What Will Layer 2 Actually Do?

By Kapil Gauhar

The world is just now entering the “Layer 2” era which is an incredible new phase of blockchain development in which the lightning network and other programming solutions that function “on top” of existing blockchains promise giant leaps in scalability, interoperability and functionality.

As Neha Narula, director of the MIT Media Lab’s Digital Currency Initiative describes it, the defining feature of Layer 2 is that “computation is moved off-chain, either to enable privacy or to save computing resources.” New security and trust solutions must be figured out for when a majority of the computing activity in individual transactions or smart contracts is taken “off chain.”

Instead of going through the laborious chain process of having the script of a particular program executed by every computer in the blockchain network, it “is implemented simply by the two or more computers involved in the transaction.”

And yet, she said, “you get similar security protections as with on-chain transactions because the blockchain acts as the anchor of trust.” An avalanche of innovation and development is headed our way and it cannot be a more appropriate time.

The web-based applications that now form part of everyday life, started when the 1989 implementation of Tim Berners-Lee’s Hypertext Transfer Protocol (HTTP) on top of the base-layer Transmission Control and Internet protocols (TCP/IP) paved the way for Marc Andreessen’s Mosaic Netscape browser in 1994.

Although HTTP was universally adopted as an almost immediate standard, there’s a great deal of competition in Layer 2 blockchain solutions. Blockchain industry will have a different sequencing.

Lightning’s payment channels were originally designed for bitcoin transactions, but it supports interoperability and has certain smart contract capability. That could put it up against alternative “state channel” Layer 2 solutions for Ethereum (Plasma, Raiden) as well as with projects aiming to enable cross-chain transactions (Polkadot, Cosmos, Interledger). The recent L2 Summit hosted by MIT DCI and Fidelity Labs showed us that there are many other lightweight off-chain ways to expand transactional capacity.

 

More than 2,000 nodes have already made their way to the Lightning Network, managing more than 7,000 channels. Although it is far from being a ubiquitous global network, however as a growing community, it provides a great foundation for experimentation.

There’s an even greater potential for development, now that a unique form of privacy-protecting smart contracts has been developed by Tadge Dryja, a co-author of the original Lightning white paper and now also at the DCI.

Lightning’s payment channels point to the kind of low-fee, fast-paced payments that bitcoin early on promised but failed to deliver. This could potentially disrupt business for banks, credit card companies and money transmitters.

Miners may also be hurt by activity going off chain.

Might Layer 2 solutions deny miners the fees they need to continue securing the underlying blockchain?

That was the topic of a recent Twitter exchange between Ryan Selkis and Jameson Lopp.