In Search of Scaling: A Guide to Layer 2

Charles Yu | Research Associate | [email protected]@fullnodechuck

Alex Thorn | Head of Firmwide Research | [email protected]@intangiblecoins

Public blockchains are distributed databases with the ability to reach consensus between an untrusted set of participants without the involvement of intermediaries or central parties. To achieving trustless consensus, blockchain design has necessarily made sacrifices on other fronts, including scalability, when compared to centralized solutions. Ensuring that a blockchain’s nodes are widely distributed requires minimizing the burden on node operators, which necessitates limiting the amount of bandwidth, storage, and computation required to operate a node.

The two most important blockchains make different design decisions in this area. Bitcoin has optimized its development to create the most widely distributed node topology, while Ethereum has made some sacrifices in node operability to achieve additional scaling and functionality. Despite these different approaches, increased adoption of both networks has nonetheless necessitated demand for additional throughput and features that can’t be achieved on the main blockchain (the “base layer,” “main chain,” or “layer 1”) without accepting tradeoffs each community has deemed unpalatable.

Today, most agree that the most effective and sustainable path to scaling blockchains is to build other protocols atop the main chain in a layered approach, where higher-layer networks are introduced to increase functionality or throughput without compromising the fidelity of the base layer. This approach is favorable to expanding the footprint of the base layer feature-set because higher layers leverage the base layer’s settlement assurances and security without negatively impacting its decentralization. In some ways, this is akin to how the internet scales, with HTTP built atop TCP/IP, HTML written on HTTP, and so on. In this report, we examine several of the most prominent second layer (“layer 2” or “L2”) scaling solutions, covering their designs, trade-offs, use cases, levels of adoption, and prospects for the future.

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