Are Layer-2 Blockchain Tokens Really Necessary?

The number of people using blockchain technology is on the rise. While good for the ecosystem, it has proven to be a difficult thing to maneuver. The blockchain models worked well in low-pressure settings, but with more users comes more challenges. One response has been to create Layer-2 blockchains with their own consensus mechanisms and native tokens. is that the solution?

The three most important considerations for a blockchain are security, decentralization and scalability. Unfortunately, scalability often falls by the wayside in pursuit of the other two.

Ethereum has the capacity to complete 1.5 million transactions per day. To put that in perspective, Visa processes 150 million transactions per day. Furthermore, Ethereum can only process about 15 transactions per second. That is why gas charges rise when many people try to use the network at the same time.

So far we’ve seen developers create new blockchains like Solana and Tezos. They operate with different validation mechanisms that make them more efficient in some ways, but less secure in others. We have also seen developers come up with Layer-2 solutions, which build on top of an existing network.

Team-1 vs. Team-2

A layer-1 blockchain refers to the main network of a blockchain, such as Ethereum. The base layer is responsible for executing transactions and running smart contracts. This is where you find ETH tokens, which consumers use to pay transaction fees on the network.

Layer-2 blockchains differ in that they exist outside of the blockchain network. They often have their own native tokens to complete transactions and pay gas fees. These blockchains bring additional scalability, privacy and speed to the Ethereum network. In addition, when the transactions are completed, the Layer-2 applications post their data to the main network. Thus, the information is secure and all in one place.

The primary benefits of Layer-2 solutions are faster transaction times and lower fees. Because people can build them on top of a base layer, they maintain the goal of decentralization. And by taking some traffic off the main network, it allows more transactions to complete without overwhelming the network. Congestion can also cause dapps to work slowly, which can be disastrous depending on the usage situation.

Some of the most famous Layer-2 blockchains on Ethereum include Polygon, Arbitrum and Optimism.

Why do Layer-2s need their own tokens?

A layer-2 blockchain may need its own tokens for several different reasons. Most importantly, consumers use the Layer-2 token to pay transaction fees on the underlying blockchain. This ensures that transactions are processed quickly and securely.

In addition, the token can be used to incentivize users who participate in the network and provide services. Finally, it can be used to generate rewards for the developers and validators of the network.

How does ETH interact with Layer-2s?

ETH tokens interact with Layer-2 blockchains in a few ways. First, they can be used to pay transaction fees on the underlying blockchain, much like any other token. In addition, they can be staked as collateral to receive additional rewards. Finally, they can also be used to buy Layer-2 tokens as an investment.

In some cases, ETH can replace Layer-2 blockchain tokens. However, there are some challenges and limitations that should be taken into account. For example, it may not be possible to achieve the same speed and scalability as with a Layer-2 token. In addition, there is a risk of speculation in ETH prices which can lead to increased volatility and unpredictability. Finally, having multiple tokens on the same system can increase complexity and create security issues.

Concerns for Layer-2 Blockchains

Vitalik Buterin, the founder of Ethereum, recognized that the network needed to scale early. Back in 2021, he said that Layer-2 blockchains would be the best option in the near future. A lot has happened with upgrades to the main network. Ethereum has gone from proof-of-work to proof-of-stake. And today it’s launching the Shanghai upgrade, which will unlock rewards for validators and allow them to withdraw stakes. Nevertheless, the problem of scalability persists.

At the end of last year, research from Binance determined that Layer-2 solutions could actually make the network less secure. Because these sidechains took revenue away from the mainnet, it could reduce the benefits of running the mainnet. With fewer validators comes less security.

Until Ethereum introduces sharding, the network will continue to struggle with higher traffic rates. And given how many delays we’ve already witnessed in the multi-stage Ethereum upgrade, it’s hard to say when that will happen.

For now, it appears that Layer-2 blockchains will continue to be an important part of the Ethereum network. It also appears that Layer-2 solutions will require their native tokens to work effectively. But as Layer-2 and even Layer-3 solutions enter the ecosystem, that may well change.

And who knows? When developers introduce sharding to Ethereum, everything can be silent.