What are Layer 2 solutions?

Layer 1 and Layer 2 solutions challenge the blockchain trilemma

Faster transactions and lower transaction costs nevertheless paired with security - Blockchain technology must also face these challenges. The issue of scalability - the ability of a system to handle an increasing number of transactions or users without negatively impacting its performance, speed, or reliability - keeps developers and innovators in the crypto world on their toes.

Fortunately, in the rapidly advancing world of blockchain technologies, you don't have to wait long for the first solutions to serve the problem.

To overcome these challenges, solutions have been introduced at two levels (layers). These solutions aim to improve the performance and efficiency of the blockchain network while maintaining its security and decentralization.

What are Layer 1 and Layer 2 solutions and what do they do? 

A Layer-1 solution builds on the first layer of a Layer-1 blockchain and modifies its transaction processing, security elements, or decentralization. Layer-1 solutions are designed to operate at the base level of the blockchain and are typically implemented using consensus algorithms such as Proof-of-Work (PoW), Proof-of-Stake (PoS), and Delegated Proof-of-Stake (DPoS). The goal; to improve basic functions of blockchains to ensure they are secure, decentralized, and reliable.

The scalability issue is addressed with Layer 2 solutions without compromising existing security and decentralization.

Layer 2 solutions are technologies that build on the second layer of the Internet protocol stack (Layer 2) and make it possible to increase the scalability, speed and efficiency of blockchains. They are also referred to as "off-chain solutions" because they execute certain transactions and processes outside of the actual blockchain. Second layer solutions can be implemented in a variety of ways, including as state channels, sidechains, and plasma.

  • State Channels enable off-chain transactions between two parties without involving the base layer of the blockchain network. State channels enable fast and low-cost transactions while maintaining the security and decentralization of the network.
  • Sidechains are separate blockchain networks that are connected to the base layer of the main blockchain network and enable higher scalability and transaction throughput.
  • Plasma is a framework for creating scalable and secure blockchain networks that can be connected to the main blockchain network.

Both layer 1 and layer 2 solutions have their advantages and disadvantages. First-tier solutions are more decentralized and secure, but have limited scalability and can only process a certain number of transactions per second. Second-tier solutions, on the other hand, can process a much larger number of transactions per second, allowing for greater scalability and transaction throughput, but often rely on trusted intermediaries that can compromise the decentralized nature of the system.

Coinbase creates excitement with its own layer 2 blockchain 

In terms of (trading) volume, Coinbase (CB) is the second largest crypto exchange. The new project "Base" has now launched its own Layer 2 blockchain on Ethereum to optimize speed and cost. Technically implemented, this is achieved with Optimistic Rollups, which collect hundreds of transactions and feed them into Ethereum (Layer 1) as one transaction. CB's goal is to create a platform for decentralized applications (DApps) that will be made available to its 110 million users.

Base is designed as a bridge that provides a user-friendly standard onchain experience and access to product chains on other platforms. It remains to be seen whether regulators will not further investigate decentralized platforms with centralized players. In addition, the company shared that there are no plans to launch its own token. Coinbase obviously wants to offer the SEC as little attack surface as possible.

We are excited to see more Layer 2 solutions!


Although we have made every effort to carefully research and verify the information in this article, the blog posts are neither an offer nor a solicitation to buy or sell investment or other specific products and cannot substitute for personal advice from a financial, legal and/or tax advisor. The content in this post is for general information purposes and therefore does not constitute investment advice. No liability can be accepted for decisions made on the basis of information in this blog post.

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