Blockchian technology has come a long way since its inception in 2008. What started with the vision of a “viable alternative to fiat currencies” has developed to now power a diverse range of applications. 

The earliest cryptocurrencies, which were built on the blockchain, Ethereum and Bitcoin, made history as the pioneers of foundational Layer-1 networks. However, as crypto started gaining traction, they experienced some setbacks with throughput and transaction processing speed compared to traditional systems. 

As a solution to the challenges faced by layer-1 blockchains, layer-2 technologies were developed to expand their capabilities. 

In this article, we’ll cover everything you need to know about layer-2 networks. Also, we’ll be providing an expertly vetted list of the most promising Layer-2 projects that are worth exploring.

How Do Layer-2 Networks Work?

Before you can fully grasp how layer-2 networks work, first you have to learn the history of layer-1 networks and the “blockchain trilemma.” This knowledge is crucial because it will help you understand how all that led to the development of layer-2 solutions.  

So, what are layer-1 networks? 

Here's a simple analogy to help you understand the concept better: Layer-1 networks are to blockchain technology what the ground floor is to a building. 

According to Binance Academy, “Layer 1 refers to a base network, such as Bitcoin, BNB Chain, or Ethereum, and its underlying infrastructure. These blockchains can validate and finalize transactions without the need for another network.”

However, as layer-1 networks became more popular, users started having issues with the technology’s ability to handle high traffic. The only solution was to scale these networks, but that revealed another fundamental problem with layer-1 blockchains’ design—called the "blockchain trilemma.” 

Luca Von Wyttenbach, a co-founder of Polimec Protocol, explains this blockchain trilemma in his post on X, which is shown below. 

Now that you understand what L1 blockchains are about, let’s explain what layer-2 networks are and how they solve the blockchain trilemma. 

Chainlink defines layer-2 solutions as “any off-chain network, system, or technology built on top of a blockchain (L1 network) that helps extend the capabilities of the underlying base layer network.”

The mechanism behind this scaling solution is that the primary blockchain gets to transfer some of its transactional load to the auxiliary system. This allows the base-layer blockchain to reduce congestion on its networks, improving its scalability.

An example of a successful relationship between a layer-1 and layer-2 network is the case of Bitcoin and Lightning Network. In this case, Lightning Network helps to accelerate transaction speeds within the Bitcoin ecosystem. 

Benefits of Layer-2 Solutions

In addition to the trilemma problem that layer-2 blockchains solve, there are many key benefits L2 networks provide. These include:

  • Enhanced Transaction Throughput: By processing transactions off-chain, Layer-2 solutions can significantly increase the number of transactions handled per second compared to the main blockchain. 
  • Lower Transaction Costs: One of the most appealing aspects of Layer-2 solutions is their ability to reduce gas fees associated with on-chain transactions. 
  • Faster Transaction Finality:  Transactions conducted off-chain can achieve near-instant finality, which greatly enhances the user experience. 
  • Increased Privacy: Certain Layer-2 solutions, like state channels, offer improved privacy by keeping transaction details off-chain. Only the final state is recorded on the main chain, which helps protect sensitive information while still ensuring transparency and security.

Key Types of Layer-2 Technologies

L2 networks have undergone various stages of advancement, which have led to the development of different types of this technology. Here’s a closer look at some of the key types of Layer-2 solutions:

Optimistic Rollups

Optimistic rollups are a widely adopted scaling solution for Ethereum's Layer-2 ecosystem. They operate on the assumption that transactions are valid unless proven otherwise. This approach significantly reduces verification costs and accelerates transaction processing, making it an attractive option for developers and users alike.

Zero-Knowledge Rollups (zkRollups)

Zero-Knowledge Rollups, or zkRollups, bundle multiple transactions into a single proof, enhancing both privacy and efficiency. This technology is characterized by its ability to maintain user confidentiality while ensuring high scalability. 

Additionally, zkRollups impose minimal computational demands on the blockchain, making them particularly popular in decentralized finance (DeFi) and non-fungible token (NFT) applications.

Plasma Chains

Plasma chains are specialized Layer-2 networks that function as sidechains connected to the Ethereum mainnet. They provide faster transaction speeds and lower fees compared to traditional methods, offering a unique alternative to rollup-based solutions. 

By offloading some of the transaction load from the main chain, plasma chains help alleviate congestion and improve overall network performance.

Validium

Validium is another innovative Layer-2 scaling technology that processes transactions off-chain while ensuring security through cryptographic proofs. This method allows for high scalability without sacrificing security, making Validium ideal for applications that prioritize speed and throughput.

State Channels

State channels enable participants to engage in multiple off-chain transactions through private channels until they reach a final agreement. 

Once the agreed state is established, it is recorded on the main blockchain. This mechanism is particularly beneficial for applications requiring frequent interactions—such as payment networks and gaming platforms—because it enhances efficiency and significantly reduces on-chain transaction costs.

Sidechains

Sidechains are independent blockchains that operate alongside a primary blockchain, allowing users to execute transactions with faster confirmation times and lower fees. They serve as alternative platforms for conducting transactions and deploying smart contracts, helping to alleviate congestion on the main blockchain. 

Projects like Plasma and OmiseGO are actively developing sidechain solutions aimed at improving scalability for platforms such as Ethereum.

Best Layer-2 Projects to Watch

Now, let’s look at some of the hottest Layer-2 projects to add to your watchlist.

Arbitrum

  • Throughput: 2,000-4,000 TPS
  • Total Value Locked (TVL): $10.7 billion
  • Market Cap: $2.37 billion+
  • Technology: Optimistic Rollup

Arbitrum stands out as a developer-friendly Layer-2 network for Ethereum, achieving a peak throughput of 4,000 transactions per second (TPS). This impressive speed makes it up to ten times faster than Ethereum's mainnet while simultaneously reducing gas fees by as much as 95%. 

As of January 2024, Arbitrum commands over 51% of the market share among Ethereum Layer-2 networks based on TVL, supporting a diverse array of decentralized finance (DeFi) protocols, NFT marketplaces, and gaming platforms. 

The ARB token associated with Arbitrum serves multiple functions, including covering transaction fees, staking, and participating in network governance. This token leverages the security of Ethereum's mainnet as an L2 solution. 

Optimism

  • Throughput: 2,000 TPS
  • TVL: $5.5 billion
  • Market Cap: $3 billion+
  • Technology: Optimistic Rollup

Optimism utilizes Optimistic Rollups to enhance Ethereum's scalability without compromising security. It can achieve peak throughput of 4,000 TPS, processing transactions up to 26 times faster than Ethereum's mainnet and reducing gas costs by up to 90%. 

The Optimism community is committed to self-governance and fosters a rich ecosystem that includes various DeFi protocols, NFT marketplaces, and decentralized autonomous organizations (DAOs).

With its developer-friendly environment and accessible tools, Optimism attracts a collaborative community. The OP token plays a vital role in transaction fees, staking, and governance. However, users should remain aware of the inherent risks associated with utilizing the Ethereum mainnet and the ongoing need for careful monitoring during its decentralization process. 

Nevertheless, Optimism's dedicated team and engaged community are continually enhancing its technology and ecosystem, positioning it as a leader in the Layer-2 space.

Lightning Network

  • Throughput: Up to 1 million TPS
  • TVL: $198 million+
  • Market Cap: Not Available
  • Technology: Bi-directional payment channels, Smart contracts

The Lightning Network offers an off-chain solution designed for faster and more cost-effective Bitcoin microtransactions. It enables near-instant transaction confirmations with significantly lower fees while addressing scaling challenges. 

Polygon

  • Throughput: 65,000 TPS
  • TVL: $4 billion
  • Market Cap: $7.5 billion+
  • Technology: zk Rollup

Polygon is a multichain ecosystem that enhances Ethereum's scalability through faster transactions and reduced gas fees. Utilizing zkRollups alongside Proof-of-Stake consensus mechanisms, Polygon achieves an impressive throughput of over 65,000 TPS. This makes it particularly well-suited for DeFi applications and NFT marketplaces due to its low transaction costs.

Polygon seamlessly integrates with Ethereum and other blockchains. Its thriving ecosystem includes popular DeFi protocols like Aave, SushiSwap, and Curve, as well as leading NFT marketplaces such as OpenSea and Rarible. The platform's developer-friendly tools attract innovative projects and contribute to its high TVL among Layer-2 networks.

StarkNet

  • Throughput: 2,000-4,000 TPS
  • TVL: $164 million
  • Market Cap: Not Available
  • Technology: zk Rollup

StarkNet employs STARK proofs for off-chain transaction validation, enabling millions of transactions per second while significantly lowering fees. This approach makes blockchain interactions nearly cost-free. 

StarkNet offers a developer-friendly environment with powerful tools and utilizes Cairo as its programming language. With aspirations for full decentralization, StarkNet supports a growing ecosystem of innovative decentralized applications (dApps) across various sectors including DeFi, NFTs, and gaming.

While StarkNet's cryptographic nature may be intimidating for newcomers, it's important to recognize that the platform is still evolving and has a smaller user base compared to more established Layer 2 solutions. Users may need to adapt to ongoing upgrades and potential changes as the platform matures.

Loopring

  • Throughput: 2,000-16,000 TPS
  • TVL: $73.4 million
  • Market Cap: $339.55 million
  • Technology: zk-Rollup

Loopring is a decentralized trading and payment protocol built on the Ethereum blockchain, designed to significantly enhance transaction speed. With a throughput capacity ranging from 2,000 to 16,000 transactions per second (TPS), Loopring allows trades to be settled in mere seconds—often without requiring confirmation from the Ethereum network. 

By utilizing layer 2 rollups, it provides a rapid and low-cost alternative that ensures high performance and scalability while maintaining Ethereum's robust security.

zkSync

  • Throughput: 100,000 TPS+
  • TVL: $1.56 billion
  • Market Cap: $858 million+
  • Technology: zk-Rollup

zkSync is a prominent layer-2 blockchain solution for Ethereum that employs zk-rollups for scaling. It achieves an impressive throughput of over 100,000 TPS, with a total value locked (TVL) of $1.56 billion and a market cap exceeding $858 million. 

Additionally, zkSync aggregates multiple transactions off the Ethereum mainnet and submits proofs of these transactions back to Ethereum. This batching process enhances efficiency by allowing hundreds of transactions to be verified simultaneously. 

The zero-knowledge proof systems utilized by zkSync ensure cryptographic security without revealing transaction details, embodying a "trust me on this" philosophy. 

Immutable X

  • Throughput: 9,000 TPS+
  • TVL: $169 million
  • Market Cap: $2.51 billion+
  • Technology: Validium

Immutable X is a Layer 2 network focused on enhancing the Web3 gaming experience. It supports more than 9,000 TPS, holds a TVL of $169 million, and has a market capitalization of over $2.51 billion. 

Powered by Validium technology, Immutable X delivers fast, affordable, and secure transactions with minimal fees—over 4,000 TPS can be processed efficiently. The network utilizes IMX tokens for staking, governance participation, and fee payments. 

Gamers benefit from swift transactions, true ownership of NFTs, and game interoperability, while developers enjoy low costs and user-friendly tools within a supportive community. 

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