What Is A Layer Two (L2) Blockchain 

The blockchain has received widespread adoption as several cryptocurrency projects started coming into the limelight. This is because the blockchain is a core component for creating these cryptocurrency projects.

The blockchain used in creating cryptocurrencies and decentralized applications (dApps) is categorized into types, with the most common being layer one (L1) and layer two (L2). Before the advent of layer two (L2) blockchains, layer one (L1) blockchains like Bitcoin and Ethereum were prevalent. However, L1 faced the issue known as the Blockchain Trilemma.

The Blockchain Trilemma posits that it's challenging for a blockchain to achieve decentralization, security, and scalability all at once. And that one of these features needed to be sacrificed to attain the other two. Scalability was sacrificed in the case of Layer 1 (L1) blockchain. Layer two (L2) blockchains were introduced to address the scalability issue, enabling faster transactions and higher throughput.

Delving Deeper into Layer Two (L2) Blockchains

In the simplest term, layer two (L2) blockchains solve the scalability problem experienced by Layer one blockchains. To put things into perspective, currently, Ethereum can process a little above 1 million transactions per day, which roughly accounts for 15 transactions per second (TPS). Bitcoin, on the other hand, can handle just 100,000 transactions per day. In contrast, counterparts like Visa in the Web2 space process up to 632 million transactions per day and 24,000 transactions per second (TPS), highlighting the high margin and evident scalability problem. L2 blockchains crack this problem with their improved technological solutions. 

Layer two (L2) blockchains are built on Layer one (L1) blockchains — like Bitcoin and Ethereum — which helps improve the overall capacity and potential of the L1. They seek to make L1 blockchain whole by adding scalability to its decentralized and secure nature — solving the Blockchain Trilemma. Also, L2 significantly reduces the fee for every transaction instead of the high fee paid on the base network — layer one — especially in Ethereum.

Core Standards of L2 Blockchain Solutions

There are several standard requirements for every L2 blockchain; one is that the L2 blockchain relies on the L1 blockchain for security, basically inheriting the L1 blockchain security. In addition, they rely on the L1 blockchain consensus mechanism, meaning transaction data are verified and confirmed on the layer one blockchain rather than relying on its own nodes or consensus mechanism. But transactions and processes are completed on the layer two blockchain itself. 

The most popular example of layer two solutions are the Lightning network of Bitcoin and the Rollups on the Ethereum network. Other common L2 blockchain solutions are Starknet and sidechain. However, there are arguments about whether sidechains are truly L2 blockchains since they operate on their unique consensus mechanism and validator without leveraging the base chain’s security. The base chains are also the L1 blockchains. Of all the L2 solutions, rollups, including optimistic and zero-knowledge variants, have gained the most attention due to their efficiency, including lower fees and faster transactions. This is why ReHold has chosen to implement rollups.

The Dominance of Rollups in L2

Rollups are the leading layer two solutions on the Ethereum network, and there are two different types of rollups available: optimistic and zero-knowledge rollups. The wide adoption of rollups can be associated with their immense impact on scaling Ethereum; with rollups, Ethereum transactions are potentially faster, from 15 transactions per second (TPS) up to 1,000 TPS. 

The general idea behind the rollups follows its name. Rollups bundle hundreds of transactions which are then added to the base chain (layer 1 — Ethereum Mainnet). The gas fee is then distributed among all the participants in the bundled transaction, making it cheaper. With the addition of the transaction data on the main chain, rollups inherit the security of the base chain.

The different types of rollups — optimistic and zero-knowledge rollups — adopt the same process; however, the distinction between both is derived from how transaction data from each rollup are posted on the main chain (L1). On ReHold, we support the Optimism and Arbitrum blockchain that uses the optimistic rollup to process transactions. Let’s take a quick dive into both the optimistic and zero-knowledge rollups. More insight will be shared about the optimistic rollup because ReHold utilizes it. 

Zero-Knowledge (ZK) Rollup

Zero-knowledge rollup is a protocol built on the Ethereum blockchain. Here, transactions are batched and bundled off-chain to be processed, after which the resulting data is compressed and uploaded to the Ethereum Mainnet as proof of validity. Validity proof is a cryptocurrency assurance that the uploaded transactions are truly accurate. 

To resolve potential disputes regarding a transaction’s validity, there’s a “challenge period” where the transaction or the batch of transactions can be re-executed. This contributes to the delayed period between withdrawing funds from the ZK-rollups.

Optimistic Rollup 

As explained earlier, optimistic rollup is a system used to improve the computation and speed of the Ethereum Mainnet blockchain by bundling transactions, processing them off-chain, and adding them to the plasma chain or the mainnet. A plasma chain ensures transaction data storage in a special location while verifying every transaction through fraud-proof.

The concept of “optimism” in optimistic rollup comes from the fact that the validity of transactions posted on the mainnet is on the assumption that the off-chain transactions are valid and don’t need proof of validity. 

For every transaction batch executed via the optimistic rollup, there is a challenge period where the transaction's validity can be questioned. In this case, a fraud-proofing scheme is used to confirm if the transaction is accurate. If the transaction or batch of transactions isn’t valid, then it’s re-executed.

The most common examples of optimistic rollup projects thriving are Optimism and Arbitrum blockchain. Both contribute to the high throughput rate of transactions on the Ethereum Mainnet. They share similarities, particularly their approach to solving Ethereum scalability issues. The key distinction lies in Optimism's reliance on a single-round fraud-proof, while Arbitum utilizes a double-round fraud-proof. Optimism fraud-proof takes a shorter time but costs more, unlike Arbitum, which takes more time to check the validity of transactions but costs way less. 

ReHold offers both Optimism and Arbitrum blockchains for broad market access, with a stronger focus on use cases leveraging Arbitrum. Let’s explore how Arbitrum — Arbitrum One and Arbitrum Nova — has been essential to the functionality of several of our features, including the Dual Investment. 

On ReHold, Arbitrum One acts more like a layer one blockchain, while Arbitrum Nova performs the function of the actual layer two. 

Arbitrum Deciphered: One vs. Nova

Arbitrum Nova and Arbitrum One, though created by the same team, have distinct functions and purposes.

Arbitrum One 

This is the backbone of the Arbitrum ecosystem, launched in late 2021 by Offchain Labs. Arbitrum One is to Arbitrum what Ethereum Mainnet is to Ethereum. Transactions are processed on the Arbitrum Virtual Machine, which is compatible with the Ethereum Virtual Machine. This is how Arbitrum One can help in scaling the Ethereum Network. 

Arbitrum Nova 

This is a new blockchain by Offchain Labs, distinct from Arbitrum One. Arbitrum Nova is a blockchain that takes a different approach from Arbitrum One. It is often considered more centralized.

In contrast to Arbitrum One, which stores transaction data on Ethereum, Arbitrum Nova adopts a novel approach by storing data on a “data availability committee,” consisting of third parties like Google Cloud and Infura. The involvement of third parties is why Arbitrum Nova is sometimes considered centralized. However, Arbitrum Nova still relies on Ethereum for storing transaction signatures. Essentially, Arbitrum Nova reduces transaction charges on the blockchain significantly.

ReHold: Combining the Power of Both Arbitrum Platforms

ReHold has found a perfect balance of using both blockchains from the Arbitrum team. This is in line with ReHold’s commitment to keeping an ultra-low and meager transaction fee for our users and an efficient way to interact with our system.

When interacting with ReHold, using the Dual Investment system, you’re participating with both Arbitrum blockchains — Arbitrum One and Arbitrum Nova. Let’s review how we’ve maintained a perfect combination of both blockchains in prioritizing and preserving an optimum output for every interaction on our platform. 

Arbitrum One: L1 for users

Arbitrum One is an entry-level for users to participate with ReHold; this is similar to other supported layer one blockchains on our platform, including Ethereum, BNB Chain, Polygon, Optimism, and Avalanche.

Users can use the Dual Investment function on Arbitrum One to earn an APR. To interact with ReHold after launching the app, you’ll find the option with the different available blockchains. You should know that rather than Arbitrum One, it’s written as Arbitrum.

The type of dual assets users receive on ReHold depends on the blockchain they choose: Ethereum, BNB Chain, Polygon, Optimism, or Avalanche. The Arbitrum chain gives users access to USDT, ARB, USDC, DAI, WBTC, GMX, ETH, JOE, RDNT, MAGIC, and WETH pairs. 

Arbitrum Nova for Execution

On ReHold, Arbitrum Nova is primarily used for execution, with a broader range of applications. This chain is the non-interactive part of ReHold and functions as a data storage layer. 

With Arbitrum Nova, data consolidates across multiple sources — the supported blockchains — acting as an aggregated database. In the transaction process, Arbitrum Nova is the final step. It’s where all signed transactions are received before it’s batched to Ethereum Mainnet to finalize the Dual Investment execution.

We chose Arbitrum Nova for its cost-effectiveness in enabling transactions for our users. The transaction per second (TPS) is higher, and the transaction cost is as low as $0.0015, which is 150 times more affordable for users. 

Closing Thoughts

Layer two (L2) blockchains have revolutionized the cryptocurrency and blockchain ecosystem by optimizing transaction speeds and lowering transaction costs. The effect has been significantly observed with Ethereum with the rise of layer two (L2), like optimistic rollups having projects like Optimism and Arbitrum.

Arbitrum is a dominant force in this arena, and ReHold has opted for it because its features, like Dual Investment, become more efficient using both Arbitrum One and Arbitrum Nova. This choice is sponsored because of Arbitrum’s flexibility: being one of the cheapest blockchains to trade with and prioritizing transactions per second. With this approach, ReHold remains committed to providing users with efficient and low-cost transactions.