Layer 2 projects are becoming a key focus in the blockchain world. In 2024, these projects are set to drive the next wave of innovation.
It’s been a while since Bitcoin shed light on the vast possibilities of the crypto world.
Enthusiast have tried hard to improve the first generation of blockchain products, which led to hundreds of immensely interesting projects, including NFTs, meme coins and many more.
But Layer 2 projects seem to be the definitive force of the new age of crypto. Built on the shoulders of the giants, like Bitcoin and Ethereum, they are shedding light on what crypto may become in the near future.
Here’s a brief description on what Layer 2 projects are and a look at the top five Layer 2 projects that are leading the charge.
What is Layer 2?
Strictly speaking, Layer 2 is a secondary framework or protocol built on top of an existing blockchain system. As of now, the main blockchain protocol is referred to as Layer 1 (L1), while Layer 2 (L2) is an overlaying network. At first these overlaying networks were aimed to solve the transaction speed and scaling difficulties faced by major cryptocurrency networks like Bitcoin and Ethereum.
Then developers saw the unlimited abilities of L2 solutions. And the game went to a totally different level.
Why is Layer 2 Important?
Layer 2 solutions are crucial for several reasons.
- Scalability: As blockchain networks grow, they often face congestion issues. Layer 2 helps process transactions off the main chain, increasing the overall capacity of the network.
- Speed: By handling transactions off-chain, Layer 2 solutions can dramatically increase transaction speeds.
- Lower Costs: With reduced congestion on the main chain, transaction fees (gas fees in Ethereum's case) can be significantly lowered.
- Maintaining Decentralization: Layer 2 allows blockchains to scale without compromising on decentralization or security.
- Enabling New Use Cases: Faster and cheaper transactions open up new possibilities for blockchain applications, especially in areas like gaming and micro-transactions.
How Layer 2 Works
Layer 2 solutions typically work by taking transaction data off the main blockchain (off-chain) for processing, then returning it to the main chain for finalization.
This process can be done in various ways, including:
- State Channels: Parties can conduct multiple transactions off-chain and only settle the final state on the main chain.
- Sidechains: Separate blockchains that run parallel to the main chain and periodically sync with it.
- Rollups: Bundle multiple off-chain transactions into a single on-chain transaction.
Challenges and Future of Layer 2
While Layer 2 solutions offer significant benefits, they also face challenges:
- Complexity: Users and developers need to adapt to new systems and interfaces.
- Liquidity Fragmentation: Assets can be spread across different Layer 2 solutions.
- Interoperability: Ensuring smooth communication between different Layer 2 networks and the main chain.
Despite these challenges, Layer 2 solutions are seen as critical for the future of blockchain technology. As they mature, we can expect to see:
- Increased adoption by major DeFi (Decentralized Finance) projects
- More user-friendly interfaces that hide the complexity of Layer 2
- Improved interoperability between different Layer 2 solutions
- New innovative applications leveraging the speed and low cost of Layer 2.
Top 5 Layer 2 Project in 2024
Now with all that said, let’s take a look at seven Layer 2 projects that may alter the near future of the crypto market.
Arbitrum
Arbitrum has gained significant traction. Known for its speed and lower fees, it’s designed to scale Ethereum.
According to official info, Arbitrum can process transactions up to 10 times quicker than Ethereum’s mainnet. And thus it is able to save up to 95% on gas expenses.
What’s even more impressive is its peak throughput - 4,000 TPS.
Developers are flocking to it because it’s compatible with Ethereum's tooling.
Steven Goldfeder, CEO of Offchain Labs, highlighted, “Our mission is to make Arbitrum the go-to Layer 2 solution for Ethereum scaling.” The platform continues to see rapid adoption, with over $2 billion in total value locked (TVL) in early 2024.
At the moment, Arbitrum holds a more than 51% market share among Ethereum’s top Layer 2 crypto projects.
Optimism
Optimism has an optimistic name and quite a future as it may seem.
This Layer 2 project is another key player. It focuses on scaling Ethereum while maintaining decentralization.
How fast is Optimism? Oh it is fast. Optimism has a throughput of around 4,000 TPS. Just as fast as Arbitrum, as you can see. This means the Layer 2 platform can handle transactions up to 26x quicker than Ethereum’s mainnet.
But there is more to it. In addition, Optimism also reduces gas fees by 90%.
The force of nature himself, the one and only Vitalik Buterin has praised its innovative approach. “Optimism is critical to Ethereum’s future scalability,” Buterin stated.
The platform’s TVL stands at approximately $1.5 billion, and its ecosystem is expanding fast. The community-driven governance model is also a major draw for developers and users alike.
Polygon (Matic)
Polygon remains a major force in the Layer 2 arena. It uses a smooth combination of Plasma Chains and Proof-of-Stake (PoS) sidechains. This unique combination helps Polygon significantly improve transaction speed and reduces costs. And security levels remain among the highest possible on the blockchain.
Polygon has a phenomenal throughput of about 65,000 TPS.
Its multi-chain approach and unique interoperability has attracted a wide range of projects. Some people claim Polygon reflects the very soul of the DeFi space, easily supporting cross-chain transactions and interactions.
Polygon hosts some of the top DeFi protocols like Aave, Sushiswap, and a couple of other top NFT platforms. Sandeep Nailwal, co-founder of Polygon, mentioned, “We are building the internet of blockchains.”
Polygon’s TVL has exceeded $3 billion, making it one of the most widely adopted Layer 2 solutions.
Lightning Network
This one is a perfect choice for Bitcoin maximalists, like Michael Saylor or Jack Dorsey. Some people still believe that Bitcoin is the only ‚true crypo‘, whatever that means. But while Bitcoin is perfectly good for holding, sorry, HODLing, it is too slow for everyday usage.
Some people are making enormous efforts to fix that.
Lightning Network is basically a Bitcoin-focused layer2 platform with cheap transactions.
With a throughput of up to 1 million TPS, the Lightning Network makes it easy for anyone to use Bitcoin and at a lower cost. That’s when the hope of paying with BTC for your morning coffee or carwash becomes plausible.
The platform supports off-chain transactions using a network of bi-directional payment channels.
Thus, users can perform several microtransactions instantly without congesting the Bitcoin network. By settling transactions off-chain, the Lightning Network makes Bitcoin scalable and easier to use.
Wide adoption of the Lightning Network may change the crypto landscape significantly.
Immutable X
ImmutableX is a popular Ethereum Layer-2 blockchain for NFTs with high throughput and significant market share. It is built on Ethereum and focuses on NFTs and Web3 gaming experience, while offering zero gas fees for transactions. In fact, with minimal fees Immutable X allows for over 9,000 TPS, which makes it one of the fastest Layer 2 blockchain solutions.
The network is powered by IMX tokens, used for staking, governance participation, and paying fees, whatever small they might be.
On Immutable X, gamers benefit from quick transactions and miscellaneous games interoperability. Ownership of actual NFTs is also a great feature.
Developers enjoy low costs, easy-to-use tools, and a supportive community. Here on Immutable X, one can find utterly easy ways to create NFT projects.
Robbie Ferguson, co-founder of Immutable X, emphasized, “Our goal is to make NFTs accessible to everyone.” The platform has seen strong growth, with a TVL of over $700 million. Its partnership with major gaming companies highlights its potential.