The rise of layer 2 scaling solutions and cross-chain solutions on blockchain

Satoshi, Bitcoin’s creator, laid the foundation of decentralized and peer-to-peer digital assets giving rise to a new ecosystem of money. Bitcoin solved the innate problems in the traditional finance world and global monetary system by introducing a censorship-free, secure and unique model that is borderless and trustless - giving personal banks for the unbanked and underbanked. 

Six years down the line, Ethereum was built changing the blockchain world forever. Ethereum brought about innovations, flexibility, and extensibility to the blockchain space via its Turing-complete ‘programmable blockchain’ allowing developers to build decentralized applications atop of it. 

Innovations have since sprouted in the field, welcoming more people, dApps, and innovations including decentralized finance (DeFi), non-fungible tokens (NFTs), initial token offerings, yield farms, and other endless innovations. However, as the adoption of Bitcoin and Ethereum soared, limitations and cracks started to appear in the technology - scalability and ‘high transaction fees’ topping the list. 

Layer-2 solutions and cross-chain solutions were built to reduce the congestion on blockchains and allow faster, cheaper, and inter-blockchain transactions. The earliest examples of Layer 2 solutions include Bitcoin’s Lightning Network and Ethereum’s Plasma, an off-chain scaling solution. 

Newer and better scalability solutions including Celer, Optimism, and faster blockchains including Polkadot, Solana, and Cardano have been built giving more utility and value to blockchain participants. 

 

A case for L2 scaling solutions?

Layer 2 solutions are simply scaling solutions built on top of the underlying blockchain (known as the L1 chain) to reduce congestion, transaction fees, gas costs, and increase throughput. Offering similar solutions to sidechains, L2 chains inherit their consensus security from the underlying blockchain unlike the former that has its own consensus security and validation process. 

At the start, L2 chains offered full solutions to blockchains without compromising security. Scalability across blockchains was enhanced and high gas (transaction) fees were reduced to a minimum. However, these solutions still lacked interoperability meaning each blockchain provided its solutions in isolation and two L2 chains cannot transmit information, tokens, or transactional data across each other. 

Cross-chain solutions like Celer bridges, Polkadot, and Polygon have solved the issues surrounding L2 chain implementation including market fragmentation and lack of composability in the ecosystem. 

 

The rise of cross-chain scalability solutions

In a bid to solve these problems, developers across the blockchain universe started building cross-chain interoperability solutions allowing the transfer of tokens on different blockchains, increased innovation in the space, and kickstarted the DeFi revolution in 2018. 

Celer Network, one of the widely known for its multi-chain solutions, launched its Celer cBridge enabling instant, low-cost, and chain-to-chain value transfers within and across Ethereum’s layer-2 chains, the main Ethereum chain, and other layer1’2 and L2’s in the future. The platform offers a multi-hop system allowing transfers across different L2 chains such as Optimism rollups, PoS sidechains such as Polygon and Celer-based rollups. 

Apart from solving market fragmentation and lack of composability, cross-chain solutions have boosted the global adoption of blockchains and DeFi as fees are minimized and transactions are processed faster. Moreover, it has enhanced the development of DApps.on platforms such as Polkadot which hosts several “polygots”, cross-chain enabled DApps, such as Polkadex, which has made a name as one of the largest decentralized exchanges in the space. 

 

Benefits of Cross-chain solutions 

As explained above, cross-chain and layer 2 solutions are majorly built to improve layer 1 scalability and reduce costs of transactions. This is key to enable mass adoption and enhance the overall innovations and developments in the industry. 

As mentioned above, cross-chain solutions are widely used - decentralized exchanges such as Polkadex leading the adoption curve. Through the adoption of layer 2 and cross-chain solutions, Polkadex has successfully created a fully decentralized platform for exchanging tokens in a peer-to-peer trustless environment, while additionally enabling high liquidity, lightning-fast transaction speed, and advanced trading features such as high-frequency trading and trading bots. 

This has allowed the company to favorably compete with centralized exchanges such as Robinhood, Binance, and FTX by offering high throughput and fast trading options on the platform. 

 

 

Scalability and fast transactions is only part of the solution. Despite the steps that blockchains have taken, no large company would choose this technology to process their payments. While output and transaction speeds may compete favorably with global card companies such as Visa and MasterCard, the lack of interoperability across the industry poses a big problem. 

Likewise, if the internet was not interoperable and data transferable through APIs, it would not have grown to what it is today. 

Blockchains need to adopt cross-chain mechanisms to ensure the industry is global and easy-to-use for all users in order to increase the appeal and utility to users. Blockchains need to be able to transfer value and data across different platforms and ensure these connections work seamlessly across every industry. 

 

Conclusion

At the moment, centralized exchanges remain the most popular channel to connect hundreds of tokens and cryptocurrencies. However, centralized exchanges require you to relinquish your private key to them which introduces major security issues given your assets are stored in a hot wallet. 

To mitigate these issues, building decentralized cross-chain solutions and decentralized exchanges will be key to boost the global adoption of blockchain technology. 

 

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Publication date: 
07/26/2021 - 09:25
Author: 
Disclaimer

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