In late 2019, research firm Forrester and Big Four company Ernst & Young (EY) published a report on corporate adoption of public blockchains. The results showed that 75% of respondents would likely use a public blockchain in the future.
While it did, the report also found that most companies were still using private blockchains for security, privacy, and scalability. The survey also found that the three main issues facing public blockchain networks were a lack of maturity, security, and privacy.
Fast forward to 2021 – those concerns remain. In the meantime, advanced solutions are being implemented to address these issues for companies considering public blockchain networks.
One of the most important developments to enable the leverage effect of public blockchains, for example, are layer two scaling solutions. While Layer-Two networks are not a new concept, many Layer-Two scaling solutions are currently being developed to cater to business needs.
Tas Dienes, ecosystem support for the Ethereum Foundation and chairman of the mainnet working group of the Enterprise Ethereum Alliance, told Cointelegraph that Layer Two scaling solutions should primarily serve to reduce the transaction throughput limitations of decentralized blockchains in Layer One networks remove:
“Instead of executing all of your transactions directly on the blockchain, they can be executed on a Layer 2 instance, which can process many more transactions per second at a much lower cost per transaction. Crucial, however, is that Layer 2 is secured by Layer 1, so you still get many of the same security guarantees provided by the underlying blockchain. “
Layer two scaling solution for business needs
According to Dienes, the most obvious advantage of a Layer Two solution is that an application running on the network is no longer subject to the throughput restriction of the underlying blockchain. This is extremely important as Ethereum’s blockchain network has been criticized over time for its ability to process very few transactions per second.
This solution was further commented on by Anna Frankowska, Chief Commercial Officer of Aventus Network – a Layer Two blockchain protocol for Ethereum transactions – who told Cointelegraph that Ethereum’s current throughput of 15 transactions per second is nowhere near enough. To put it in perspective, “The Visa network alone handles about 17,000 transactions per second,” she said.
With Layer Two solutions, Dienes explained that companies now have the best of both worlds because of the “high throughput and low transaction costs as well as the high security of a public chain and the ability to interact with other applications that are based on it.” he noticed. This is an advance on how businesses previously used private blockchain networks due to the semi-centralized chains that can process more transactions per second than fully decentralized public chains.
Dienes went on to mention that Layer Two solutions can also help solve other problems that companies have with public blockchains. For example, data protection is one of the biggest problems companies face when it comes to using a public blockchain network. In fact, 50% of respondents surveyed in the EY and Forrester 2019 report said privacy was their top concern.
Dienes found that certain Layer Two technologies were designed specifically for this. Organizations can now deploy a private Layer Two instance that keeps sensitive information out of Layer One networks. This increases privacy and some of the interoperability and security benefits of a Layer-One network are also preserved. He went on to note that when combined with knowledge-free evidence, this is even more powerful for companies using Layer 2 solutions on public networks such as Ethereum, which has become a popular platform for business use cases.
In terms of security, Layer Two solutions can address business challenges like data locality, which is another major concern for companies considering public blockchains. For example, Dienes noticed that companies that store data in a specific location for compliance reasons can use a Layer Two server to run that data in a known location from a known entity.
Discover different layer two solutions
While layer two solutions can solve many of the challenges companies face when adopting public blockchain, Frankowska mentioned that layer two solutions can also help companies use private blockchain on public networks, adding:
“You can start with an approved Layer 2 chain with natively implemented business logic and gradually open it up to the public. Most businesses want to dip their toes in Layer 2 waters before fully submerging them. “
This is an important point as many companies today are still using private blockchains and may be reluctant to move to open networks. It is also important for businesses to understand that there are still many Layer Two scaling solutions to be implemented and developed. Therefore, there is no single solution for a company’s needs
Despite the hesitation, hybrid layer two solutions are also emerging. “There are new developments almost every week in this rapidly evolving area,” said Dienes, who are able to combine some of the best qualities from different technologies.
He went on to explain that a second tier category that has been gaining traction in many organizations recently is rollups. According to Dienes, rollups “roll up” a batch of transactions in networks of the second layer and write the transaction description data to the first layer:
“By calculating the transactions on L2 and using L1 only to store the transaction descriptions and to ensure that the calculation was done correctly, the overall throughput of the system can be increased by several orders of magnitude.”
Ethereum whitepaper author Vitalik Buterin recently stated that rollups will soon be entering the Ethereum ecosystem, noting that it could improve Ethereum’s transaction throughput by 100x.
Dienes mentioned that different types of rollups are developed for different cases. Here, zk rollups and optimistic rollups use different mechanisms to enforce transaction correctness and allow different compromises in terms of transaction latency and payment delays.
Additionally, there are a number of Layer 2 scaling solutions that use Layer 1 for security reasons, but store transaction data out of chain or not on Layer 1. “Validium, plasma and status channels are the most important. Because they don’t write that much data in L1, they can offer much higher throughput than rollups at the expense of decentralization, ”noted Dienes.
Challenges in navigating the vast second tier ecosystem
While it’s noteworthy that so many Layer Two developments have been done, the vast ecosystem can present a navigation challenge for businesses.
Dienes explained that a major challenge for newcomers is that there are many different Layer Two technologies, each with their own strengths and weaknesses. As a result, the companies creating the second tier must tailor it to the needs of each applicant in order to maintain a level of security and success.
For example, Dienes mentioned that off-chain data scaling solutions – like Validium, Plasma, and Status channels – may be very well suited for certain types of enterprise applications where it is acceptable to trust a known entity to store that data. “This category of solutions has other business-friendly characteristics such as the potential for more data protection compared to rollups, greater isolation from the resource requirements of other applications (like CryptoKitties), and control over where data is stored,” he noted .
Although Dienes’ recommendations can be helpful, it is still not easy for many companies to understand what features Layer Two solutions can offer for specific use cases. Fortunately, as the storage space matures, this could become easier over time, as more solutions to business needs may be highlighted
This may be easier said than done, however, as Frankowska pointed out that there can be recurring security concerns, issues related to volatility, uncertainties about the regulatory landscape, and skepticism about what can seem like a panacea. “That’s why not all Layer Two solutions are created equally. In addition to scaling, you also need to consider the issues of price stability, interoperability, and security. A missing pillar and the temple will crumble, ”she commented.