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Layer 2: Off-Chain#

Layer 2 solutions are secondary frameworks or protocols constructed on top of a Layer 1 blockchain protocol. Their purpose is to enhance the efficiency, scalability, and capabilities of the underlying blockchain by facilitating off-chain transactions or computations.

Ergo is compatible with a broad range of Layer 2 solutions derived from other UTXO blockchains, such as Bitcoin's Lightning Network. Ergo can also implement various off-chain solutions like Hydra and sidechains, which help alleviate blockchain congestion and offer benefits akin to ZK-rollups.

The integration of specific Layer 2 solutions into Ergo is determined by the requirements of the applications being developed.

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ErgoScript: Powering Layer 2 Transactions#

ErgoScript's flexible design allows large parts of transactions to be executed on Layer 2, which are then settled on the Ergo blockchain in a single transaction. For instance, a developer successfully used the eUTXO model to airdrop native tokens to 10,000 addresses simultaneously.

ErgoScript features several advancements like time-weighted data, Turing completeness, read-only data inputs, multi-stage contracts, sigma protocols, NIPoPoWs, and more. These enhancements enable a variety of Layer 2 protocols, each addressing scalability issues in their unique way.

Ergo can thus be considered a shared settlement layer for multiple Level-2 protocols and applications.

Plasma: Enhancing Data Structures#

Ergo inherently supports AVL trees, an efficient authenticated data structure that allows for proving different properties of the data without accessing the entire dataset.

The ledger is maintained as an AVL tree using Plasma. Users conduct off-chain transactions with the bank, resulting in changes in the ledger. The bank periodically publishes a compact snapshot of the ledger on the blockchain.

The Plasma Library can be used to build Plasma chains, leading to a comprehensive L2 solution. Currently, it's mainly used for data compression and contract simplification, but the development of Plasma chains is a promising future prospect.

NIPoPoWs: Facilitating Scalability#

NiPoPoWs offer significant scalability potential by enabling the interoperability of various blockchain networks. This capability can alleviate the load on individual chains by distributing it across multiple networks, thus enhancing overall network efficiency and scalability.

Enhanced Security through Interoperability#

One practical application of NIPoPoWs involves smaller, less secure blockchains leveraging the security of larger, more established chains. For example, a minor blockchain could periodically submit proofs of work to a larger chain, effectively anchoring their blockchain to the larger network. This anchoring process utilizes the security and computational power of the larger chain to enhance the integrity and trustworthiness of the smaller chain.

This approach not only boosts the security of the smaller chain but also enables seamless asset transfers between chains without requiring a centralized intermediary. By utilizing NIPoPoWs, these transfers maintain cryptographic proof of their legitimacy, ensuring that both chains recognize the validity of the transaction.

Scalability of Layer 2 Solutions#

NIPoPoWs could further improve the scalability of Layer 2 solutions like sidechains or state channels. By providing a robust method for these technologies to communicate more securely and efficiently, NIPoPoWs help to offload transactions from the main blockchain. This reduces congestion and increases transaction throughput, addressing one of the primary challenges facing blockchain scalability today.

Applications in Layer 2 Technologies:#

  • Sidechains: NIPoPoWs enable sidechains to operate more autonomously from the main chain while still maintaining a connection secured by proof-of-work. This is particularly useful for applications requiring faster processing times or handling specialized transactions.
  • State Channels: By securing state channels with NIPoPoWs, transactions can be processed off the main chain with assurances of their eventual consistency and integrity when reconciled on the main chain.

The Role of NIPoPoWs in Cross-Chain Communications#

NIPoPoWs facilitate not just asset transfers but also a variety of cross-chain interactions, from smart contract executions to consolidated data verification across networks. This interoperability is key to realizing a fully integrated blockchain ecosystem where different platforms can share capabilities and enhance each other's functionality without compromising on security.

By leveraging NIPoPoWs, blockchain networks can achieve higher scalability, enhanced security, and increased efficiency, making blockchain technology more practical and accessible for a broader range of applications.

Emerging Layer 2 Solutions#

There are several Layer 2 solutions currently under development that show great promise:

Lightning Network#

The Lightning Network is a Layer 2 protocol that operates by allowing two participants to pool their funds into a specific type of joint multi-signature wallet. This wallet facilitates the creation and enforcement of off-chain agreements. The network is composed of these interconnected channels, enabling off-chain payments to be routed across multiple channels, akin to an abacus.

Rainbow Network#

The Rainbow Network is an off-chain, non-custodial exchange and payment network that supports any assets for which two parties can agree on a price oracle. It enables users to trade, borrow, lend, and make payments in synthetic assets entirely off-chain, even though they only have one on-chain payment channel collateralized by a single asset. For more details, refer to this paper.


Rollups are a Layer 2 solution that could be implemented on Ergo using AVL trees. They involve bundling groups of transactions together, with the primary focus being on data posting on-chain, rather than verification.

There are two primary types of Rollups used for scaling:

  • Optimistic Rollups operate by handling transactions on a parallel chain that is compatible with the main chain. This model is termed 'optimistic' because it relies on the Fraud-Proof principle, where aggregators do not actively verify Layer 2, but intervene in case of fraud disputes. For more information, refer to this ergoforum post.
  • ZK-Rollups utilize zkSNARKs (zero-knowledge succinct non-interactive arguments of knowledge) to reduce network load by bundling hundreds of transfers off-chain into a single transaction. While their implementation is more complex than hybrid approaches, many projects are exploring this direction.


Hydra, a form of State Channels, employs a peer-to-peer signing model that is particularly effective for simple applications such as payment channels. One of its limitations is that it requires the participants to be predefined at the time of channel creation, necessitating a new contract for each new participant. While this model provides high levels of privacy and security, it lacks flexibility for open systems. To address this, IOHK introduced Hydra: Isomorphic State Channels, a solution that leverages both on-chain and off-chain computations, powered by the eUTXO design, to facilitate multi-party state channels. This approach opens up possibilities for other innovative state channel constructions, which could be utilized in tools like ErgoMixer.

Zero-Knowledge Contingent Payments#

Zero-Knowledge Contingent Payments are designed to be released only when the payee discloses specific knowledge in a trustless manner, ensuring that neither the payer nor the payee can cheat. This is achieved through a combination of a hash-locked transaction and an external protocol that verifies the correct data is revealed when the hash lock is released.

FairSwap/FastSwap protocols#

The FairSwap and FastSwap protocols are Layer 2 solutions that provide secure and efficient transaction methods. Detailed information about these protocols can be found in this paper.


Coinpools represent another potential Layer 2 solution for the UTXO model. They offer a method for grouping transactions to improve efficiency and scalability. More information about Coinpools can be found in this paper.