Layer-2 Solutions to Fix Blockchain Scalability Issues and Expand Cryptocurrency Use – Cryptopolitan
Blockchain has undergone continuous transformations since its inception, and its expansion shows no signs of stopping. It enabled many things that would have seemed impossible decades ago, such as the ability to create an account on a crypto exchange to buy Ethereum with a credit card and expand your investment portfolio. According to Statista, global spending on related solutions is estimated to reach around USD 19 billion by 2024. As studies show, the myriad benefits of this revolutionary technology do not go under the radar of companies looking to improve their internal operations. Blockchain rocked the business world, with global business leaders such as Tesla and Lóreal jumping on the bandwagon and implementing blockchain strategies in their organizations to benefit from improved security, increased transparency, data traceability and other benefits.
However, as enterprise interest in this technology increases, more needs to be done to address scalability issues, which may hinder its mainstream adoption. The more leveraged the blockchain network grows, the greater the necessity to create scalable Layer-2 solutions.
While the benefits of blockchain are undeniable, it also presents several challenges. Its scalability limitations, either the long response time or the high transaction fees have made it difficult for the technology to become a mainstream payment venture.
The industry has recognized these limits and explored ways to overcome them, reduce fees and improve transactions. This is how the Layer-2 solutions came about, possibly solving the inherent scalability issues. But is it enough to stimulate the use of Ethereum, Bitcoin and other cryptocurrencies? Let’s dive into the topic to understand more before jumping to conclusions.
What are the scalability issues?
Scalability, one of the significant hurdles blockchain faces, is critical in the crypto industry. It refers to the capacity to manage many transactions quickly, increasing speed and making the blockchain attractive to more potential users. However, this term may be subject to change as it has different interpretations. But in short, it is linked to transaction speed and emphasizes the need for it to grow. Commonly known blockchain networks such as Ethereum and Bitcoin use a single-layer system that imposes limits on the number of transactions per second (TPS) that can be processed, thereby slowing transaction capacity and increasing fees incurred when demand is high. . Therefore, blockchain-related solutions are challenging to find their way into a company’s payment strategy, especially when it comes to retail transactions.
What are Layer-2 technologies?
The highly acclaimed Layer-2 solutions enable new perspectives on blockchain scalability and can transform the industry by unlocking more applications and use cases. A Layer-2 protocol or framework is developed on top of an existing blockchain to improve transaction speed and fix other inherent problems that most crypto networks deal with.
Layer-2 technology is about the many solutions that can address scalability of blockchains. It provides tools to increase throughput on the blockchain and minimize congestion by offloading some transaction processing.
Bitcoin Lighting Network and Ethereum Optimistic Rollups
In this regard, Bitcoin Lighting Network and Ethereum Optimistic Rollups are some of the most notable examples. Bitcoin’s innovation refers to a second layer on top of the blockchain that allows transactions to be moved off-chain. As mentioned above, the switch can reduce the pressure on the system, thus relieving congestion.
This technology acts as a decentralized network of payment methods that enables cheaper and faster off-chain transactions, transforming it into a promising solution for scalability. The network can therefore handle thousands of TPS by creating this system, and becomes an essential solution for businesses that operate large transaction volumes.
Ethereum is not lagging behind and brings other solutions: Optimistic Rollups. These use the chain to verify transactions, but payments are made off-chain, making for more cost-effective and faster payments. This fact allows Ethereum to work through 2,000 TPS, an impressive leap from the current number, making it better suited for businesses that have high transaction throughput.
Layer-2 can take the industry by storm and spawn other use cases. Blockchain can access a wider range of applications in gaming, micropayments, retail and other industries. Implementation of such strategies can reduce transaction costs, increase appeal to users and expand the use of Ethereum as a payment method. Ethereum can buy many things, from cars to Starbucks coffee. Purchases made with crypto may become more common as the world gains crypto education, the industry fixes scalability issues, and more clarity surrounds the legal system regarding crypto.
Here is an example of scaling solutions enabled by the Ethereum network. Polygon, formerly called Matic Network, uses a Proof-of-Stake system and plasma chains to make transactions faster, cheaper and safer. It has become famous recently thanks to its capacity to reduce transaction costs and improve throughput on Ethereum. Given the scalable and flexible infrastructure, users can easily create decentralized apps (dApps). And considering how it might work with other crypto networks, it becomes an appealing bet for interoperability and cross-chain communication.
Interoperability and security issues
While L-2 can provide unparalleled benefits, these come packed with struggles and obstacles. Among the main existing challenges is that different L2 chains and their ledgers cannot work together. They need additional protocols and infrastructure to enable interoperability, which means that the L2 solution providers and the blockchain network must work together to create protocols that facilitate the required functionality.
In addition, the decentralization and security of the blockchain must be protected. L2 solutions can accommodate more security threats, making it imperative to create new protocols that approximate these features to protect network integrity. Multi-factor authentication, encryption and other measures must be used to prevent risks.
The potential of the Layer-2 technologies is to disrupt the industry and create new payment options that companies can implement to improve their internal operations. As blockchain becomes a more secure technology and gains ground, the world is becoming more educated about it and the crypto industry. Knowledge will remove doubt and skepticism around digital money, which can only lead to increased use of Ethereum and other digital tools, helping them advance globally and potentially have more support from the traditional financial systems.