Blockchain Scalability Solutions: Layer 2 & Beyond

Blockchain technology has the potential for huge positive change across various industries. But, a large roadblock is its limited scalability. The nature of blockchains limits the number of transactions per second resulting in slower transaction speeds and higher costs, hindering its extensive adoption. 

However, LI.FI stands out. It offers its users fast transactions and low costs, which puts it among the best multichain liquidity aggregation protocols.

In the following section, we’ll give deeper insight into the classical definition of blockchain scalability and will start to look into Layer 2 solutions as well as other scaling technologies that try to deal with the described shortcomings of blockchains.

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The scalability challenge

Imagine a busy highway. If too many cars try to use it at once, traffic jams become inevitable. Blockchains face a similar issue. Every transaction requires approval from the whole network. This process can create a slowdown as usage goes up.

Famous chains like Bitcoin only manage a few transactions each second. This capability is much lower than conventional payment systems such as Visa. The slow processing results in two significant issues:

• High transaction fees: With limited space for transactions on the main chain, competition drives fees up. Users may have to pay significant amounts just to get their transactions processed quickly.
• Slow transaction times: With a congested network, users may experience long delays for their transactions to be confirmed. This can be frustrating for everyday use cases.

Enter Layer 2 Solutions

Layer 2 solutions come in the form of an extension added on top of the main blockchain network otherwise referred to as Layer 1. They are designed to enhance transaction capacity and slash fees by doing the transaction on Layer 2 but utilize the Layer 1 blockchain for security. Here's how they work:

• Offloading transactions: Layer 2 protocols handle a large number of transactions outside the main chain. This frees up space on Layer 1 for crucial functions like security and settlement.
• Bundling transactions: Layer 2 solutions can bundle multiple transactions together before submitting them to Layer 1. This significantly reduces the number of individual transactions requiring processing, improving efficiency.
• Faster verification: By processing transactions off-chain, Layer 2 solutions can leverage faster verification methods, leading to quicker transaction times and lower fees.

There are several different Layer 2 scaling solutions, each with its own advantages and trade-offs. Some popular examples include:

• State Channels: These are secure channels between two parties where transactions occur off-chain. Once finalized, the outcome is recorded on the main chain.
• Plasma Chains: These are independent blockchains that operate alongside the main chain. Transactions are batched and submitted to the main chain periodically.
• Rollups: These systems package transactions outside of the chain, with just the end status being inserted into Layer 1. There are two primary forms, Optimistic Rollups, which accept transactions as valid but provide a contest period for disagreements. Conversely, ZeroKnowledge Rollups use encryption proofs to confirm transactions without exposing their specifics.

Beyond Layer 2: Exploring other scaling solutions

Layer 2 solutions notably advance blockchain scalability but there are other emerging developments. 

• Blockchain bridges: Blockchain bridges, for instance, are specific protocols letting users shift assets from one blockchain to another. Li.fi is a great example of a service that brings together blockchain bridges, thus making cross-chain swaps easier for users. 
• Sharding: Sharding is another technique which breaks the blockchain into smaller segments (shards) and these shards can independently carry out transactions. This can significantly increase scalability but requires complex coordination between shards.
• Directed acyclic graphs (DAGs): These offer a different arrangement of blockchain structures that could result in swifter processing. 
• Blockchain interoperability protocols: These agreements are intended to offer smooth interaction and asset transfer between various blockchains, thus, improving its usefulness. 

The progress of these solutions plays a central role in blockchain technology gaining general acceptance. As these technologies ripen, faster, cost-effective, and easily manageable blockchains will emerge, opening routes for a decentralized future.