Layer 2

Layer 2 refers to the solution built on top of a blockchain. The goal is moving small transactions off-chain. It pass the transactions to the blockchain only in certains states, such as initializing, terminating.

Therefore, it provides much lower fees. However, it's more centralized.

Mechanics

Layer 2 has a multi-signature address. It's like a vault that can only be opened when both parties agree. It's a payment channel.

When we initialize this channel, both parties deposit coins into this address. It's on-chain.

After that, the transaction between both of them, it's off-chain.

Either of the parties wants to withdraw the coin, it's on-chain.

Importance

• Any party in the multi-signature address can release its fund. One party can't hold on to the other.

• Network can find the fastest and cheapest path to transact from A to B.

Rollup

Similar to Layer 2, Rollup aggregates the small transactions into a big one and put it on-chain.

The aggregator needs to escrow. If the aggregator misbehaves, the escrow will be used.