The crypto market has continued to showcase a staggering amount of growth over the course of the last year and half, as is probably best made evident by the fact that the total capitalization of this sector doubled from $1 trillion to $2 trillion over the course of Q1 2021 alone. Not only that, during the aforementioned time window, even the decentralized finance (DeFi) sector has grown tremendously, with the total value locked (TVL) in the space rising from $15 billion to a whopping $67 billion, thereby showcasing a growth of more than 400%.
That being said, as the DeFi market has continued to expand and thrive recently, a lot of functional issues related to the Ether network — the platform on which a bulk of all DeFi platforms in existence today are built on — have continued to arise, primarily those related to high transaction costs and low data throughput.
To put things into perspective, all through Q1 2021, gas costs (or transaction fees) on the Ether network continued to remain at all-time high, staying at an average of around $40 during February and recently scaling up to a whopping $70.
So what’s the deal with Layer 1 and Layer 2 solutions exactly?
In its most basic sense, the term ‘Layer-1’ describes the core architecture (i.e. setup and operational design) of a particular blockchain network while a Layer-2 refers to a solution that can be used atop an existing network. To better illustrate this setup, we can take into consideration the example of Ethereum and Celer, wherein, as one can expect, the latter is a layer-1 network and the former is the layer-2 system.
In this context, Celer can be viewed as a scaling platform that is designed to help enable the creation of fast, secure and low-cost blockchain applications on a variety of blockchain networks including Ethereum, Polkadot, etc. Thanks to its scaling capabilities, the system is able to process easy, off-chain transactions for not only payment transactions, but also generalized off-chain smart contracts.
In fact, Celer recently launched a layer-2 rollup-based DeFi aggregator called Layer2.finance, allowing individuals to interact and utilize existing DeFi protocols while paying up to 100x lower transaction costs. Not only that, Layer2.finance offers seamless scaling opportunities to DeFi protocols without the need for chain migration. As a result of this, issues related to liquidity fragmentation and break composability can be greatly minimized.
Why are Layer 2 options so important?
As pointed out previously, Layer 2 solutions seek to address some of the biggest, most pertinent problems facing the DeFi market today, particularly in terms of adoption. For example, they can help weed out high transaction fees-related issues being faced by a network by unclogging any transaction (txn) bottlenecks that the main channel may be suffering from. This is done by sending the existing data into peripheral processing centers for faster computation.
As a result, not only is the core blockchain protocol left entirely unaffected, it also becomes extremely easy to facilitate multiple microtransactions without an individual having to waste time with things like miner verification or having to pay exorbitant, unnecessary transaction fees. Not only that, this also makes it possible for casual crypto users to facilitate multiple small-time transactions without having to burn a hole in their pockets.
While Bitcoin is fast turning into the digital equivalent of gold, there are those — including a whole host of investors and analysts — who believe that Ethereum too is, slowly but surely, transforming into the base transaction layer of the digital asset universe. This is best exemplified by the fact that the ETH ecosystem currently handles transactions worth a whopping $25 billion per day (a figure that is 80% more than that of Bitcoin’s).
As a result, it stands to reason that as we move into an increasingly decentralized future, it is only natural that issues related to network congestion, low throughput rates and increasing processing costs will continue to plague the DeFi sector, thus, in turn, spurring the need for efficacious layer-2 solutions in the market.