Layer 2s: The Solution to Cryptocurrency Scalability

Barriers Facing Blockchain Networks

Blockchain networks are facing challenges due to the increasing demand for block space. As more users join the network, the volume of transactions grows, leading to congestion and slower processing times. This also results in higher costs for users.

Joel Hugentobler, a Cryptocurrency Analyst at Javelin Strategy & Research, explains that blockchain networks are trying to solve these scalability issues. However, they face what is known as the blockchain trilemma, which involves finding a balance between decentralization, security, and scalability.

Layer 2s Defined

Layer 2 refers to a solution that is built on top of the original blockchain to enhance scalability and performance. It is a separate protocol that can be directly implemented on top of the blockchain or as a separate function of a base layer. The main role of Layer 2 is to free the base layer from additional tasks and keep it from becoming congested.

Risk Inherent to Layer 2s in Traditional Business Models

While Layer 2s offer a solution to scalability, there are risks involved, especially when integrating them into traditional business models. Users may face difficulties in withdrawing their funds or even lose them if the solution is not implemented properly. Additionally, integrating Layer 2s into existing business infrastructure can be complex. There are also calls for government regulation to protect consumers.

Companies and developers considering the adoption of Layer 2s should carefully evaluate these risks as potential barriers.

Looking Ahead

Research shows that Layer 2 protocols, such as the Lightning Network, have experienced significant growth in transaction volume since 2018. This indicates the direction in which Layer 2s are heading. More businesses and merchants are accepting bitcoin payments using Layer 2 solutions like the Lightning Network.

To learn more about how Layer 2s can address blockchain issues and the barriers associated with implementing them for businesses, click here.