What Are Layer 2 Networks and Why Your Crypto Exchange Should Use Them?

When looking for a crypto exchange to trust your money with, there are a lot of factors you should study carefully, as the legal jurisdiction it follows or the number of users already using it. But this time we are going to emphasize the importance of layer 2 network solutions compatible with the exchange, since that will likely bring you benefits in the long term.

If you are investing in crypto, no matter large or small amounts, you are probably familiar with the concept of blockchain already, but some people struggle a bit when it comes to grasping the layer 2 or layer 3 concepts.

We need to understand that blockchains, for all their benefits, also have their set of difficulties given the necessity to operate a lot of checks before validating new information (like new transactions) into the blockchain. To improve the speed and amount of operations that a chain can do, layer 2 solutions provide new creative ways to not collapse the net even if the pool of users is augmenting dramatically.

That is why, for example, Bitcoin and Ethereum would be way more expensive to trade with if it was not for layer 2 solutions. The two biggest cryptocurrencies in the market of course have their own 2 layer systems: Lightning Network for Bitcoin, and Optimism and Arbitrum One for Ethereum.

Advantages of Layer 2

Layer 2 networks can work in different ways, which we will explain later. What they have in common is their purpose: to allow for escalation in the network, avoiding congestion, and facilitating fast and secure transactions in huge amounts, that would other way collapse the main chain (or layer 1 chain) of the blockchain. To do that, they usually make some processes on their own and then interact with the main chain to validate several transactions at the same time.

Cryptocurrency trading app

Knowing that, we can understand now why good exchanges will provide compatibility with these systems. You could enjoy lower fees and faster transaction speeds on your exchange or trading operations if your crypto services provider is connected to any of these layer 2 solutions.

The exchange will be more competitive and efficient if it does not require sending transactions to the main blockchain of the cryptocurrency of your interest, which may take way more time to consolidate and might leave you with fewer options once the transaction has been approved.

Different types of Layer 2 blockchains

To know exactly how layer 2 used by your exchange is improving your transactions, it’s important to acknowledge the different types of layer 2 technologies. The most common are roll-ups (like Arbitrum and Optimism for Ethereum), sidechains, state channels or plasma.

Roll-ups are networks that validate transactions on their own and later pack them and send them to the main chain. They can be “optimistic roll-ups” of “ZK-Rollups”.

Optimistic roll-ups, like the two from Ethereum mentioned earlier, assume that transactions are correct, and only revise them if a user opens a dispute. The ZK-rollups, on the other hand, use cryptographic tests to prove the transactions are valid, not needing to send each one of them the main chain.

Sidechains are also independent networks that stay connected to Layer 1 by a bridge. They have their own consensus mechanism and interact with Layer 1 to exchange data or information. State channels are useful when a couple or group of users will make several transactions between them. They fix all of these transactions, and then, only report them to Layer 1 when a final state is confirmed, saving the time and resources that would be wasted if all previous transactions should have passed through the main chain.
Finally, plasma is able to create not one but many subchains, also called child chains, that take and process transactions on their own, and only send them to Layer 1 from time to time to verificate everything is right.

Yes, the crypto industry has been able to apply a lot of technologies to scape from the lack of scalability problem that affected cryptos in the early age. It would be a waste if a modern exchange do not interact with some type of layer 2, since it could provide more efficient movements for the user.