What is a Layer-2 Token?

Layer-2 tokens, polygon

The Blockchain Trilemma discusses that the three desirable aspects of a blockchain should be decentralized, scalable and secure. With Layer-1 blockchain, scalability is often compromised. 

For instance, Ethereum being a Layer-1 blockchain has reached its maximum network capacity at 1+ million transactions a day. There is high demand for the Ethereum network and thus, gas prices have also increased drastically.

To counteract this, layer-2 solutions are brought in. 

What is a Layer-2 Token? 

Layer-2 tokens are native tokens of Layer-2 projects or networks. 

A Layer-2 network is a separate blockchain that extends the Layer-1 blockchain. This Layer-2 network helps with breaking down the processes that occur in the Layer-1 blockchain and helps with scaling. 

We can think of a Layer-1 blockchain as a biscuit factory. If one person handles the process from design, production to packaging and the factory needs to produce 100 million biscuits, it’s likely the process will not be completed in time.

Layer-2 networks are like separate machines that ease the process such as a machine for rolling the dough, cutting the biscuits into separate sizes and another for packaging. 

This makes the process more efficient. No one person is handling all the tasks alone. 

In the case of a network, Layer-1 blockchains handle all the aspects of decentralization, security and data availability. Layer-2 handles scaling related to transactions. 

In addition, Layer-2 tokens also help lower fees for transactions and provide higher transactions per second. They also focus on improving utility by improving user experience and expanding the range of applications for users. 

What Are The Types Of Layer-2 Solutions?

There are quite a few types of Layer-2 solutions out there suited for different needs. Here are a few you should know about: 

State Channels

A state-channel is like a two-way communication channel for participants. In this network, there is no need for a miner to verify the transactions. This improves efficiency of transactions within the network. 

Examples of state channels include Bitcoin’s Lightning Network and Ethereum’s Raiden Network

Rollups

Rollups perform transactions off the main blockchain. They are secured by the same layer-1 security measures. 

There are two kinds of rollups which are: 

Optimistic Rollups

These rollups sit parallel to the mainnet. After each transaction is completed, they submit the new state to the mainnet which certifies the transaction. 

This makes the process efficient and reduces gas fees. 

Examples of optimistic rollups include: 

Zero Knowledge Rollups

These networks bundle up a bunch of transactions off the mainnet and create a cryptographic proof known as SNARK (succinct non-interactive argument of knowledge). This proof is the validity proof needed. 

The data on the transactions can only be edited with the use of the validity proof. Since the proof is already approved by the rollup, the transactions can easily be moved from layer 2 to layer 1 thus making the transactions more efficient. 

Examples of zero knowledge rollups include: 

Plasma

A plasma network makes use of a child blockchain that uses the mainnet as a network of trust. The blockchain can be used to create specific use cases that may not be feasible on the mainnet. This blockchain assists the mainnet with transactions which helps it to scale as well. 

Real-Life Applications Of Layer-2 Solutions

Bitcoin Lightning Network

One of the best known Layer-2 solutions to have ever existed is the Lightning Solution for Bitcoin. It’s pretty well-known that Bitcoin handles transactions really badly at only 7TPS. Compare that to VISA at 24,000 TPS and you can see why Bitcoin needs an upgrade. 

In comes the Lightning Network!

This network takes transactions off the Bitcoin network and processes them off-chain before transferring them back to the mainnet. 

This network hopes to be able to provide instant payments, scalability, low costs and cross blockchain swaps. It is also said that the network will be able to process millions to billions of TPS which is significantly higher than VISA. 

The lightning network also promises to reduce transaction time from the average of 10 minutes with Bitcoin to milliseconds. 

Starkware

Starkware is an Ethereum scaling solution provider which offers three products: StarkNet, StarkEx and Cairo

StarkNet is a permissionless decentralized zero knowledge rollup type solution. 

Developers who use StarkNet are able to reach an infinite amount of scaling for dApps and still benefit from the security that Ethereum offers. 

StarkEx is a scalability engine and has customers from the likes of DeversiFi, Immutable and dYdX. Developers are able to design self-custodial dApps and robust ad secure scaling solutions. It is trustless and scalable using the ZK-STARK technology. 

Cairo is Starkware’s Turing language behind StarkNet and StarkEx. 

Final Thoughts On Layer-2 Tokens

Layer-2 solutions are essential for scaling Layer-1 networks which are already strong foundations for blockchains. Both work hand in hand to provide the user with the best experience when utilizing a blockchain. 

In most cases, blockchains are only able to overcome the blockchain trilemma by incorporating both layer 1 and layer 2 solutions. 

If you’re looking to buy some Layer-2 tokens, make sure you evaluate its use cases and how it works with its mainnet before taking the dive. Check out the list Coinranking has on Layer-2 tokens to know more about these tokens!

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