Blockchain has undergone continuous transformations since its inception, and its expansion shows no signs of ceasing. It enabled many things that would have seemed impossible several decades ago, like the possibility of creating an account on a crypto exchange to buy Ethereum with a credit card and broaden your investment portfolio. According to Statista, global spending on related solutions is estimated to reach approximately 19 billion USD by 2024. As studies show, the myriad advantages brought by this revolutionary technology don’t pass under the radar for companies looking to improve their internal operations. Blockchain shook the business world, with global business leaders like Tesla and Lóreal jumping on the bandwagon and implementing blockchain strategies in their organizations to profit from improved security, enhanced transparency, data traceability, and other benefits.
However, as corporate interest in this technology is growing, more needs to be done to solve scalability issues, which may halter its mainstream adoption. The more utilized the blockchain network grows, the higher the necessity to create scalable Layer-2 solutions.
While the advantages of blockchain are undeniable, it also brings several challenges. Its scalability limitations, whether 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 acknowledged these limits and explored ways to overcome them, reduce fees, and improve transactions. This is how the Layer-2 solutions came into existence, possibly solving the inherent scalability problems. But is it enough to stimulate the adoption of Ethereum, Bitcoin, and other cryptocurrencies? Let’s dive into the topic to understand more before reaching conclusions.
What are the scalability issues?
Scalability, one of the significant obstacles blockchain faces, is critical in the crypto industry. It refers to the capacity to manage many transactions fast, increasing their speed and making blockchain appealing to more potential users. However, this term may be subject to modifications as it has various interpretations. But in short, it is linked with the transaction speed and emphasizes the need for it to grow. Widely-known blockchain networks like Ethereum and Bitcoin use a single-layer system which poses limitations regarding the number of transactions per second (TPS) that can be processed, thus leading to slowing the transaction capacity and increasing the fees incurred when it’s in high demand. Therefore, blockchain-related solutions are challenging to find their way into a business’ payment strategy, especially regarding retail transactions.
What are Layer-2 technologies?
The highly endorsed Layer-2 solutions enable new perspectives on blockchain scalability and may transform the industry by unlocking more applications and use cases. A Layer-2 protocol or framework is developed on an existing blockchain to improve the transaction speed and fix other inherent issues that most crypto networks deal with.
Layer-2 technology is about the numerous solutions that can address blockchain scalability. It provides tools to boost 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 noteworthy examples. Bitcoin’s innovation refers to a second layer on top of its blockchain that permits transactions to be moved off-chain. As mentioned above, the switch can reduce the pressure on the system, thus alleviating congestion.
This technology works as a decentralized mesh of payment methods that enables cheaper and quicker transactions outside the chain, transforming it into a promising solution for scalability. The network can, therefore, handle thousands of TPS by creating this system, becoming an essential solution for businesses that operate high volumes of transactions.
Ethereum doesn’t lag and brings other solutions: the Optimistic Rollups. These use the chain to verify transactions, but payments are done off-chain, providing more cost-effective and quicker payments. This fact allows Ethereum to work through 2.000 TPS, an impressive leap from the current number, making it a better fit for businesses dealing with high transaction throughput.
Layer-2 can take the industry by storm and give birth to other use cases. Blockchain may access a broader range of applications in gaming, micropayments, retail, and other industries. Implementing such strategies may cut transaction costs, boosting its appeal to users and expanding the adoption 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’s an example of scaling solutions enabled by the Ethereum Network. Polygon, previously called Matic Network, uses a Proof-of-Stake system and Plasma chains to make transactions quicker, cheaper, and safer. It has risen to fame recently thanks to its capacity to reduce transaction costs and improve throughput on Ethereum. Given the scalable and flexible infrastructure, users can effortlessly create decentralized apps (dApps). And considering how it can work with other crypto networks, it becomes an appealing venture for interoperability and cross-chain communication.
Interoperability and security issues
While L-2 can provide unparalleled advantages, these come packed with struggles and hurdles. Among the main existing challenges is that different L2 chains and their ledger can’t work together. They need extra protocols and infrastructure to enable interoperability, meaning the L2 solution providers and the blockchain network must work together to create protocols that facilitate the needed feature.
Additionally, the decentralization and security of the blockchain must be sheltered. L2 solutions may make room for more security threats, making it crucial to create new protocols approaching these features to protect the network’s integrity. Multi-factor authentication, encryption, and other measures must be used to prevent risks.
The potential held by Layer-2 technologies is to disrupt the industry and create new payment options that businesses can implement to improve their internal operations. As blockchain becomes a more secure technology and gains ground, the world becomes more educated about it and the crypto industry. Knowledge will remove doubts and skepticism surrounding digital money, which may only lead to increased adoption of Ethereum and other digital tools, helping them advance globally and potentially have more support from the traditional financial systems.