THEMATIC REPORT ON LAYER 2

Layer 2

‘Ready layer 2’

  • Layer 2 is often referred to as an “off-chain” solution for blockchains. Its main purpose is to scale blockchain transaction capacity.
  • Layer 1 blockchain networks, like Bitcoin and Ethereum, face inherent scaling limitations. Ethereum processes roughly 15–20 transactions per second (compared to Visa with several thousand transactions per second).
  • Solving the scalability problem helps blockchains get ready for mainstream adoption.

Background

  • Bitcoin and Ethereum are not able to process thousands of transactions per second.
  • Bitcoin is often referred to as digital gold. The settlement of physical gold, like bitcoin is a slow and expensive process. With a little bit of human creativity, gold certificates emerged as an easier, more flexible way to transact — forming an additional layer.
  • The dollar, bank transactions, credit cards, are all layers upon the base layer money. That base layer was physical gold until 1929 when Australia left the gold standard due to an emergency measure during the Great Depression. ‘Fiat’ the Latin term used to express authoritative order, is now our legal tender that derives its value not from a scarce physical commodity but from our trust in governments.
  • The concept of layered money is not new in monetary history. The base layer of a monetary system does not need to have the fastest transaction speed, but it needs to serve as a final settlement layer.
  • Hal Finney (renowned cryptographer and Bitcoin pioneer) stated;
  • Layer 2 is a collective term for solutions built on top of an existing blockchain system with the main goal to solve transaction speed and scaling difficulties.

How does layer 2 work?

Current State of Scaling Solutions for Ethereum

Source: Delphi Digital
Source: Delphi Digital

Rationale for Layer 2

References

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