Satoshi Nakamoto, the Bitcoin creator, established the foundation for decentralized and peer-to-peer digital assets, resulting in the birth of a new financial ecosystem.
Bitcoin addressed the inherent problems with traditional finance and the global monetary system by introducing a censorship-free, secure, and one-of-a-kind model that is borderless and trustless – providing personal banks for the unbanked and underbanked. Bitcoin is a form of digital currency.
Six years later, Ethereum was born, forever altering the blockchain industry’s landscape. Ethereum has facilitated innovation, flexibility, and extensibility in the blockchain space through its Turing-complete „programmable blockchain,“ which enables developers to build decentralized applications on top of blockchain technology.
Since then, innovations have sprung up in the field, including decentralized finance (DeFi), non-fungible tokens (NFTs), initial coin offerings (ITOs), yield farms, and countless other possibilities. However, as Bitcoin and Ethereum gained popularity, flaws and limitations in the technology became apparent, most notably scalability and ‚high transaction fees.‘
Layer-2 and cross-chain solutions have been developed to alleviate blockchain congestion and to enable faster, more affordable, and inter-blockchain transactional capabilities. Two of the earliest Layer 2 solutions to emerge are Bitcoin’s Lightning Network and Ethereum’s Plasma, which is an off-chain scaling solution.
New and improved scalability solutions, such as Celer and Optimism, as well as faster blockchains, such as Polkadot, Solana, and Cardano, have resulted in increased utility and value for blockchain participants.
A case for L2 scaling solutions?
Layer 2 solutions are essentially scaling solutions built on top of the underlying blockchain (also referred to as the L1 chain) in order to reduce congestion, transaction fees, gas costs, and throughput while simultaneously increasing throughput.
In comparison to sidechains, L2 chains inherit their consensus security from the underlying blockchain, whereas the former has its own consensus security and verification process.
For a long period of time, L2 chains provided comprehensive blockchain solutions without sacrificing security. Scalability was significantly improved across blockchains, and high gas (transaction) fees were reduced to an absolute minimum. However, these solutions lacked interoperability, which meant that each blockchain could not transmit information, tokens, or transactional data across the networks of two L2 chains without jeopardizing their security.
Numerous cross-chain solutions, such as Celer bridges, Polkadot, and Cosmos, have been developed to address issues inherent in L2 chain implementation, such as market fragmentation and an ecosystem’s lack of composability.
The rise of cross-chain scalability solutions
The DeFi revolution began in 2018 as a result of developers from across the blockchain ecosystem cooperating to develop cross-chain interoperability solutions that would enable token transfers between different blockchains. This resulted in an increase in innovation in the space and sparked the DeFi revolution.
Celer Network has released a new version of its Celer cBridge, which enables instant, low-cost, and cross-chain value transfers within and across Ethereum’s layer-2 chains, the main Ethereum chain, and any future layer1’2 and L2 chains. Celer Network is a well-known provider of multi-chain solutions. The platform features a multi-hop system that enables transfers between various L2 chains, including Optimism rollups, PoS sidechains such as Polygon, and Celer-based rollups.
Apart from addressing market fragmentation and incompatibility, cross-chain solutions have aided in the global adoption of blockchains and distributed ledger technologies (DLT) by lowering transaction fees and speeding up transaction processing. Additionally, it facilitated the development of decentralized applications (DApps) on platforms such as Polkadot, which hosts several „polygots,“ or cross-chain DApps, and Polkadex, which has grown to become one of the largest decentralized exchanges in the space.
Benefits of Cross-chain solutions
As mentioned previously, cross-chain and layer 2 solutions are primarily intended to increase layer 1 scalability while decreasing transaction costs. This is critical for enabling widespread adoption as well as advancing the industry’s overall innovations and developments.
As previously stated, cross-chain solutions are prevalent, with decentralized exchanges such as Polkadex experiencing the greatest adoption. Polkadex has developed a fully decentralized platform for exchanging tokens in a trustless peer-to-peer environment, while also offering high liquidity, lightning-fast transaction speeds, and advanced trading features such as high-frequency trading and trading bots.
This enables the company to compete favorably against centralized exchanges such as Robinhood, Binance, and FTX by offering a platform with high throughput and quick trading options on the Ethereum blockchain.
Scalability and transaction processing speed are only a portion of the solution. Regardless of the steps taken to date, no large corporation would choose blockchain technology to handle their payment processing needs. While the output and transaction speeds are comparable to global card companies such as Visa and MasterCard, the industry’s lack of interoperability is a major concern.
Similarly, if the internet were not interoperable and data transferable via APIs, it would not have grown to its current size.
The adoption of cross-chain mechanisms by blockchains is necessary to ensure that the industry is global and simple to use for all users, thereby increasing blockchains‘ appeal and utility to users. To be truly effective, blockchains must be capable of transferring value and data across multiple platforms while also ensuring that these connections work across all industries.
At the moment, centralized exchanges continue to be the most popular way for hundreds of tokens and cryptocurrencies to communicate.
However, centralized exchanges require you to give them access to your private key, which creates significant security concerns when your assets are stored in a hot wallet.
To address these concerns, it will be critical to develop decentralized cross-chain solutions and decentralized exchanges in order to accelerate global adoption of blockchain technology.
This article is provided solely for informational purposes. It is not intended to serve as legal, tax, investment, financial, or other professional advice.