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The last few months in the crypto world have been a roller coaster, to say the least. Once a $32 billion behemoth, FTX exchange collapsed in a spectacular blaze, followed by the likes of BlockFi and Celsius.
These events have fueled a devastating crypto bear market, marked by a loss of trust in the security and transparency of these platforms. As with all assets, however, cryptocurrency goes through both bear and bull markets, and this is no different. The next bull market will require secure, seamless infrastructure to eventually yield more healthy expansions.
Layer 2s offer a solution here as they magnify the security and scalability of blockchain projects while maintaining the core values of decentralization and immutability that make blockchain so attractive.
Layer 2s are essentially protocols built on top of existing blockchains and provide the ability to effectively scale up as more users enter the network. They cannot be used to impact the base protocol, rather they simply improve user experience by making transactions nearly instantaneous and far more affordable.
It is no surprise, then, that total value locked (TVL) in Layer 2s has been relatively resilient. While cryptocurrencies are down over 70% from their peak market cap of $3 trillion, the TVL in Layer 2s is down just 40% from its peak.
Let’s explore the many ways in which Layer 2s can serve as the robust building blocks needed for Web3 to reach greater adoption and continue its maturation process.
Security, security, security
The inherent security properties of blockchain created a never-before-seen solution to the Byzantine Generals Problem, thus allowing decentralized applications to exist for the first time. Enabled by the so-called "3 Cs" of code, consensus, and cryptography, blockchains provide an immutable and secure platform for transactions to take place.
Layer 2 solutions build on that foundation with fraud proofs, using mathematical proofs to detect fraudulent transactions and preventing exploitation. This proof-based security measure makes it difficult for malicious actors to manipulate the system without being detected, ensuring that users—retail or institutional alike— can rest assured that their interests are safe in Layer 2s.
Optimistic rollups are one example of a fraud proof-enabled Layer 2, allowing users to save on fees while saving time and maintaining the security of their transactions.
Simplicity and user-friendliness
Complexity has been a persistent hurdle in the mainstream adoption of decentralized technologies, as was evidenced by Ethereum’s insufficient scalability that resulted in sky-high gas fees and long wait times for users.
Layer 2 solutions provide a simple yet effective way to increase transaction speed and throughput while reducing costs; this is especially beneficial for applications that have previously been hindered by the lack of scalability of layer 1 solutions.
The strength of the Layer 2 ecosystem is evidenced by the fact that Layer 2 gas usage is up 170% in 2022 - signifying a thriving demand. Solutions built on-top of Layer 2s, such as Polis wallet and Metis’ RPS Matrix—a Web3 identity system—provide an easier way for users to take advantage of blockchain technologies.
The efficiency advantages of Layer 2s is enabled by bundling transactions together for finalization on the Ethereum mainnet. This is no small innovation, considering that modern consumers are unwilling to accept waiting times exceeding two or three seconds for transactions and transfers to complete.
Layer 2s offer a near-instantaneous ride to users, and can be the perfect solution to ushering in larger user volumes that would otherwise be deterred by slow speeds and high fees. As Web3 ushers in the early stages of a new revolutionary financial paradigm, it is critical for its users to have trust that their assets are secure - without sacrificing speed or efficiency.
Easy adoption
Any digital founder knows the importance of minimizing friction. Before 2007, smartphone users had to use clunky, small keyboards to type out a text message. Then, the iPhone removed the friction of sending messages with an intelligent, multi-touch, easy to use touch display. This enabled mass adoption of smartphones.
Similarly, prior to Robinhood, investors had to use clunky and arcane interfaces to buy stocks. But Robinhood’s intuitive user interface was the first of its kind and paved the way for revolutionary retail participation in stock markets with its simple click-and-buy system.
Layer 2 solutions are taking a page from this playbook and offering users a similar level of convenience, security, and scalability when using Web3. Consider an application as simple as a digital wallet - users want to be able to pay for goods and services, send money to their friends, or load their accounts instantly. Decades ago, before widespread fiber Internet connection or 4G networks, users expected some load time.
But today, users expect all digital actions to be instant, and there's no excuse for Web3 applications to be any different. Layer 2s are making this wish a reality by facilitating near-instant, secure transactions that won’t break the bank in terms of fees or commissions.
By removing the friction associated with traditional financial systems, Layer 2s are allowing more users to join the crypto revolution—whether they want to buy digital goods, invest in DeFi projects, or just store their funds away securely and privately.
Looking Ahead
From Terra Luna's collapse in May 2022 to the more recent FTX contagion, Web3 has had its fair share of head-scratching moments and cautionary tales. While Layer 2s won't prevent reckless speculation and fraudulent actors, it does provide a building block for the next bull run by delivering the speeds, fees and infrastructure required for mainstream adoption.
As Web3 transitions from a tool for retail investors to an indispensable financial infrastructure, Layer 2s must continue to innovate and evolve to meet the needs of users young and old. By prioritizing the safety of users and their assets, Web3 will be able to accelerate its growth into a fair, open, and decentralized economy that is accessible to anyone, anywhere.
Author Bio
Elena Sinelnikova is a former Government of Canada solutions architect turned entrepreneur who co-founded several startups. Metis.io, scalability and low-code solution for DeFi, NFT, and dApps on Ethereum, and CryptoChicks.ca – educational hub and accelerator for women in blockchain in 56 countries.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.