8 common questions about Layer 2 from newbies

Is Layer 2 necessary? How does Layer 2 affect Layer 1? Let's learn everything about Layer 2 through the following article.

Layer 2 - Solution to the Layer 1 extension problem

1. What is Layer 2?

Layer 2 is the common name for solutions developed on Layer 1 blockchain such as Ethereum, BNB Chain, Bitcoin... The goal of Layer 2 is to expand the scale of Layer 1 blockchain while still inheriting their advantages.

Many people mistakenly think that only Ethereum has Layer 2. In fact, Layer 2 can be developed on any Layer 1 blockchain, as long as the user's needs are great enough. Besides Ethereum, Bitcoin, BNB Chain... also have Layer 2.

2. Why is Layer 2 necessary?

During peak hours, transaction fees on Ethereum can reach hundreds or tens of thousands of USD for a single transaction. Besides high gas fees, the time it takes for a transaction to complete on Ethereum is also very long.

Layer 2 packages multiple transactions into one and sends it to Layer 1 for authentication. This results in cheaper gas fees, faster transaction speeds, and improved user experience. Because they are developed on Layer 1, Layer 2 also inherits the advantages of Layer 1 such as security, decentralization...

To know more about Layer 2, please read: What is Layer 2? The key to layer 1's expanding ambitions.

What is the future of Layer 2?

3. Why doesn't Layer 2 have Liquid Staking?

Liquid Staking protocols that allow users to stake an amount of tokens to receive yield often appear on Layer 1 blockchains such as Ethereum, Solana, BNB... But on Layer 2 blockchains, these protocols do not yet appear.

The reason is because Layer 1 blockchains own validators that specialize in validating transactions. For their transaction to be completed, users need to pay a transaction fee called gas fee to these validators so they can validate the transaction. These validators will then divide a portion of the received funds to the asset stakers.

Layer 2 blockchains like Arbitrum and Optimism still do not have any validators. In fact, Layer 2 blockchains currently only support transaction execution, so there are no Liquid Staking projects that support Layer 2 token staking.

In the future, it is possible that Layer 2 blockchains will launch programs that allow staking of their tokens, but the profits for users who stake tokens will likely not come from the network so these projects will not be called projects. Liquid Staking project.

4. Why does Ethereum support Layer 2 projects?

Newly born Layer 2 projects such as Arbitrum, Optimism... take advantage of Ethereum's security while providing cheap transaction costs. If Ethereum does not support Layer 2 projects, transaction costs on Ethereum will become too expensive, waiting times too long, causing users to tend to switch to other blockchains with cheaper costs and faster speeds. Faster transaction speeds like Solana, Aptos... Thus, Ethereum will lose its customers.

The development of Layer 2 helps Ethereum retain customers. In the long term, after Ethereum completes upgrades such as The Surge, The Scourge, The Verge, The Purge..., the problems that Ethereum is facing such as high gas fees, slow transactions, inflation... can be resolved. handle. At this point, Ethereum may no longer need to support its Layer 2s.

Low transaction fees and high bandwidth are the advantages of Layer 2.

However, according to Vitalik Buterin - founder of Ethereum blockchain: "Ethereum will take at least 10 to 20 years to solve all its problems." Therefore, in the short term of the next 5 to 10 years, Ethereum will need Layer 2 to retain users in its EVM ecosystem.

Currently, there are many Layer 2 projects launched, focusing on many different fields. So what opportunities exist on Layer 2? Let's find out through the video "Layer 2: Potential but is there a chance?":

5. Will Layer 2 evolve into Layer 1?

Mr. Le Thanh, founder of Ninety Eight once affirmed: "In the future, Layer 2 solutions will develop into Layer 1."

Currently, Layer 2 projects have begun to build Layer 3. These Layer 3 depend on Layer 2, making the Layer 2 blockchain the foundation blockchain. In other words, with Layer 3, Layer 2s have become Layer 1s.

In the future, when Layer 2s have a strong enough community, they can create their own validators by allowing users to stake tokens to become validators, and themselves to validate this transaction to become validators. to Layer 1.

In particular, with the current trend of Modular blockchain development, each task is undertaken by a separate blockchain, making it even more feasible for Layer 2 to develop into Layer 1.

For example, the Data Availability solution on Eigen Layer is being handled by EigenDA. In the future, EigenDA can switch to supporting Celestia instead of Eigen Layer if desired.

Where does Layer 2 make money?

6. How does a Layer 2 project generate revenue?

When users pay transaction fees on Layer 2, part of this fee will be paid to Layer 1 and the sequencer to validate the transaction, the rest will be paid to Layer 2. The more transactions performed on Layer 2 , the greater the project's profit.

As of April 2024, Base's 1-month profit is nearly 21 million USD, followed by Linea with 4.8 million USD, Scroll with 3.59 million USD... Profits also show where the cash flow is in the Layer ecosystem. 2.

7. Why are Layer 2 tokens not used to pay gas fees but have high value?

Layer 2s often operate under a governance model. This means that holders of large amounts of these tokens will have great influence on how the ecosystem operates through Layer 2 project reward programs.

By the end of 2023, Arbitrum proposes to increase an additional 21.4 million ARB to reward projects on Arbitrum participating in its Short-Term Incentive Program (STIP). To be able to receive rewards from Arbitrum, the project needs to be voted for by ARB holders. The more ARB you hold, the higher your voting power.

In October 2023, a total of 29 projects received ARB 49.6 million in funding from the Arbitrum Foundation. The GMX platform is the project that received the most rewards, followed by DEX Camelot.

What are the weaknesses of Layer 2?

8. Does Layer 2 have weaknesses? What should you pay attention to when using protocols on Layer 2?

One of the characteristics of blockchain is decentralization. However, this feature is lacking in Layer 2.

Specifically, the majority of sequencers (components responsible for arranging transactions on Layer 2 and sending them to Layer 1) operate alone and are highly centralized (centralized sequencer). Only a few Layer 2 sequencers include a distributed network of nodes and are decentralized (decentralized sequencer) like Metis.

Because they operate alone and are highly centralized, these centralized sequencers are very vulnerable to attacks, endangering users' assets. In addition, they also have high technical complexity, depend on data verification parties, are susceptible to censorship, data changes or even being affected by MEV.

Decentralized sequencers also face many risks such as reduced profits due to having to be divided among many organizations/individuals, reduced scalability and transaction speed, and technical challenges if the sequencers use different protocols. different…