I'm calling it. Second-layer protocols - AKA Layer 2 - are the most crucial evolution in Ethereum. They enable a world where people can seamlessly and frictionlessly interact with contracts and each other without a centralized service.
This is not news to anyone who has been watching Ethereum closely. But it bears repeating; Layer 1 did incredible things and pushed the prototyping and development of Ethereum protocols and contracts forward at a feverish pace.
Layer 2 is about real applications that can disrupt society as we know it.
Layer 2 platforms execute transactions off the Ethereum main chain using various tools, but their primary purpose is to increase the efficiency and flexibility of on-chain applications.
DeFi is a new development in blockchain technology that takes the decentralization of cryptocurrencies to the next level by allowing financial applications to be built on top of decentralized platforms, creating more opportunities for economic participation from people worldwide.
One of the most popular and successful Layer 2 platforms is plasma, which was first proposed by Vitalik Buterin and Joseph Poon. The idea behind plasma is to carry out transactions off-chain in a highly scalable manner for cheap, avoiding the problems of on-chain saturation.
Layer 2 chains process a lot more transactions than Ethereum's first layer; they have algorithms that keep track of the state of smart contracts and accounts, and they often have their own tokens that function as a method of value transfer.
Layer 2 builds are essential to the growth of Ethereum because they allow applications with large user bases to be built on top of Ethereum, attracting more users into the decentralized world. And that makes them essential as the next evolution of NFTs as tradeable assets and interactive tokens.
Why Layer 2 is critical...
Although Ethereum's market share and strong demand for NFTs indicate that it is currently the de-facto platform for NFTs, we can't pretend there aren't significant problems that must be overcome for NFTs to operate on and embrace an accessible, stable underlying infrastructure on which they may be accessed by a global audience.
Gas fees are the most significant pain point in NFTs. The increasing popularity of the Ethereum network has resulted in congestion and delays, and higher gas prices. It's also driven up the cost of gas4, making transactions unfeasible at various points throughout a trading day.
Although not having enough gas to execute transactions is the most common reason for failed transactions, network congestion means users are still subject to high fees, long waiting periods, and transaction failure. Transactions can take minutes or hours to finish, and when they fail or get front-run, it alienates users and discourages widespread adoption.
The network is inaccessible to new users, and this problem will only compound as more ERC-721s are added.
Layer 2 platforms can amplify user bases by allowing cheap transactions via state channels, sidechains, or other features that prioritize low costs alongside solid security.
NFT platforms' second-layer protocols and non-fungible tokens aim to solve the problems of on-chain congestion and scalability by allowing application developers and users to interact with de-facto marketplaces and applications without adding unnecessary strain to the network.
NFTs are the first true enablement of unique digital asset ownership, and they will pave the way for a massive shift in how we view property in the virtual/Web3 space. But that's not going to happen if people can't use them, can't afford to run transactions, and cannot effectively interact with the blockchain. That's why Layer 2 solutions are so important. We won’t scale to mass adoption without them.