How L2s Are Helping Crypto Swaps

Layer 2 scaling solutions have quickly become an integral part of the blockchain and crypto industry. Over the years, they have also taken on a bigger role in cryptocurrency exchanges (both centralized and decentralized exchanges) that provide a wide variety of services.

That includes token swap services like those offered on LNSwap, a protocol developed in part by Trust Machines. LNSwap is a decentralized atomic swap protocol that allows users to exchange crypto (more specifically swapping Bitcoin to Stacks assets). But there's one crucial component that impacts how crypto swaps work on LNSwap: Lightning Network. LN plays a huge role in creating an efficient token swap experience for LNSwap users, and the protocol is just one example of how the crypto market is looking to L2s to facilitate crypto swapping services.

So how are L2s changing the landscape for crypto users looking to swap cryptocurrency? We'll explain.

Crypto Layer 2 Solutions: An Overview

Cryptocurrency Layer 2 solutions are like add-ons to blockchains that improve certain aspects like speed and functionality. With most of the popular Layer 1s — especially Bitcoin, which is the original blockchain — network congestion quickly becomes a problem.

When too many transactions flood the network, transaction speeds decrease and network fees go up. But with crypto Layer 2 solutions, transactions can get done off-chain more quickly. Then, batches of transactions can be settled on-chain.

Think of Layer 1 blockchains like cars and Layer 2 solutions like airplanes. You’ll likely get to where you’re going in a car but it'll definitely take you longer, especially if you hit traffic along the way. That takes a lot of time and energy.

Jumping on a plane, however, will get you — and more people than can fit in your car — to the destination much faster. Layer 2 solutions (L2s) are needed because they make cryptocurrency transactions faster, more efficient and more affordable to use.

How Do Layer 2s (L2s) Work?

There are many types of Layer 2 solutions that all use different methods to solve scalability and cost issues. Since we touched on Lightning in the beginning, let’s use Lightning Network as an example to explain how crypto L2s can help.

The Lightning Network (LN) is a BTC L2 built on top of the Bitcoin blockchain. Instead of recording every individual transaction on the main blockchain, LN allows users to create private payment channels.

Payment channels are like direct connections between users. When two users want to transact frequently, they can open a payment channel between them by creating a multi-signature wallet. This wallet contains some cryptocurrency as an initial balance.

With the channel open, users can send payments to each other off-chain, meaning the transactions are not broadcast to the entire blockchain network. This makes the process incredibly fast and with the lowest fees possible.

Each time a payment is made, the channel's balance is updated accordingly. Users can keep sending payments back and forth as long as the channel's balance allows it. When they're done, they can close the channel, and then the final state is recorded on the main Bitcoin blockchain.

The Lightning Network improves scalability by reducing the number of on-chain transactions necessary for frequent interactions, leading to faster, more cost-effective and private cryptocurrency swaps.

What are Crypto Swaps and How Can You Swap Crypto?

Crypto swaps basically work as instant crypto exchanges. Imagine that you have bitcoin, but you want some ethereum instead. You could go through a tedious process of selling your bitcoin and buying ethereum separately. But a crypto swap lets you swap BTC and ETH directly and instantly. Swaps remove steps in the process of exchanging one cryptocurrency for another.

As long as you have ETH and want BTC and there’s another user who has BTC but wants ETH, you can swap P2P (peer-to-peer). These swaps are non-custodial, meaning there’s no need for a middleman or complex procedures. It's all about saving time, avoiding transaction fees, and diving into different crypto worlds hassle-free.

Many exchange platforms like LNSwap use liquidity pools with trading pairs to facilitate swaps in and out of crypto pairs. Liquidity providers then receive swap fees as a reward for placing pairs into the pool.

Bitcoin Swaps and How Layer 2 Can Make for Better Transactions

As we’ve discussed, Bitcoin swaps allow you to start swapping instantly for other cryptocurrencies and digital assets. Usually, these swaps occur on the main Bitcoin blockchain, which is time-consuming with potentially high fees. But with Layer 2s and swaps moving between cryptocurrencies becomes much faster and easier.

Here are some of the ways L2s can improve your crypto swapping experience. Much of this technology is still in development on Bitcoin (take rollups, for example), but L2s can help in facilitating the following:

Off-chain order matching

In off-chain order matching, users privately match trade details like prices and quantities outside the main blockchain. This speeds up and streamlines order execution because the complex calculations needed for matching happen off the blockchain. Only the final transaction is settled on the main chain. This cuts down on congestion and lowers costs, all while maintaining a secure and transparent trading experience.

Batch processing

Batch processing groups multiple transactions and processes them simultaneously. It saves time and resources compared to handling each one individually. Bundling multiple transactions into a single batch reduces network congestion as more transactions get processed together. Transactions become also more economical by reducing the overhead of processing each transaction separately.

Rollups

Rollups, like batch processing, are used for processing data. But they’re different because they summarize and aggregate data for Bitcoin swaps. When you're dealing with multiple swap actions, rollups combine all those moves into one concise report that's presented on the main Bitcoin platform. This simplifies the process, making it easier to manage and understand what's happening.

Payment channels

Payment channels are kind of like a tab you open at a bar. Instead of paying for each drink separately, you keep a running total. When you're ready to leave, you settle the bill. Payment channels in Bitcoin swaps are like that tab. They let users make several swaps off the main blockchain in a payment channel and then settle them all together on the main chain when the channel is closed.

Conclusion

More use cases for blockchain, DeFi and Bitcoin specifically are emerging every day. And more people are adopting crypto, needing to trade in and out of certain crypto assets. L2s and crypto swaps will remain increasingly vital to the crypto industry as these user needs continue to increase.

The faster, more decentralized and P2P Bitcoin can become, the more unstoppable it will be. Platforms like LNSwap and L2 protocols like Lightning Network are building the infrastructure we need for a robust Bitcoin ecosystem.

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