Hey Edge readers,
In this edition, we begin a deep dive into “Layer 2 (L2) blockchains” in the first installment of a new mini series that will explain and explore what are L2s and why they are important for scaling blockchain technology for the next billion users.
Here's what we're covering this week:
1. What are Layer 2s? 📘
The limitations of Layer 1 blockchains like Ethereum and why Layer 2 solutions are needed
2. New in Exponential: Earn 7% yield on BTC
The newest additions to our catalogue of investing opportunities feature 7% yield BTC and 11% yield on ARB
3. zkSync record-breaking token drop 🗞️
Lido enters the restaking arena, Bitcoin ETH inflows reach new highs, and more..
Stay sharp. 🫡
- The Exponential team
Scaling Up: The Essential Guide to Layer 2s
Welcome to the first issue of our mini series, “Scaling Up: The essential guide to Layer 2.” In this series, we’ll break down the basics of Layer 2 blockchains and explore why they are crucial for the growth and scalability of DeFi.
Issue 1: What are Layer 2s?
A blockchain is a decentralized digital ledger that records transactions across a network of computers. Each block in the chain contains a list of transactions, and once a block is filled, it is added to the chain in a linear, chronological order. This ensures that the transaction history is transparent and immutable. Nodes agree on the validity of transactions through consensus mechanisms like Proof of Work (PoW) or Proof of Stake (PoS).
Layer 1 blockchains, like Bitcoin and Ethereum, serve as the foundation for decentralized applications (dApps) and services. However, they face significant limitations:
- Scalability: Most first-generation blockchains can process only a limited number of transactions per second (TPS). For example, Ethereum can process about 15 TPS, whereas traditional systems like Visa can handle up to 1,700 TPS.
- Throughput: Low throughput means that the network can become congested, leading to slower transaction times and higher fees.
- Energy-Intensive: Consensus mechanisms like PoW consume a significant amount of energy.
These limitations hinder the widespread adoption of blockchain technology for everyday transactions.
Enter Layer 2s…
Layer 2 blockchains are protocols built on top of existing blockchains (Layer 1) to improve their performance. They handle transactions off-chain and only settle them on-chain when necessary, alleviating congestion and reducing costs.
Imagine a busy highway that connects different cities. This highway represents the main blockchain, used by many people to transfer assets and information. As more people start using the highway, it becomes congested and slows down, making it difficult for people to move things. To solve this problem, a Layer 2 solution acts as an elevated expressway on top of the existing road. This parallel road handles a large number of transactions and data transfers, while still being attached to and secured by the main Layer 1 blockchain.
Conclusion
Layer 2 solutions are vital for the continued growth and adoption of DeFi. They address the fundamental issues of scalability and cost, making blockchain networks faster, cheaper, and more user-friendly. In our next issue, we’ll dive into the specific types of Layer 2 solutions and how they enhance the performance of Layer 1 blockchains.
DeFi summer continues on Exponential with our latest additions for you to earn yield on BTC and ARB:
In the news
- Layer 2 blockchain zkSync is airdropping $3.67 billion (with a b) in ZK tokens to its early users - Read
- Lido, the largest ETH staking protocol, is launching a new restaking service to increase the utility of stETH - Read
- Bitcoin ETF inflows and Bitcoin futures short interest reach new records - Read