Layer-2 Solutions, What Are They?

| November 17, 2023

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The adoption and use of blockchain technology have increased dramatically in recent times, thanks to the myriad use cases and ease of value transfer it offers. Its ability to generate returns as a financial instrument has further contributed towards the rising popularity of crypto assets and underlying blockchain technology. The rising number of novel financial applications and increasing user base has led to a phenomenal increase in the number of transactions conducted over these blockchain networks, exceeding the parameters considered during their creation.

Increased transaction activity exceeding the throughput on blockchain networks like Bitcoin and Ethereum has, on many occasions, led to backlogs and long transaction confirmation times. With limited scalability in sight, slower transaction speeds and higher transaction/miner fees resulting from high demand have significantly affected the large-scale adoption of decentralized solutions by individuals and enterprises alike.

The scalability issues faced by most native blockchains are legacy problems that are deeply ingrained in their design, leaving little room for improvement without compromising on other crucial parameters like the degree of decentralization and security. As a workaround, Layer-2 solutions that work on top of the native blockchain protocol have emerged as a viable alternative. By offloading the majority of transaction processing activity to a secondary protocol, layer 2 solutions have made faster and cheaper transactions possible while ensuring that the records of such transactions are maintained and secured by the primary chain.

What is a Layer-2 Solution?

Layer-2 solutions are external blockchain protocols implemented over layer-1 blockchains like Bitcoin and Ethereum to offer increased throughput to these networks. Layer-2 blockchains work by handling the processing of transactions off-chain and help relieve network congestion from the layer-1 chains that are unable to scale and witness increased user activity.

Layer-2 protocols operate on independent consensus mechanisms as compared to the layer-1 mainnet but rely on the mainnet for transaction security. These scaling solutions process transactions rapidly using their consensus mechanisms and send them to the main chain as compressed data packets. On the main chain, the transaction bundles are processed and stored immutably at a fraction of the cost and time. Thus, layer-2 protocols improve the transaction rates of the blockchain network tremendously while relying on the robust transaction security of the layer-1 chain.

Why is Layer-2 Preferred Over Layer-1 Updates?

The immense popularity of off-chain or layer-2 scaling solutions lies in their easy implementation over existing blockchain networks. By using layer-2 solutions, the desired improvements can be attained without making any significant changes to the primary or the main protocol, thereby allowing users to enjoy the security and integrity offered by the main chain.

Improving existing layer-1 solutions by switching consensus mechanisms or implementing other changes is a painstaking process that often comes with its own drawbacks. Today, even though we have multiple layer-1 protocols that promise higher transaction throughput and seamless scalability, many prefer layer-2 solutions on legacy protocols over them, and for a good reason.

Newer blockchains are still in the process of gaining a strong user base, and for a decentralized system, its security and reliability depend on the extent of network participation. Meanwhile, using a widely adopted blockchain enhanced by an associated layer 2 scaling solution ensures that the record of all transactions is maintained in one form or another on a reliable, widely adopted protocol.

Hence, layer-2 solutions are looked at as an immediate means to scale for Proof-of-Work blockchains that look to preserve decentralization. Layer-2 solutions were in fact popularized by the Ethereum network much before it transitioned to PoS. Further, layer-2 solutions can exist in tandem with layer-1 solutions, providing exponential transaction throughput when combined.

Beyond offering scalability, layer-2 solutions have managed to provide various benefits to blockchain networks that witness high traffic. They have been able to reduce transaction fees drastically for users, which on networks like Bitcoin and Ethereum would sometimes amount to more than the funds being transacted. With faster speeds and lower fees also comes the opportunity for developers to offer new use cases to blockchain users, which are set to further drive-up adoption.

Types Of Layer-2 Solutions

The superior functioning of layer-2 solutions can be seen with some of the more popular off-chain scaling projects. For example, Lightning Network for Bitcoin and Optimism for Ethereum are making transacting on these networks convenient and allowing Ethereum developers to expand use cases on the programmable blockchain. These scaling projects incorporate various technical solutions like state channels and rollups to achieve their goals.

State Channels

State channels are multisig smart contracts on blockchain networks that allow transacting parties to create channels on which transactions occur off-chain without the need for the validation of all transactions. The first and the last transaction, however, are recorded on the main chain representing the initial and final states of the channel. By keeping the interaction with the layer-1 blockchain minimal, users spend a fraction of the transaction fees and experience fast transaction confirmations thanks to state channel protocols.

Multisig authentication on state channels prevents the wrong parties from entering transaction channels, keeping these protocols secure. The Lightning Network is the most popular state channel protocol allowing huge numbers of users to transact quickly and economically.


Like state channels, rollups submit condensed amounts of data that aptly represents the entire bulk of transactions, limiting the resources needed by the mainchain to process and store transactions. They, thus, increase scalability and come in two different forms depending on how they function to scale layer-1 networks.

Optimistic Rollups

Optimistic rollups function by assuming that every transaction initiated on the layer-2 is valid. The transactions are bundled into data packets that consume lesser space and computation on the main blockchain than processing all the transactions conventionally on-chain. Reduced storage combined with the lack of individual transaction verifications reduces transaction fees drastically and improves on-chain confirmation times.

A distinct feature of optimistic rollups is their use of fraud proofs to determine the validity of transactions within batches. While all transactions are assumed to be valid, disputes surrounding suspected transactions can be raised within specific time windows. Fraud-proof computations are executed to check the validity of said transactions before submitting the rolled-up data on-chain.

Optimistic rollups possess EVM compatibility, unlike other rollup solutions, making it a highly popular layer-2 solution. Optimism and Boba Network are two of the most prominent optimistic rollups that work on top of the Ethereum blockchain.

Zero-Knowledge Rollups

While optimistic rollups use fault proofs to maintain transaction validity, ZK rollups utilize validity proofs to prove the authenticity of all transactions. Unlike their counterpart, each transaction is validated on the layer-2 protocol. Once validated, a summary of the transactions represented by their initial and final states is sent to the layer-1 chain for record-keeping purposes.

ZK rollups are the faster of the two rollups since they submit smaller amounts of data to the main chain and do not have to reserve waiting times for fraud disputes like optimistic rollups. Notable examples of ZK rollups are Loopring and zkSync, which operate as layer-2 solutions for Ethereum.

Layer-2 Solutions to Solve Blockchain Scalability and Drive Layer-1 Developments

Layer-2 solutions are considered the go-to for addressing scalability issues faced by many native blockchain networks. Some of the popular layer-2 solutions offer great security with respect to protocol practices and smart contract utilization — hence gaining user confidence. These solutions are, therefore, witnessing increased user adoption which is simultaneously taking the burden off layer-1 blockchains. Their easy implementation is a boon for blockchains, causing many networks to rely on them also. With the development of layer-1 scaling solutions, it will be interesting to watch how layer-2 protocols fare. Their implementation will likely synchronize with layer-1 developments, offering great scalability which will make blockchain networks more efficient than centralized systems.

Learn more about Liminal here.

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Original Content Published On Medium

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More on Crypto

As a regulated custodian, offering formalised and monitored asset custody to institutions registered under a defined jurisdiction has become a pivotal point in pushing the envelope of virtual asset security. 

We are actively pursuing accreditation from reputable regulatory bodies to penetrate the burgeoning markets in emerging jurisdictions. This strategic approach will establish Liminal as a credible and qualified custodian, enabling us to provide comprehensive custody and wallet infrastructure services to both regional institutions and enterprises seeking to develop their operations in these rapidly evolving markets.

A Step Towards FSP License

Moving to the most progressive state of Abu Dhabi with a vision of becoming a key digital asset custodian, we are stoked to announce that we have received an In-Principle Approval from the Financial Services Regulatory Authority(FSRA), a governing body in ADGM to establish progressive financial services environment. 

This IPA marks a crucial milestone in our journey as we look to expand our custody services in the region of MENA and work closely with institutions to offer them our advanced suite of wallet infrastructure, white label solution, automation workflow, secure staking, compliance integrations and more. 

Following the successful acquisition of our first custody license, TCSP, in Hong Kong, this impending second custody license marks a definite win for Liminal. 

It firmly establishes our position as a disruptive force in the custody sector, demonstrating our commitment to addressing the most critical challenges institutions face in digital asset management, security, and scalability.

Navigating the Rigorous Licensing Process

Obtaining an FSP is a rigorous and complex process that involves extensive due diligence and adherence to stringent regulatory requirements. 

The FSRA meticulously evaluates the applicant’s business model, risk management practices, operational capabilities, and compliance infrastructure. This comprehensive assessment ensures that only the most qualified and secure entities are granted the FSP, safeguarding the interests of investors and promoting the integrity of the digital asset ecosystem.

Advancing Liminal’s Regional Presence

Liminal’s path to securing the IPA was paved by a deep commitment to meeting all the FSRA’s exacting standards. We demonstrated unwavering dedication to operational excellence, robust risk management frameworks, and a comprehensive compliance program. 

Our team of experts worked tirelessly to address every aspect of the FSRA’s requirements, ensuring that the platform met the highest international security, governance, and transparency standards.

The IPA is not merely a formality; it represents a testament to Liminal’s persistent commitment to providing institutional-grade custody services that meet the evolving needs of the digital asset industry. 

With the IPA in hand, we are well-positioned to expand product offerings, establish strategic partnerships, and further solidify our position as a leading digital asset custody solutions provider.

December 5, 2023

As a new asset class, cryptocurrencies represent cutting-edge innovation in finance, thanks to their decentralized, secure, and transparent nature. Its very characteristics also make it a volatile instrument whose value is purely dictated by market forces. As the applications of cryptocurrencies and their underlying blockchain technology continue to increase, so has investor interest in them.

The rising interest in cryptocurrencies and the value they represent have got many people interested in acquiring and trading these digital assets. As a result, the demand for crypto exchanges and trading platforms has risen to record levels. At the same time, various businesses and institutions have chosen to diversify their assets by increasing their cryptocurrency holding, all in anticipation of the value appreciation expected to happen over time. These developments have led to a surge in traffic as well as transaction volumes on crypto platforms.

With crypto exchanges handling huge volumes of crypto assets, they continue to remain attractive targets to cybercriminals looking to make a quick buck by exploiting possible vulnerabilities on these platforms. Faced with constant threats, crypto platforms, investment houses and enterprises dealing with crypto assets are in need of secure crypto wallet infrastructure to safeguard their holdings.

Securing Crypto Assets with the Right Type of Wallet

Wallets are specialized applications for storing and managing crypto assets. They store the private keys and allow users to interact with all the on-chain digital assets associated with the key. To ensure two-way interaction, crypto wallets generate public keys based on the private key stored within, to act as a public address to accept incoming transactions.

Ownership of the private key signifies ownership of all the cryptocurrencies associated with that key, making it very important to safeguard them. There are multiple types of crypto wallets that differ from one another based on the key management techniques. In an enterprise setting, the wallets can be classified as hot, warm, and cold wallets. In hot wallets, the private keys always remain online while cold wallets keep the private keys in their original form completely isolated from the internet. Meanwhile, warm wallets are a version of hot wallets with better security and in some cases, the private key is connected online for a short duration to execute transactions.

Each wallet type comes with its own advantages and disadvantages. Hot wallets are generally faster and easy to use while cold wallet operations can involve multiple steps. Meanwhile, warm wallets are a more secure form of hot wallets with the private keys sparingly connected online, only at the time of executing transactions.

Securing funds With a Combination of Crypto Wallets

The differing performance and security features of wallet types make it hard for crypto platforms to rely solely on one wallet type to meet all their storage and security requirements while ensuring smooth operations. As a result, they implement a combination of different wallets as part of a sophisticated wallet infrastructure to balance the security of their holdings and the uninterrupted performance of their platform.

A typical wallet infrastructure includes a combination of hot, cold, and warm wallets where hot wallets handle the immediate requirements associated with sending and receiving cryptocurrencies while the cold wallet secures a majority of the assets held by the platform. Meanwhile, warm wallets act as intermediaries by holding reserve funds to refill hot wallets whenever their balance goes down. These warm wallets are periodically refilled from cold wallets, keeping their activity to a minimum.

Among all the wallets that are part of an enterprise wallet infrastructure, cold wallets hold a majority of the funds, and for a very good reason. Best operating practices require crypto platforms to maintain just enough liquidity on other wallet types that are part of the infrastructure. A typical hot wallet never holds more than 5% of the platform’s total funds at any time. Warm wallets generally hold similar amounts or a bit more, with some also supporting recirculation of excess funds received by deposit wallets from platform users.

What Makes Cold Wallets Interesting?

Cold Wallets are considered the safest among all crypto wallet types as they remain disconnected from the online world. With private keys never coming online, the chances of them being compromised either by hacks or leaks are almost none, at least until the best practices are followed. Moreover, they provide users with total control over their private keys to ensure a truly decentralized experience which is often neglected when it comes to cryptocurrency storage. By maintaining the majority of the funds in a cold wallet, the wallet infrastructure limits the risk exposure of the platform’s reserves to cybersecurity threats.

There are different types of cold wallets, ranging from a simple low-tech paper wallets to air-gapped machines and more advanced hardware wallets. As the name suggests, paper wallets are basically pieces of paper with the private key and its corresponding public key printed on them. These wallets are never online and as long as the private key is not entered into an online wallet solution, the crypto assets or funds stored in them can’t be accessed. Until recently, setting up cold wallets on air-gapped devices was widely practiced until HSM-based hardware wallets became popular.

When setting up a cold wallet on an air-gapped device, the user creates a wallet by generating a private key offline. The machine on which the wallet is created is never connected to the internet or other machines either physically or over wireless networks. Transferring funds from such cold wallets requires a multistep process where the transaction needs to be created on a device with an internet connection, followed by retrieval of transaction details along with current nonce on a USB drive or as a QR for signing by the wallet on the air-gapped machine and then transferring the transaction back to the connected device for broadcast.

In both instances, executing transactions is a multi-step, time-consuming process. At the same time, if paper wallets aren’t stored carefully, they may get destroyed or if someone gains physical access to the paper wallet, they can easily clear out all the funds in no time. Meanwhile, if proper precautions like using high entropy secrets, strong KDF parameters, and encryption protocols aren’t taken during the key generation process for an air-gapped machine, it may lead to the creation of weak private keys and associated public keys that can be easily compromised.

The introduction of HSM-based hardware wallets has made cold storage of crypto assets a lot easier. The hardware security modules implemented in these devices allow users to sign transactions on any connected device without revealing the private key. As long as the recovery phrase is secured and physical access to the device is controlled, the chances of a hardware wallet getting compromised are very slim. The security of cold wallets can be further strengthened by introducing additional redundancy in the form of multisig configuration which prevents transactions with a single private key in case it is lost or stolen.

Adopting Only the Best Practices in Liminal Smart Cold Wallets

Enterprise crypto asset storage and management solutions provider, Liminal incorporates the best wallet handling practices along with the most reliable wallet infrastructure to secure crypto assets stored in them. The HSM-only multisig cold wallet infrastructure with customizable storage and transfer policies enables it to provide the highest level of security to crypto assets stored in them. Further, the Liminal Signer retains the final signing authority as part of an automated process that gets triggered only if the transaction initiated conforms with the declared transaction policy.

Having Liminal’s Smart Cold Wallets as part of any platform’s wallet infrastructure offers the highest imaginable level of security for any crypto platform’s funds while providing a much easier, and quicker way to process transactions in and out of cold wallets.

Wish to adopt the Liminal Smart Cold Wallet Solution for your platform? Fill out this form or reach out to us on any of our available communications channels for more information.

Learn more about Liminal here.

Original Content Published On Medium

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November 17, 2023

Enterprise-level secure crypto storage and management solutions provider, Liminal is creating innovative, state-of-the-art blockchain products. With its main focus on crypto businesses of all sizes, family offices, and even individuals whose lives and savings revolve around extensive dealings in crypto assets, Liminal has introduced multiple interconnected crypto wallet infrastructure solutions with standalone operation capabilities. The first two among the lot are Liminal Cold wallets and Liminal Smart Wallet Refill solutions.

Crypto platforms can either choose to implement any of the available Liminal solutions depending on specific requirements or use the entire suite for all-around security and safe management of assets. Liminal Cold Wallets and Smart Wallet Refill solutions, together, make up the majority of the enterprise wallet infrastructure. To understand better, let us take a look at a conventional enterprise wallet infrastructure commonly implemented by crypto exchanges and other platforms.

Conventional Enterprise Wallet Infrastructure

Every crypto business needs to consider the safety of its crypto assets; as a result, they use a combination of different wallets to optimize security while maintaining operational convenience. A standard enterprise wallet infrastructure includes a cold wallet where the majority of the funds are stored; an always-online hot wallet with just enough funds to meet immediate requirements, and an intermediary warm wallet receiving reserve funds from the cold wallet to refill the hot wallets as and when they run low on funds. A dedicated wallet refill team with access to the warm wallets keeps track of hot wallets and initiates refills whenever the crypto asset levels in them go below a fixed threshold limit. Most enterprises generally maintain their cold wallets on air-gapped machines or use software multisig or MPC-based cold wallet solutions with access to these wallets limited to one or few handpicked top-level executives of the organization.

The conventional process is time and resource-intensive, requiring round-the-clock monitoring and inefficient key management where wallet keys are shared with multiple people just to ensure uninterrupted operations. All these factors introduce vulnerabilities to the wallet infrastructure, exposing the company’s crypto assets to various risks, including hacking attacks, theft, and misuse of keys, and unauthorized transactions. At the same time, proprietary MPC-based cold wallet solutions don’t come cheap and create excessive dependence on the solutions provider regarding troubleshooting, key management, and recovery.

Liminal’s Enterprise Wallet Solution to the Rescue

Liminal’s suite of enterprise crypto asset management solutions addresses the shortcomings of existing wallet infrastructure. The Liminal Smart Cold Wallets, along with the Smart Wallet Refill solution, create an end-to-end secure channel for high-value crypto transactions within the platform’s infrastructure.

Liminal Smart Cold Wallets

Liminal Cold Wallets is a secure, HSM-based multisig cold wallet infrastructure with multiple built-in security and failsafe features. The implementation of tried and tested hardware wallet-only multisig wallet solution instead of the more popular MPC or software multisig option combined with KYC-backed, customizable Policy Shield allows users to implement their desired transaction parameters without compromising the safety of their assets. Further, Liminal’s Cold Wallet solution virtually eliminates the chances of users executing transactions to a wrong address, either deliberately or by mistake, with the help of its wallet whitelisting feature. But that’s not all, as Liminal Signer acts as the final line of defense by retaining the final signing authority to initiate any outgoing transaction from the cold wallets upon satisfactory verification of compliance requirements per user-dictated policies.

Using Smart Cold Wallets, crypto platforms can easily replenish their warm wallets or transfer funds to other addresses in a few simple steps without worrying about possible security risks.

Liminal Smart Wallet Refill

With assets safely transferred from the cold wallet to the warm wallet, the next task is to secure the hot wallet refill process. The Smart Wallet Refill solution takes care of the subsequent steps by allowing the wallet teams to automate the wallet refill process by programming the applicable refill policies. Each Smart Refill Wallet acts as a warm wallet, receiving funds from the cold wallet and disbursing it to the hot wallets whenever the requirement arises.

Like the Liminal Cold Wallets, the Smart Refill Wallet responsible for initiating refill transactions are multisig in nature. The number of required signatures for refill transactions will be decided by the client, with Liminal Signer being one of the final signatories. To ensure uninterrupted operation, the Smart Refill Wallets secure batches of partially signed transactions from all the assigned participants, allowing Liminal Signer to place the last signature to process refill transactions once the conditions as per refill policy are met.

The client-provided parameters considered by the Smart Refill Wallets to replenish hot wallets include the transaction size, whitelisted wallet address, trigger amount in the hot wallet to initiate refill, cooldown period after each transaction, and more. In addition, the solution also makes allowance for manual intervention to trigger one-time refill transactions if the need arises during the cooldown period. The right implementation of the Smart Wallet Refill solution removes the need for a large, dedicated team just for monitoring and refilling hot wallets, allowing efficient allocation of manpower throughout the organization.

Operating Smart Cold Wallets and Smart Wallet Refill Solutions in Synchrony

Both solutions singlehandedly strengthen the wallet infrastructure and streamline operations to a great extent. Implementing them together can potentially make a huge difference in the way wallets are managed within the organization.

Working in tandem, both solutions will allow organizations to manage the bulk of their funds in a secure ecosystem with inbuilt redundancies. While the Smart Cold Wallets ensures a convenient and safe execution of outbound transactions without compromising the integrity of critical private keys, the Smart Wallet Refill safeguards significant volumes of transactions downstream by minimizing human intervention in the hot wallet refill process.

In other words, implementing Liminal’s solutions such that the outward transaction from the Smart Cold Wallets is sent to the Smart Refill Wallet to be further transferred to hot wallets will significantly improve the overall security standards of the platform’s wallet infrastructure.

A Lot More to Come

The Smart Cold Wallets and Smart Wallet Refills are just two of Liminal’s many products as part of its all-around crypto asset custody and management solutions. More products for enhanced security and convenience will be revealed soon.

Meanwhile, if you wish to learn more about Liminal’s Smart Cold Wallets and how it works in conjunction with Smart Wallet Refill solutions, reach out to us by filling out this form.

Learn more about Liminal here.

Do not forget to follow our blog and social media channels to keep yourself updated.

Original Content Published On Medium

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November 17, 2023

Find Out How You Can Benefit From A Fully Self-Custodial Wallet Architecture