What is a Blockchain Layer 1 vs. Layer 2?
With over 420 million crypto owners worldwide, we are presented with an infrastructural bottleneck to the operations of blockchain networks. And this is where the issue of blockchain scaling solutions comes in. If we do not achieve high scalability, blockchain cannot experience mainstream adoption.
Layer 1 and Layer 2 blockchains are terms used to categorize different types of blockchain architectures based on their functionalities and roles in the overall blockchain ecosystem.
Here is a brief explanation on the differences between the two:
Layer 1 Blockchain Technology
Layer 1 refers to the base layer of the main blockchain protocol, where the primary blockchain infrastructure operates. It is the foundation of the entire blockchain network and defines the core rules as well as consensus mechanisms.
Layer 1 blockchains are responsible for handling the creation and validation of blocks, securing the network through various consensus algorithms (e.g., Proof of Work, Proof of Stake), and managing the native cryptocurrency. (if and where applicable)
Key Characteristics of Layer 1 Blockchains Include
- Security: The base layer ensures the security and immutability of the blockchain through its consensus mechanism.
- Decentralization: Layer 1 blockchains are generally designed to be decentralized, meaning no single entity has complete control over the network.
- Scalability: Layer 1 blockchains can be a challenge in offering scalability solutions, especially for popular networks like Bitcoin and Ethereum, which have limited transaction throughput.
As a result of higher transaction volumes, each Layer 1 blockchain has to either adopt or develop a custom scaling solution for sustainability for the blockchain layers. These are:
- Change in Consensus Mechanism
Before any transactions can be approved as valid, the nodes in each blockchain protocol need to agree. To this point, different blockchain networks have diverse methods of reaching agreements referred to as consensus mechanisms.
Some consensus mechanisms are not as efficient as Layer 1 scaling solutions. One popular example is the proof-of-work method, (PoW) where the miners solve cryptographic algorithms.
The best Layer 1 example to use for this is Ethereum. It moved from proof-of-work to proof-of-stake. (PoS) It could only process around 10 transactions per second as PoW. But PoS increased the data processing load of Ethereum to around 32 blocks.
Ethereum still has a long way to go in terms of scalability, however the switch to PoS is a huge step in that direction.
- Chain Fork
Forking is best described as upgrading or adjusting the chain. There are 2 types of forks – either a soft or hard fork. Soft forks are the new infrastructural changes compatible with the chain’s old nature. On the other hand, hard forks are new changes with a different mode of operation from the previous chain. The best example of this is Bitcoin which modelled a soft fork in its journey of blockchain scalability.
Bitcoin researchers came up with one of the Layer 1 scaling solutions of segregating witnesses in a transaction in order to facilitate scalability. The popular Bitcoin network SegWit Soft Fork was formed. Since the soft fork, the Bitcoin blockchain network has increased tremendously in performance, with Its processing load moving from handling over 1600 transactions in a block to processing almost 3000.
- Sharding
Sharding is a scaling solution where data is partitioned into smaller portions for faster processing. The state of a blockchain network would be broken into sizeable pieces called shards.
Therefore, only the nodes in an individual bit will process transactions. This is more efficient and faster than the time it takes for all the nodes on a blockchain protocol to agree. Currently, no particular Layer 1 has successfully implemented sharding. It is still a concept that major Layer 1 blockchains like Ethereum are working towards in the long run.
One to Watch – Aleph Zero (AZERO)
Aleph Zero is a layer 1 blockchain platform based on a novel, peer-reviewed consensus protocol, AlephBFT. The consensus utilizes a Directed Acyclic Graph architecture as an intermediary data structure, resulting in a rapid time to finality. In the end, however, Aleph Zero is still a blockchain—not a DAG.
The consensus is integrated into Substrate, an open framework built by Parity and the Polkadot developer community—however, it doesn’t make Aleph Zero a parachain, but rather an independent Layer 1.
In 2023, Aleph Zero will introduce Liminal, a software-based privacy layer based on zero-knowledge proofs and secure multi-party computation.
With the above, Aleph Zero aims to solve the shortcomings of DLT base layers and to help the industry tackle the problem known as the Blockchain Trilemma.
In early July 2023, AZERO was trading at $0,89
Examples of Layer 1 blockchains: Bitcoin, Ethereum network, Litecoin, Aptos, Algorand, Avalanche, Cardano, Cosmos, Elrond, Binance Smart Chain, Aleph Zero etc.
Layer 2 Blockchain Technology
Layer 2 refers to solutions that are built on top of existing Layer 1 blockchains to address their scalability and transaction speed limitations. Layer 2 chains takes out bundles of transactions from the main chain, processes the transactions on their behalf and bundles them back into Layer 1. These solutions aim to enhance the overall performance and capabilities of the underlying blockchain without altering its core protocols. Layer 2 blockchains achieve this by conducting transactions off-chain or through sidechains, reducing the burden on the main chain and improving scalability.
Since most Layer 1 networks are not achieving sharding anytime soon, Layer 2 networks are here to help increase their throughputs.
Most overlaying networks rely on a Layer 1 blockchain for security and data availability for the transaction data. But they often have their custom consensus and execution layers, even though the execution must be synchronized with the state of Layer 1.
Key Characteristics of Layer 2 Blockchains Include:
- Scalability: Layer 2 solutions enable higher transaction throughput by processing transactions off-chain or in a more efficient manner.
- Faster Transactions: By transacting some off chain transactions, Layer 2 blockchains can offer faster confirmation times and lower fees compared to Layer 1.
- Interoperability: Many Layer 2 solutions are designed to be interoperable with multiple Layer 1 blockchains.
Below are the scaling solutions that most L2 networks have adopted:
- State Channels
The Layer 2 blockchain networks most often utilize the state channels mechanism to scale their underlying blockchain. State channels are commendable for both their unparalleled privacy and speed. Some portion of the Layer 1 state will be moved into a multi-signature wallet outside of the blockchain. The participants in the state channels are able to carry out activities between themselves directly. For example, they can send funds by mutual agreement since they are using a multi-sig contract.
Miners (PoW) are not needed to be involved in their activities. When they are done overall, the last state of the channel will be integrated with the current state of the main chain. State channels are currently the best scaling solutions. For example, Bitcoin’s Lightning Network, a state channel on Bitcoin is able to process approximately 1 million TPS.
- Rollups
Rollup is a blockchain scalability solution that continues to gain wider acceptance in the blockchain ecosystem. Rollups gather up bundles of transactions from the main chain, then execute them off-chain and load the processed transactions back into the main chain.
This frees the neck of the main chain from processing all the transactions itself. With the assistance of rollups, Layer 1 networks such as Ethereum can then be more scalable. In addition, rollups operate differently. Some utilize the zero-knowledge mechanism, while others use the optimistic method.
An example of a Layer 2 network with ZK rollup is StarkNet, and Optimism uses an Optimistic roll-up mechanism. Recent research confirmed that a smart contract on ZKRollups can have as much as 100,000 transaction capacity per second.
- Nestled Blockchain
In engineering, nesting is determined to be a state where a program or instruction houses other programs or instructions. Nesting is one of the Layer 2 scaling solutions whereby a blockchain protocol houses other blockchains within or on top of it. The nested chain starts with a parent chain, which also has child chains. When processing the transaction, the parent chain will delegate to the children. The children will then execute the transactions and send the eventual result to the parent chain. Once the parent chain has the executed transactions, it will furnish Layer 1 with the result. This is one of the best scaling solutions and is faster because all hands are on deck.
A typical example of a nested blockchain protocol on Ethereum is Ethereum Plasmawhich has a relatively fast transaction capacity of 5,000 TPS.
- Sidechains
A sidechain is a Layer 2 scaling solution that exists alongside a main chain to optimize its performance. Assets become locked once the sidechain is processing transactions from the main chain. The majority of sidechains also have a federation or independent third party that cross-checks if there are no anomalies in the activities between the mainnet and the sidechain. The federation can be either a smart contract or a group of people. Although these side chains are independent, they can still rely on the security of the main chain. However, when the security of a sidechain is breached, the attack is unable to affect the main chain. Sidechains such as Polygon are able to process around 65,000TPS
One to Watch – Arbitrum (ARB)
Ethereum’s surge in adoption has led to high transaction fees and occasional congestion. Some believe on-chain upgrades are the solution, while others opt for second-layer solutions. One solution to this is Arbitrum.
With the recent token airdrop in March 2023 that has seen its market value skyrocket above other Layer 2 solutions, Arbitrum is gaining popularity due to its innovative approach to the problem as well as leading the next phase of dApps development.
Arbitrum is a Layer 2 solution for the Ethereum blockchain, designed to improve the speed of transactions, increase scalability, and boost the network’s privacy. It permits users to perform transactions off the main network and has them verified and batched before being committed back to the main chain.
In early July 2023, ARB was trading at $1,09
Examples of Layer 2 solutions: Lightning Network for Bitcoin, Plasma for Ethereum, State Channels, Rollups (Optimistic Rollups and ZK-Rollups), Arbitrum, Polygon etc.
The 2 Key Differences Between Layer 1 vs. Layer 2 Blockchains
- The purpose they serve
The fundamental purpose of Layer 1 blockchains is to work independently. This is evident in their independent, self-existing, and primary nature. They have all the data availability layer, consensus layer, and execution layer within themselves. However, that is different for Layer 2 scaling solutions. Their purpose is to help Layer 1 blockchains and not to be base blockchains themselves. Therefore, Layer 2 networks are dependent on the primary network by design.
- The key difference in Scalability Methods
The second major difference is the dichotomy in how each blockchain network achieves scalability. Layer 1 blockchains utilize methods such as changing the consensus mechanism, forking the chain, and sharding. And Layer 2 blockchains in contrast exist as state channels, nested blockchains, rollups, and sidechains.
Conclusion
With the rapid growth and adoption in the blockchain industry, increasing demands need to be met. The slow nature of the Layer 1 blockchain network in handling millions of users and transactions is unfit for the optimal growth of the overall ecosystem and Layer 2 blockchains provide the answer by offering various scaling solutions.
