Is it Worth Investing in Layer-2 Solutions?
Layer 2 protocols are designed to address the scalability issues that arise on the main network of the Ethereum blockchain. The secondary layer functions as an extension of the primary Ethereum blockchain, allowing transactions to be performed on the blockchain and transmitted to the main network.
Layer 2 protocols are related to the main network in much the same way as trunk and secondary roads. If the highway is congested, the driver can take detours and save time. Second-level solutions work in the same way, reducing the load on the main network.
They help increase the speed of transactions on Ethereum without sacrificing security and decentralization. They also help reduce transaction costs and allow developers to create new applications with a better user experience.
Types of second layer protocols
Over the past few years, various variants of layer 2 protocols have been developed, such as state channels, plasma, and rollups. Each of these types of protocols has its own advantages and limitations, which allows them to be adapted to different tasks and needs.
The state channel mechanism provides the ability to conduct transactions outside the blockchain, enabling instant and decentralized Ethereum transactions. In addition to high performance in transactions, this approach also allows for instant withdrawals and minimal fees. However, the state channel system can be vulnerable in the context of cross-chain interactions. The possible introduction of state channels between different blockchains can increase the flexibility of this approach.
The Plasma protocol is another popular layer 2 solution based on smart contracts and the Merkle framework. It allows you to create an almost unlimited number of sidechains. Due to the fact that operations and calculations take place inside sidechains, Ethereum is able to process much larger data sets. However, the withdrawal time may take from 7 to 14 days.
The rollups technology has some similarities with Plasma, however, in this case, the grouped data is partially stored on the Ethereum blockchain. This unique mechanism enhances security and reduces centralization. It is even possible to run an Ethereum virtual machine (EVM) inside rollups. There are two main types of rollups: optimistic and zero-knowledge (ZK). In the long run, ZK packages may prove to be more practical due to shorter withdrawal times.
Is it worth investing in second-tier projects?
Ethereum is considered one of the most promising cryptocurrency projects. Analysts do not exclude that in the foreseeable future it will become the market leader as a result of flipping. It is difficult to say what the BTC to USD exchange rate will be by that time.
Projects running on the Ethereum layer 2 blockchain play an important role in solving the most pressing scalability issues associated with Ethereum itself. This, in turn, can speed up the flipping process. The rise in prices for domestic tokens after the implementation of the Ethereum merger and some success of second-tier projects in late 2022 and early 2023 were taken as confirmation of the theoretical conclusions. In the long run, investing in second-tier solutions can bring good returns.
One of the largest layer 2 scalable solutions on the Ethereum platform, known as Polygon, is a parallel sidechain that runs in sync with the main Ethereum blockchain. The main goal of Polygon is to speed up operations and reduce transaction costs. By integrating their cryptocurrency systems with the Polygon network, users can access a variety of decentralized applications (dApps) specific to the Ethereum ecosystem. The current market decline is probably a good chance to convert WAX to MATIC, the native token of the Polygon network, as profitably as possible.
Optimism uses the optimistic rollup mechanism introduced by the Optimism Foundation. This method assumes that each transaction is considered valid. Any potentially fraudulent transaction will be canceled as soon as participants provide evidence of fraudulent activity.
In addition to expanding scalability in the Ethereum ecosystem, Optimism also contributes to the security of transactions. Individual nodes in the network stake to provide a new block, and each node has the right to challenge the veracity of the ongoing transaction.
In fact, there are many more promising projects and their role will most likely increase in the future. However, market trends are formed under the influence of a huge number of factors and it is impossible to take everything into account in the forecast. Therefore, make wise investment decisions and never invest more than you can afford to lose.