Plasma solutions use Merkle trees to create an additional chain to the main blockchain. It also takes time to set up channels between users, so doesn’t allow for much open participation.Ĭhannels come in two forms: state channels and payment channels.Įxamples of channels include Connext and Raiden. That means the network needs to be regularly monitored to ensure that the funds are safe. Participants need to be known in advance, and they’re also required to deposit funds into a multisig contract. This allows for high throughput at a low cost, however there are limitations. Examples of Layer 2 solutionsĮthereum’s Layer 2 solutions fall under several categories, and each one differs in its approach to making the network more scalable.Ĭhannels offer users a way of making multiple transactions off-chain, while submitting only two transactions to the settlement layer, i.e. In some cases, they can process thousands of transactions per second, which will be needed if Ethereum is to achieve wider adoption. Layer 2 solutions offer a way of increasing transaction speeds and scaling, while benefiting from the security of the main chain. It’s the settlement layer for all transactions on the network. Like Bitcoin, Ethereum can be thought of as a Layer 1 protocol. Layer 2 is what gets built on top of the base chain in order to improve scalability. And with Etheruem usage peaking at around 1 million transactions daily, it needs other solutions today. It’s hoped that Ethereum 2.0 will improve scalability, but it will still be some time before the upgrade is complete. While there are ways of improving transaction speeds by using more powerful nodes, this approach compromises on decentralisation. This has caused a number of issues: the network often gets congested, sometimes pushing gas fees to extreme highs.īlockchains should be scalable, secure and decentralised. What is Layer 2?Įthereum has created a financial system unlike anything the world has seen before, but it suffers from some well-documented problems.Įthereum in its current iteration processes around 15 transactions per second. For our latest Understanding DeFi guide, we wanted to detail how they work for the community, along with some examples of the solutions that are being developed today. We’ve spent a lot of time researching them in regards to our own offering, and we’re closely linked with Layer 2 projects like Polygon (formerly known as Matic). Layer 2 solutions have an important role to play in improving scaling. Layer 2, meanwhile, is the framework that gets built on top of the blockchain. Blockchains like Bitcoin and Ethereum are often described as “Layer 1” chains because they settle every transaction on their network. Crypto natives often talk about blockchains in terms of “Layer 1” and “Layer 2”, but to understand what they mean, it’s worth explaining from the base point. If you follow DeFi closely, you’ve probably come across the term “Layer 2”.
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