If you are familiar with blockchain technology, you will know that it can record and verify transactions without the need of an intermediary and that they run on decentralized platforms. Layer 2 solutions have been created as an alternative to the limited amount of transactions that can fit into blocks.

In this article we will explore what L2s are, how they work, and their benefits.

What are Layer 2s?

Layer 2s are protocols that run outside of a cryptocurrency’s blockchain but depend on it. These solutions are often called second-layer protocols, off-chain protocols, scalability solutions, etc.

This means that users can make transactions at unparalleled speeds, without having to wait for block confirmations on the network to happen.

Most second-layer protocols are based on data anchoring, which links data between two chains. Users can execute transactions off the mainchain, but their data is still recorded on the mainnet. 

Some L2 protocols were also created for payment processing; by allowing users to make transactions at much lower fees. In other cases, the protocols use a mixture of these approaches to improve the performance and security of their blockchain network.

How do Layer 2s work?

Layer 2s optimize the performance of blockchains. These protocols allow users to perform transactions outside of main chains, as they do not require the same workload as mainnet transactions; hence, they can reduce payment-confirmation wait times.

This means that transactions can be processed much faster and at reduced costs.

Second-layer protocols also allow users to make transactions pegged to the mainchain. They’re smart contracts that users control to move money off-chain and back on-chain at a later point in the future.

Benefits of Layer 2 Protocols

L2 offers numerous advantages to users of blockchain technology. Here are some of the main benefits:

•  Better performance: They allow users to make transactions much faster than on the main chain, which translates into better network performance.
• Lower Fees: As mentioned above, second-layer protocols allow users to execute transactions with much lower fees.
• Increased privacy: Some L2 projects use zero-knowledge-proof mechanisms that allow users to transact with greater privacy, without having to disclose personal information.
• Scalability: Second-layer protocols also allow users to increase the scalability of the network by offering different tools that wouldn't be possible to perform on-chain.

Examples of L2 Protocols

There is a wide variety of L2 protocols available in blockchain technology. Here are some of the most popular protocols:

• Lightning Network: This is a second layer-based payment channel network that allows users to transact with much lower fees on the Bitcoin network.
• Polygon: This is one of the most used L2 in Ethereum because thousands of dApps have moved to its network thanks to its speed and low commissions.
• Raiden Network: The Raiden Network is a second-layer solution based on data anchoring. This network allows users to transact with greater security and scalability on the Ethereum network.
• Plasma: Plasma is a second-layer protocol based on payment processing. This solution allows users to transact with much lower fees on Ethereum.

Layer 2 solutions are a way to optimize the performance of blockchain technology. These solutions generally allow users to carry out transactions with incredible speed, privacy, scalability, and last but not least, they also allow users to carry out transactions with much lower fees.

At El Dorado we are building the most accessible and easy-to-use P2P marketplace for Bitcoin and stablecoins, and we recognize the importance of second-layer solutions to onboard the next billion people into crypto. 

If you have questions, would like to learn more, or are simply interested in crypto visit our blog.