Ethereum is considered by many to be the most important blockchain in the cryptocurrency space. It spearheaded numerous innovations in the crypto space, including initial coin offerings (ICOs), decentralized finance (DeFi), non-fungible tokens (NFTs), and more. Thanks to its contribution to the growth of the crypto market, Ethereum is held in high regard.
Scalability Issues for the Rapidly Expanding Network
However, a major problem with the Ethereum network is the lack of scalability and the high network fees attached to using the blockchain. This led to the rise of Layer 2 solutions, which are designed to make it easier for people to scale their operations on the Ethereum blockchain and reduce the fees involved.
The problem here is that the Ethereum network is migrating to a proof of stake protocol. With the launch of ETH 2.0, the Ethereum blockchain is expected to solve some of the problems, such as scalability and high network fees. If or when that happens, what would be the fate of the Layer 2 solutions and their tokens? Would they become obsolete, or will they still be relevant in the cryptocurrency market?
Layer 2 Networks – What Are They?
Second layer solutions or Layer 2 are designed to provide all or most of the features and security of their underlying network without using it. They could also use it in a different way. These solutions are designed to relieve the Ethereum blockchain of congestion in the short term. In the long term, the solution helps keep the Ethereum network free of unnecessary transaction history.
The L2 solutions are complex and tough to develop since they are working hard to ensure users enjoy both security and convenience. With blockchain networks, each transaction is safe since they are recorded on an immutable ledger. The situation is different with the Layer 2 solutions because they bypass this constraint. The L2 solutions make it easier for people to conduct transactions.
While Layer 2 solutions are popular on the Ethereum network, they didn’t start there. Bitcoin, the world’s leading cryptocurrency, also experienced network congestion and scalability issues prior to the development of SegWit. The SegWit is a Bitcoin hard fork that changed the rule, making it possible to fit more transactions in a single block.
For the Ethereum network, we have numerous Layer 2 solutions, such as the Matic Network. Matic builds on the Plasma project and is focused on providing Ethereum users with an alternative proof of stake blockchain. The Matic network serves as a checkpoint between the two blockchains. This enables the users to enjoy a cheaper, faster, and higher volume of transactions per second on the Matic blockchain, which is then settled on the Ethereum blockchain.
The layer two solutions have become very popular within the decentralized finance (DeFi) space. Several DeFi applications are hosted on the Ethereum network, and since the blockchain is still struggling with congestion and scalability issues, L2s have made it easier for these DeFi platforms to scale their activities and ensure more people can gain access to their services.
Ethereum 2.0 is Coming. Is it a Threat to Layer 2 Solutions?
One of the biggest developments in the cryptocurrency space is ETH 2.0. The Ethereum blockchain is migrating from a proof of work protocol to a proof of stake. This means that Ethereum would no longer be mined. Instead, the network would work based on a staking method.
The migration to a proof of stake protocol is expected to make the Ethereum network faster, less congested, more environmentally friendly, and more scalable. The biggest question remains the future of the Layer 2 tokens once ETH 2.0 goes live.
These solutions might still be around even when Ethereum 2.0 goes live. The Layer 2 solutions might still exist since, similar to Bitcoin, ETH 2.0 might not provide infinite scalability. The Ethereum network is considered by many to be the most important blockchain in the cryptocurrency space, and this means it might only get bigger. The Ethereum blockchain could host more projects over the coming years than any other network, and the scalability it would offer would not be infinite. Hence, this means that the Layer 2 solutions might still be in use. However, their use on the Ethereum network might not be as much as they are currently used.
Furthermore, the L2 solutions are not exclusive to the Ethereum blockchain. Some of these layer two solutions are designed to provide their services across multiple blockchains in the future. They are also working on enabling decentralized cross-blockchain transfers.
While the world is waiting for ETH 2.0, the development process has taken longer than most people expected, and the DeFi ecosystem is growing at a faster rate than any other sector of the cryptocurrency industry.
Most people regard ETH 2.0 solution as the long-term solution that would ensure stability on the Ethereum network and bring about scalability. However, the Layer two solutions might still be very useful within the cryptocurrency space, especially those that broaden their function to move beyond the Ethereum ecosystem.