Blockchain Layer 1 vs. Layer 2 Scaling Solutions
Introduction
With the multitude of available blockchains and cryptocurrencies, you may be unsure whether you are using a Layer 1 or Layer 2 chain. While avoiding the complexities of blockchain can be advantageous, understanding the system you are investing in or using is still very important. This article will help you differentiate between Layer 1 and Layer 2 blockchains, as well as explore various scaling solutions.
What are Layer 1 and Layer 2 Blockchains?
Layer 1 refers to the foundational layer of blockchain architecture, serving as the core structure of the blockchain network. Examples of Layer 1 blockchains include Bitcoin, Ethereum, and BNB Chain. In contrast, Layer 2 networks are built on top of other blockchains. For instance, Bitcoin is a Layer 1 blockchain, while the Lightning Network that operates on top of it is categorized as Layer 2.
Improvements in blockchain network scalability can be divided into Layer 1 and Layer 2 solutions. Layer 1 solutions directly modify the rules and mechanisms of the original blockchain, whereas Layer 2 solutions employ external parallel networks to facilitate transactions beyond the main chain.
Why is Blockchain Scalability So Important?
Imagine a new highway constructed between a bustling city and a rapidly growing suburb. As more vehicles use the highway, congestion becomes increasingly severe, particularly during peak hours, significantly increasing the average travel time between locations. Given the limited capacity of road infrastructure and the continuously growing demand, this scenario is not surprising.
So, what measures can authorities take to help more commuters travel faster? One solution is to improve the highway itself by adding more lanes. However, this is not always feasible due to high costs and the inconvenience it may cause to vehicles currently using the highway. Another option is to be creative and consider methods unrelated to the core infrastructure, such as building additional service roads or introducing light rail transit alongside the highway.
In the realm of blockchain technology, Layer 1 networks act like the main highways, while Layer 2 solutions resemble service roads that extend overall capacity.
Bitcoin, Ethereum, and Polkadot are all considered Layer 1 blockchains. They serve as the underlying blockchains responsible for processing and recording transactions within their respective ecosystems and feature native cryptocurrencies, which are typically used to pay transaction fees and provide broader functionalities. For example, Polygon is a Layer 2 scaling solution for Ethereum that regularly submits checkpoints to the Ethereum mainnet to update its state.
Throughput is a crucial metric for blockchains, measuring speed and efficiency by indicating the number of transactions that can be processed and recorded within a specific timeframe. As the number of users and transaction concurrency increases, the speed of Layer 1 blockchains can become slow and costly, especially for those that employ Proof of Work mechanisms rather than Proof of Stake.
Current Issues with Layer 1
Both Bitcoin and Ethereum, as Layer 1 networks, face scalability challenges. These networks ensure security through a distributed consensus model, meaning that all transactions must be validated by multiple nodes before being confirmed. Miners compete to solve complex computational puzzles, with successful miners receiving the network's native cryptocurrency as a reward.
In other words, transactions require independent validation by multiple nodes before confirmation. This effective method allows verified data to be recorded on the blockchain while reducing the risk of malicious attacks. However, as networks like Ethereum and Bitcoin gain popularity, the demand for throughput becomes increasingly pressing. During periods of network congestion, users may experience slower confirmation times and higher transaction fees.
How Do Layer 1 Scaling Solutions Work?
For Layer 1 blockchains, there are several options to enhance throughput and overall network capacity. If a blockchain uses Proof of Work, transitioning to Proof of Stake may be a viable option, as it can increase transactions per second (TPS) while reducing processing fees. However, there remains a diversity of opinions within the crypto community regarding the advantages and long-term implications of Proof of Stake.
Scalability solutions for Layer 1 networks are typically introduced by the project's development team. Depending on the solution, the community may need to undergo a hard fork or a soft fork. Some minor changes are backward compatible, such as Bitcoin's SegWit update.
In contrast, significant changes, like increasing Bitcoin's block size to 8MB, would require a hard fork. This results in two versions of the blockchain: one that is updated and one that remains unchanged. Another way to increase network throughput is through sharding, which divides the operations of the blockchain into multiple smaller parts to process data simultaneously rather than sequentially.
How Do Layer 2 Scaling Solutions Work?
- Aggregation
Zero-knowledge rollups are the most common Layer 2 solution, bundling off-chain transactions into a single transaction submitted to the main chain. These systems use validity proofs to ensure the integrity of the transactions. Assets are retained on the original chain through bridging smart contracts, which confirm that the aggregation functions correctly, thereby securing the original network while reducing resource consumption.
- Sidechains
Sidechains are independent blockchain networks that have their own set of validators. This means that the bridging smart contracts on the main chain do not validate the legitimacy of the sidechain. Consequently, users must trust the operations of the sidechain, as it controls the assets on the original chain.
- State Channels
State channels provide a bidirectional communication environment between transacting parties. Participants lock a portion of the underlying blockchain and connect via off-chain transaction channels, typically facilitated by pre-defined smart contracts or multi-signatures. The parties then execute transactions off-chain without immediately submitting data to the main chain. Once all transactions are completed, the final "state" of the channel is broadcasted to the blockchain for validation. This mechanism enhances transaction processing speeds and increases the overall capacity of the network. Bitcoin's Lightning Network and Ethereum's Raiden are both state channel-based solutions.
- Nested Blockchains
This solution relies on a set of secondary chains located above the primary "parent" blockchain. Nested blockchains operate based on rules and parameters set by the parent chain, which does not participate in transaction execution, serving only to resolve disputes when necessary. Daily operations are handled by the "child" chains, which process transactions under the main chain and return completed transactions to it. OmiseGO's Plasma project is an example of a Layer 2 nested blockchain solution.
Limitations of Layer 1 and Layer 2 Scaling Solutions
Layer 1 and Layer 2 solutions each have their unique advantages and disadvantages. Layer 1 can provide the most effective solutions for large-scale protocol improvements, but this requires convincing validators to accept these changes through a hard fork.
However, validators may be hesitant to embrace such a transition, particularly when moving from Proof of Work to Proof of Stake. While this shift can enhance system efficiency, it may also lead to a reduction in miner revenues, thereby diminishing their incentive to drive scalability.
Advantages and Risks of Layer 2
Layer 2 offers a faster way to enhance scalability, but it also introduces risks. Depending on the approach taken, the security of the original blockchain may be compromised. Users trust networks like Ethereum and Bitcoin because of their reliability and security. If some of Layer 1's characteristics are sacrificed in the pursuit of efficiency, users must then rely on Layer 2 teams and networks to ensure safety and effectiveness.
What Comes After Layer 1 and Layer 2?
A key question is whether we will still need Layer 2 solutions as Layer 1 scalability improves. While existing blockchain technologies have been enhanced and new networks are striving for effective scalability, improving the scalability of the main system often takes considerable time and may not yield reliable results. Therefore, a likely direction is for Layer 1 to focus on security while allowing Layer 2 networks to be customized for specific use cases.
In the near future, mainstream chains like Ethereum are likely to continue dominating the market due to their large user bases and active developer communities. Additionally, the decentralized validator networks and solid reputations of these chains provide a strong foundation for the goals of Layer 2 solutions.
Conclusion
Since the inception of cryptocurrency trading, the pursuit of scalability has led to a dual approach of Layer 1 enhancements and Layer 2 solutions. If you hold various cryptocurrency assets, you have likely encountered both Layer 1 and Layer 2 networks. You now have a deeper understanding of the differences between the two and the distinct scaling methods they each offer.