Layer-2 Scaling Solutions
Layer-2 refers to a network or technology that operates on top of an underlying blockchain protocol to improve its scalability and efficiency. This category of scaling solutions entails shifting a portion of a blockchain protocol’s transactional burden to an adjacent system architecture, which then handles the brunt of the network’s processing and only subsequently reports back to the main blockchain to finalize its results. By abstracting the majority of data processing to auxiliary architecture, the base layer blockchain becomes less congested — and ultimately more scalable.
For instance, Bitcoin is a Layer-1 network, and the Lightning Network is a Layer-2 solution built to improve transaction speeds in this fashion on the Bitcoin network. Other examples of Layer-2 solutions include:
A nested blockchain is essentially a blockchain within — or, rather, atop — another blockchain. The nested blockchain architecture typically involves a main blockchain that sets parameters for a broader network, while executions are undertaken on an interconnected web of secondary chains. Multiple blockchain levels can be built upon a main chain, with each level using a parent-child connection. The parent chain delegates work to child chains that process and return it to the parent after completion. The underlying base blockchain does not take part in the network functions of secondary chains unless dispute resolution is necessary.
The distribution of work under this model reduces the processing burden on the main chain to exponentially improve scalability. The OMG Plasma project is an example of Layer-2 nested blockchain infrastructure that is utilized atop the Layer-1 Ethereum protocol to facilitate faster and cheaper transactions.
A state channel facilitates two-way communication between blockchain and off-chain transactional channels and improves overall transaction capacity and speed. A state channel does not require validation by nodes of the Layer-1 network. Instead, it is a network-adjacent resource that is sealed off by using a multi-signature or smart contract mechanism. When a transaction or batch of transactions is completed on a state channel, the final “state” of the “channel” and all its inherent transitions are recorded to the underlying blockchain. The Liquid Network, Celer, Bitcoin Lightning, and Ethereum's Raiden Network are examples of state channels. However, state channels sacrifice some degree of decentralization to achieve greater scalability.
A sidechain is a blockchain-adjacent transactional chain that’s typically used for large batch transactions. Sidechains use an independent consensus mechanism — i.e., separate from the original chain — which can be optimized for speed and scalability. With a sidechain architecture, the primary role of the main chain is to maintain overall security, confirm batched transaction records, and resolve disputes.
Sidechains are differentiated from state channels in a number of integral ways. Firstly, sidechain transactions aren’t private between participants — they are publicly recorded in the ledger. Further, sidechain security breaches do not impact the main chain or other sidechains. Establishing a sidechain might require substantial effort, as the infrastructure is usually built from the ground up.