What Are Layer-2 Solutions, And Are They Worth Investing In?

Scalability has always been the biggest hurdle holding back cryptocurrency and blockchain technology. As it has matured over the years, the earlier established cryptos such as Bitcoin and Ethereum have had to try and adapt their systems to allow for the massive popularity explosion which they have experienced and were not quite prepared for. 

These early networks were never really designed to operate at the levels of volume that newer decentralized apps and exchanges have managed to become accustomed to.

These massive, original cryptocurrencies and digital assets have suffered from higher fees, slower processing, and congestion that have come with the demand expected of them, which, if left unresolved, will place doubt upon their wider and more mainstream adoption.

But to solve the issues and limitations that these cryptos suffer from, layer-2 solutions have emerged as a great innovation specifically designed to overcome these hurdles. But what exactly are layer-2 solutions, and what makes them a worthwhile investment?

The Different Types Of Layer-2 Solutions Available

Layer-2 solutions come in many different forms:

1. Rollups

- These types of layer-2 solutions combine multiple transactions and then submit them to L1 as a single item. Examples of these include optimistic rollups, which default to assuming transactions are valid, and Zero-Knowledge Rollups, which can verify transactions immediately using cryptographic proof. ZK-rollups offer faster and more secure transactions with lower fees. An example of this type of layer-2 solution is Bitcoin Hyper ($HYPER).

2. State Channels

- These layer-2 solutions permit users to make transactions privately away from the chain and then only submit final results to the main chain. State channels are mainly used in micro-payment transactions within the crypto network. The best example of these is Lightning Network (Bitcoin).

3. Plasma Chains

- These are smaller mini-blockchains that run parallel to the main chain and can submit checkpoints to L1 networks at given instances. Plasma chains have become much less common recently due to issues with how people can use them. 

What Is A Crypto Layer-2 Solution?

Layer-2 solutions are specifically designed secondary systems that are built on top of an already existing blockchain cryptocurrency. They are typically used to increase the speed of these original coins, reduce costs or fees, and implement newer technology such as smart contracts. They use technology to process transactions off the blockchain instead of changing the base blockchain, and then they settle the results of these changes back on the main blockchain.

These layer-2 solutions solve a few main issues with original cryptos. They allow scalability by increasing the number of transactions possible on the blockchain, whilst mitigating higher transaction fees by navigating around the high gas fees that occur. These gas fees spike when demand is higher and there is larger network congestion, which is often an issue for L1 coins. By taking the operation off-chain, layer-2 solutions can provide a less crowded environment to commit transactions and then reintroduce them into the chain to settle any results.

Are These Layer-2 Solutions Worth Investing In? The Bottom Line

Layer-2 solutions are one of the most active areas of the cryptocurrency market these days. They have grown at 4.6% year-on-year in the blockchain to allow for future innovation and solutions to old problems. As the demand for scalability within the blockchain rises, layer-2 solutions have become an essential part of cryptocurrency growth. They have offered dApps and DeFi capability, amongst other additional perks, which have allowed the sector to continue to grow despite limitations from L1 currencies. 

Due to their recognised value within the industry, many of the layer-2 solutions that are currently available have strong backing from major firms and developers who value what they can offer.

Despite their value as a whole being clear on the market, not all layer-2 solutions will accrue value. Investing in these layer-2 solutions is not a guarantee, and reasonable research and risk management are still essential when placing investments in these coins. This is especially true when you consider the market competition, which continues to heighten throughout the digital economic sphere.

Against the backdrop of this are the regulatory implications that much of the crypto market continues to face. Whilst policymakers around the world are increasingly welcoming the use of crypto, there are still a lot of doubters and those wanting stricter regulations. Ensuring that you remain up to date with news developments relating to this is important if you are looking to invest in layer-2 solutions.

Despite this, the longer-term importance of layer-2 solutions is widely recognised in the crypto world. They clearly will play a role in the blockchain's future. Ensuring wise investment with a diverse portfolio is key, but having diligence and managing risks within these investments is your best chance at having the most profitable outcomes.