What Is Layer 2?

Layer 2 is the name given to a scaling solution that enables high throughput of transactions whilst fully inheriting the security of the underlying blockchain that it is built on. 

Blockchains such as Ethereum have grown in popularity over the past several years as they are programable (smart contracts) and censorship resistant, meaning that a wide number of products and use cases can be built on-top of them. The problem with Ethereum is that it can only process 7 to 11 transactions per second, compared to the Visa network of over 20,000 transactions per second. As the blockchain becomes congested, economic actors (users) compete with each other to have their transactions processed in a short space of time. This leads to a bidding war for space in each block and causes the price of transactions to soar. At some points in 2021, it cost over $80 to send a token to another address on the Ethereum network. 

In order to solve the bottleneck problem described above, layer 2 solutions have been launched to take the pressure off Ethereum. Layer 2 solutions enable transactions to be abstracted away from the underlying blockchain, meaning thousands of transactions can be processed per second. The two main forms of layer 2 solutions are zero knowledge rollups and optimistic rollups. 

Importantly, the property that separates a layer 2 such as DeversiFi, StarkWare, Optimism and Arbitrum from a side-chain such as Polygon, is that layer 2 solutions inherit their security from the Ethereum chain itself, and are not reliant on any other network, validators or entities to secure funds, as is the case with sidechains.

Author: Ross Middleton, co-founder and CFO at DeversiFi  

Ross is the co-founder of DeversiFi, a layer 2 decentralized finance (DeFi) trading platform powered by StarkWare’s scalable technology. He is responsible for finances as well as looking after DeversiFi’s project partners and biggest customers. 

Previous to DeversiFi, Ross worked at the Ethfinex and Bitfinex exchanges. Before joining crypto, Ross was a professional energy trader and analyst in London for ten years. He worked on global energy trading desks at companies such as Centrica, Gazprom and RWE to deploy funds into advanced proprietary fundamental-backed trading strategies. Outside of the trading world, he is a committed angel investor and Ironman triathlete. Ross brings a wealth of both non-traditional and traditional asset trading and commercial experience as well as connections to the alternative finance space. Ross holds a BSc in economics.