The number of people using blockchain technology is increasing. While this is good for the ecosystem, it has proven difficult to operate. Blockchain models work well in low-pressure environments, but having more users creates more challenges. Some argue that it is necessary to create layer 2 blockchains with their own consensus mechanisms and native tokens. Is this a valid solution?
The three most important considerations for blockchains are security, decentralization, and scalability. Unfortunately, scalability is often overlooked compared to the other two factors.
Ethereum is capable of completing 1.5 million transactions per day. By comparison, Visa processes as many as 150 million transactions per day. Additionally, Ethereum can only process about 15 transactions per second. That’s why gas costs go up when many people try to use the network at the same time.
So far, we have seen builders create many new blockchains, such as Solana and Tezos. They use different authentication mechanisms that are more efficient in some ways but less secure in others. We also see builders come up with many layer 2 solutions built on top of existing networks.
first and second floors
The first layer of the blockchain refers to the main network of the blockchain, such as Ethereum. The base layer is responsible for executing transactions and running smart contracts. There you will find the ETH token that users use to pay for network transactions.
Layer 2 blockchains differ in that they exist outside of the main blockchain network and typically have their own tokens to complete transactions and pay gas fees. These blockchains provide additional scalability, privacy, and speed to the Ethereum network. Additionally, layer 2 applications publish data to the mainnet after transactions are completed. So information is safe and all in one place.
The main advantages of Layer 2 solutions are faster transaction times and lower fees. Because people can build them on top of the base layer, they maintain the goal of decentralization. By removing some traffic from the main network, it can complete more transactions without overloading the network. Depending on the use case, congestion can also slow down decentralized applications (DApps) or even be catastrophic.
Some of the most notable layer 2 blockchains on Ethereum are Polygon, Arbitrum, and Optimism.
Why does Layer 2 need its own token?
Layer 2 blockchains need their own tokens for a few different reasons. Most importantly, users pay transaction fees on the underlying blockchain using layer 2 tokens. This ensures that transactions are processed quickly and securely.
Additionally, tokens are used to incentivize users to participate in the network and provide services. Finally, it can be used to generate rewards for the developers and validators of the network.
How does ETH interact with Layer 2?
ETH tokens interact with layer 2 blockchains in a number of ways. First, they can be used to pay transaction fees on the underlying blockchain, just like any other token. Furthermore, this altcoin is used as collateral for additional rewards. Finally, layer 2 tokens can also be purchased using ETH as an investment.
In some cases, ETH could be a substitute for layer 2 blockchain tokens, however, there are some challenges and limitations to consider. For example, the same speed and scalability as layer 2 tokens cannot be achieved. In addition, there is a risk of increased volatility and unpredictability due to ETH price speculation. Finally, having multiple tokens on the same system adds complexity and creates security concerns.
Concerns about layer 2 blockchains
Ethereum founder Vitalik Buterin acknowledged that the network needed to scale very early on. Back in 2021, he stated that Layer 2 blockchains would be the best option for the foreseeable future. A lot happened during the mainnet upgrade. Ethereum has moved from PoW to PoS. Today they launched the Shanghai upgrade, which will unlock validator rewards and allow staking withdrawals. However, scalability issues still remain.
Late last year, Binance research claimed that layer 2 solutions would actually reduce the security of the network. Because these sidechains take away the revenue of the main network, reducing the rewards for running the main network. Fewer validators means less security.
Until Ethereum introduces sharding, the network will continue to struggle with higher traffic speeds. Due to the many delays we’ve seen with the multi-shard Ethereum upgrade, it’s hard to know when that will happen.
For now, it appears that Layer 2 blockchains will continue to be an important part of the Ethereum network. Layer 2 solutions seem to require native tokens to work properly. However, this is likely to change as layer 2 and even layer 3 solutions enter the ecosystem.
Or, when developers introduce sharding to Ethereum, everything will fall into place.
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Mingying
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