 2 sector. Currently, the L2 sector is bustling with various cryptocurrency technology innovations that meet various transactional needs, such as the emergence of the DeFi sector, crypto-based games (GameFi), and NFTs.

How Does Layer 2 Work?

Layer 2 blockchain operates in parallel and serves as an extension of layer 1 beneath it. In its operational mechanism, L2 transaction processes are carried out in two ways: by initially processing them off-chain and then returning them to layer 1, or by conducting all processes on-chain using complex cryptographic techniques.

This approach distributes the heaviest workload to L2, thus allowing L1 to only play a role in the final validation stage.

The essence of this process lies in L2 still leveraging the security provided by Ethereum without undergoing the cumbersome network transaction verification process. L2 enables layer 1 to handle security, data availability, and decentralization, while L2 manages its transaction scaling.

Ethereum openly supports developers who wish to develop L2 on their network as a scalability enhancement solution without compromising network decentralization and security. This ultimately gives rise to cryptocurrency projects based on L2. Examples of popular L2 crypto projects include Polygon, Arbitrum, Loopring, Immutable X, and Optimism.

Potential Growth Of Layer 2 in 2024

Several cryptocurrency research firms like Delphi and Messari project that the potential of L2 in 2024 remains significant. This potential stems from on-chain data indicating exponential growth in two L2 projects, Arbitrum and Optimism.

Despite being launched only in the last two years, both continue to attract new users even as the crypto market experiences a bearish trend. Polygon also remains a key player in the L2 sector as it successfully captures new markets by collaborating with numerous major companies.

Moreover, 2024 will be a crucial year for Ethereum. L2 is in a favorable position post-The Merge. The Shanghai update, EOF, and Proto-dank sharding will provide significant advantages for all L2 projects, especially Optimistic Rollup. All these updates will enhance Ethereum's competitive value and also improve the performance of Ethereum applications and the L2 blockchains built on it.