Layer 2 Protocols: a solution to improve blockchain scalability

Market Insights Apr 15, 2021

Although public blockchains, such as Ethereum, offer great potential and applications as an alternative to traditional finance, they are still facing hurdles in terms of scalability, i.e. the capability of processing a growing amount of transactions. They also suffer historic high fees, also referred to as gas fees due to the huge growth of decentralised apps.

To tackle this fundamental issue, scaling solutions have been built either into the blockchain itself (layer 1, L1) or on top of it (layer 2, L2).

In L1 solutions, the main blockchain is amended to make it more efficient. Ethereum, for example, is currently going through a consensus protocol change, moving away from proof of work (PoW) protocol in favour of proof of stake protocol (PoS). The PoW protocol, also in use with Bitcoins, can be very slow. As a matter of facts, Bitcoin only manages 7 transactions per second, while Ethereum can only manage 15–20 on a good day. You can read more about the PoS consensus here.

L2 protocols, also designed to solve the transaction speed and scaling difficulties faced by the major cryptocurrency networks, are built on top of an existing blockchain system. They are referred to as a secondary framework and their processes take place independently from the main chain. L2 solutions do not change the base protocol, but rather built on top of it to take some strain off the base. They provide various types of solution: some scale payment, some scale smart contracts, some do computation off chain...while retaining the benefits provided by the main chain, i.e. security and finality.

L2 solutions improve both transaction speeds and throughput while reducing gas fees.

When a second layer is added as an extra layer, a great portion of the work that would have been performed by the main chain can be moved to the second layer. As such, L2 solutions have the potential to achieve high throughput without sacrificing network security. So, while the main chain provides security, the second layer offers high throughput, being able to perform hundreds, or even thousands, of transactions per second. Some L2 solutions like state channels, and particularly Lightning Network (payment protocol operating on bitcoin), allow to conduct multiple microtransactions without wasting time with miner verification and paying unnecessary transaction fees.

L2 popular solutions: Matic and Skale Network

L2 protocols are key to Ethereum scalability and many solutions are getting traction, with some of the most famous ones being Matic and Skale Network.

Matic is a standalone PoS sidechain, the flagship product of the project Polygon. The scaling technology uses an adapted version of Plasma, a framework allowing the creation of side blockchains with Ethereum blockchain as a trust and arbitration layer. The side chains can be configured to match the demands of specific applications, further improving efficiency and throughput.

Skale Network is an elastic blockchain network composed of many Skale chains connected to the Ethereum Network. Using Skale, developers can configure their own application specific blockchain and deploy a scalable Ethereum-compatible Dapp, without compromising on security or decentralization.

Trakx’ indices with L2 constituents

Trakx offers various types of digital assets indices and some of them, Top 10 DeFi, Decentralised Exchanges have L2 constituents, such as Loopring, or Ren.

Loopring is an open protocol that leverages on ZK Rollups[1] for building high-performance decentralised exchanges on Ethereum. Again, it enables the building of highly scalable exchanges without compromising Ethereum-level security guarantees. As proof of concept, Loopring has created a Decentralised Exchange that achieves 2,000+ transactions per second. Recently, Loopring unveiled gasless transfers from L2 to L1 environments, which will allow users to transfer assets from Loopring L2 accounts to any Ethereum L1 wallet, without being constrained anymore to only transact with other L2 protocols.

Ren, formerly known as Republic Protocol, is an open protocol that enables the permissionless and private transfer of value between any blockchain, bringing interoperability to decentralised finance (DeFi).



[1] ZK Rollup (Zero Knowledge Rollup) is a relatively new L2 scaling technology using cryptography so that one entity can prove to another identity that they have the knowledge of particular information without revealing the information itself. Then the Rollup method consists in processing hundreds of side chain transactions offline with only a single hash of the side chain block being included in the main blockchain.




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Caroline Jacquard

Seasoned marketing manager with 15+ years of experience in the financial industry: traditional finance, alternative investment and digital assets. Advisor @trakx.io