What is a Layer 2 Blockchain?
Blockchain technology has evolved significantly since the inception of Bitcoin. With the rise of various cryptocurrencies and the growing need for faster transaction speeds and increased efficiency, Layer 2 solutions have emerged to enhance blockchain performance. In this article, we will discuss what a blockchain Layer 2 is, its significance, and how it differs from Layer 1, along with the role of Cybrid in providing crypto as a service, crypto banking, and crypto custody solutions to Web3 companies and the broader market.
What is a layer 2?
Layer 1 is often described as the base layer of a protocol, whereas layer 2 is often a third-party solution meant to specialize or abstract portions of base layer functionality while adding features or capabilities. These additional features can vary but can include one or more of the following:
Increasing the transaction speed Increasing the number of transactions per block Decreasing the cost of transaction processing Introducing alternative consensus mechanisms (such as a Layer 2 Proof-of-Stake sidechain for a Layer 1 Proof-of-Work network)
Regardless of layer type, all will have some form of validator mechanism which could be viewed as the hardware layer of the chain, as that is where the transaction computation/mining will take place. Without this hardware infrastructure layer, just like with any computational program, blockchains would not be able to exist. One of the key differences between traditional and decentralized networks is who controls this layer.
Layer 1 vs Layer 2
According to CoinMarketCap, there are nearly 20,000 cryptocurrencies, and they diverge quite significantly in terms of underlying blockchains and technology. Layer 1 blockchains are full cryptocurrency platforms or networks by themselves, while Layer 2 blockchains, which are often referred to as side-chains, are an extension of their Layer 1 parent chains with the purpose of introducing additional benefits, such as an additional data layer.
The predominant Layer 1 solutions include Bitcoin (BTC), Ethereum (ETH), Solana (SOL), Cardano (ADA), and Terra (LUNA), while Layer 2 solutions of note include Lightning Network (LN), Polkadot (DOT), Polygon (MATIC), Arbitrum, and Optimism.
Different Types of Layer 2 Solutions
Layer 2 solutions come in various forms, each with its unique approach to enhancing the performance and capabilities of the underlying Layer 1 blockchain. Some of the notable Layer 2 solutions available are:
State Channels: These are off-chain communication channels that enable users to conduct transactions privately and securely without requiring every transaction to be recorded on the main blockchain. The Lightning Network, for example, is a state channel solution for Bitcoin.
Sidechains: Sidechains are separate blockchains that run parallel to the main chain, allowing assets to be transferred between the two. They provide additional functionality, increased scalability, and often operate with their own consensus mechanisms. Examples include Polygon PoS (Proof of Stake) and xDai.
Plasma: Plasma is a Layer 2 scaling solution that allows for the creation of child chains, which are linked to the main Ethereum chain. These child chains can process transactions independently, increasing overall throughput and reducing congestion on the main chain. Polygon initially started as a Plasma-based solution but has since expanded to include multiple Layer 2 technologies.
Rollups: Rollups are Layer 2 solutions that bundle multiple transactions into a single proof, which is then submitted to the main chain. This approach reduces congestion on the main chain and increases transaction throughput. Optimism and Arbitrum are examples of rollup-based solutions.
Zero-Knowledge (ZK) Proofs: ZK proofs enable users to prove the validity of a statement without revealing any information about the statement itself, ensuring privacy and security in blockchain transactions. Polygon Nightfall is a Layer 2 solution within the Polygon ecosystem that leverages zk-SNARKs (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge) to enable private and secure transactions on the Ethereum network.
With the variety of Layer 2 solutions available, developers can choose the most suitable option for their specific needs and requirements. These solutions allow for greater flexibility, scalability, and privacy, further expanding the potential use cases and applications for blockchain technology, including the support for non-fungible tokens (NFTs) and embedded crypto.
Layer 2 Total Value Locked (L2 TVL)
As Layer 2 solutions continue to gain traction and adoption in the blockchain ecosystem, it is essential to measure the success and growth of these technologies. One key metric that has emerged to gauge the impact of Layer 2 solutions is the Total Value Locked (TVL) in Layer 2 networks.
Total Value Locked (TVL) is the amount of assets, such as cryptocurrencies and tokens, locked in a specific decentralized finance (DeFi) protocol, platform, or Layer 2 solution. It serves as an indicator of the trust users place in a given project, and the growth in TVL reflects increased usage and adoption of the platform.
L2 TVL provides insights into the overall market growth and adoption of Layer 2 solutions by measuring the amount of value stored within these networks. This metric demonstrates how much users trust and rely on Layer 2 networks for their transactions, and it can be an essential factor when considering which Layer 2 solutions are the most successful and widely adopted.
There are several platforms and websites that track L2 TVL for various Layer 2 solutions, such as DeFi Llama, L2Beat, and Dune Analytics. These platforms provide valuable information and comparison data on the growth and adoption of different Layer 2 solutions, helping users, developers, and investors make informed decisions.
A high L2 TVL indicates that a Layer 2 solution has gained significant traction and is being actively used by users for their transactions. This, in turn, implies that the solution is providing a valuable service in terms of scalability, efficiency, or privacy, making it a crucial consideration for projects and developers looking to adopt Layer 2 solutions.
Introducing Cybrid's Layer 2 Solutions
At Cybrid, we understand the importance of Layer 2 solutions in optimizing the performance and efficiency of blockchain networks. That's why we have developed a seamless onramp and offramp experience for our customers by supporting USDC on Layer 2 networks, specifically Polygon. Either use your own wallet infrastructure, or utilize Cybrid's integrated hot and cold wallets, offering crypto wallet as a service for any USDC use case your company wishes to adopt.
Our cutting-edge solution allows users to easily onramp from 40 currencies and offramp to 120 currencies through our offramp API, connecting the traditional financial world with the ever-evolving blockchain ecosystem. With Cybrid's innovative platform, businesses can enjoy the benefits of faster transactions, lower fees, and enhanced scalability associated with Layer 2 solutions.
Additionally, Cybrid offers FBO (For the Benefit Of) bank accounts for CAD and USD, providing a streamlined and compliant banking experience for our customers. We have also integrated KYC (Know Your Customer) and KYB (Know Your Business) processes to ensure that our platform remains secure and adheres to the highest regulatory standards.
By choosing Cybrid, you not only benefit from the advantages of Layer 2 technologies, but you also gain access to a comprehensive suite of financial services tailored to the needs of fintech startups and established businesses alike, including crypto banking as a service, crypto to fiat conversions, and crypto savings accounts. Our crypto SDK enables seamless integration of our services into your projects.
Our Crypto as a Service offering empowers businesses to build and scale their operations by providing a robust and reliable infrastructure, coupled with a suite of services designed to meet the diverse needs of the blockchain industry. This includes features such as crypto custody, ensuring the secure storage and management of digital assets for both businesses and their clients.
By choosing Cybrid, businesses can focus on their core competencies while relying on a trusted partner for their crypto banking, custody, and infrastructure needs. Don't miss out on the opportunity to harness the power of Layer 2 solutions for your blockchain projects – get started with Cybrid today!