These Fast Multi-Layered Blockchains Are The Future
I think the best way to help you understand the tremendous value of adding cryptocurrencies to your investment portfolio is by helping you understand how they work and why they have unparalleled growth potential.
But have no fear, I plan on killing two birds with one stone.
Since the world of cryptocurrencies is constantly evolving and improving, you’ll find the best cryptos to trade are those that continue to find solutions to big problems.
One of those problems is scalability.
Scaling means growth. Growth translates to a market that trends up.
So, I will continue pointing out the cryptocurrencies that are staying ahead of the curve. You’ll find valuable trade opportunities while you gain a fundamental understanding of how to become financially sovereign.
Today, I’m talking about capacity and speed. Scalability and speed go hand-in-hand. To understand speed, you need to understand the multiple layers that can make up a blockchain ecosystem.
Layer 1 vs Layer 2
One of the main goals of next-generation blockchains is to increase the number of transactions per second (TPS).
More TPS means less congestion when lots of transactions come in all at once.
Specifically, the goal is to increase the throughput to thousands of TPS, which is one of the reasons why there are layer 2 (L2) blockchains.
As an example, bitcoin uses a layer 2 called the Lightning Network. And Ethereum has various layer 2s such as Optimism and Arbitrum.
These additional layers allow for transactions and computations to occur independently from the Layer 1 (L1) blockchain.
One of the main functions of the L1 is to provide security and data availability, making lower transaction costs and higher transaction capacity the main purpose of the L2.
It’s all about the scalability of the blockchain. In other words, how do crypto ecosystems expand?
It’s simple. They need to securely fulfill and log more transactions faster.
There’s what is referred to as the "blockchain trilemma.” In order for a blockchain to work, it needs to be decentralized, secure, and scalable.
Blockchains with one layer are, for the most part, only capable of accomplishing two of those mandates.
As an example, after the Merge is completed for Ethereum later this month, the developers plan to begin another stage of upgrades.
They call it “Sharding” and it’s intended to improve the scalability and capacity of the Ethereum blockchain.
Sharding specifically targets layer 2s to enable lower transaction fees while maintaining security with the main Ethereum blockchain (L1).
Here is a list of some other blockchains using a multi-layered approach:
- Cosmos (ATOM)
- Avalanche (AVAX)
- Polkadot (DOT)
- Polygon (MATIC)
One of the main challenges that projects have when scaling the blockchain using L2s is “composability.”
Composability is often compared to Legos in that one piece connects with another piece to form one larger unit.
So, with blockchains, when smart contracts such as a decentralized application (dApp) are created, it only needs to be created once. It can then be adopted by the entire ecosystem and combined with other smart contracts, creating additional functionality and utility.
One example would be a lending platform that combines collateralized loans with options to hedge against loan liquidations when the price of the collateral drops. This is creating a new feature of two underlying building blocks, loans and options.
This is composability in a blockchain.
The problem is that composability is not possible if the building blocks are separated on different L2s or on L2 and L1.
This essentially kills one big advantage blockchain ecosystems offer.
Multi-layered blockchains increase the Blockchain Ecosystem’s scalability and allow for more TPS by moving many transactions from the L1 blockchain to layer 2s.
However, this comes at the cost of foregoing composability.
A modular blockchain architecture where different processes are separated into different layers is the future.
But it remains to be seen which design choices will establish themselves and turn into big winners.
To sovereignty and serenity,