Layer 1 and Layer 2 – key differences

To achieve blockchain scalability, there are two main ways: Layer 1 and Layer 2 solutions. In this article, we’re gonna take a look at the key differences between these two solutions, and break them down.

To compete with a whole system of payments, blockchain has to become highly scalable, in other words, capable of accommodating a constantly growing number of users, data, and transactions. 

And this can be achieved by incorporating scalability into their structure. Layer 1 solutions add utility to a native blockchain in order to optimize its performance.

On the other hand, Layer 2 solutions are third-party protocols that integrate with a basic Layer 1 blockchain to increase throughput. 

To put it simply, Layer 1 is the term that is used to characterize the underlying main blockchain architecture. However, Layer 2 is an overlaying network, lying on top of the underlying blockchain. 

Blockchain Scalability

Even though blockchain technology is constantly proving to be a new pillar of the global economy, its underlying structure of decentralization faces a challenge known as the blockchain trilemma. 

It’s a balancing act between security, decentralization, and scalability inside a blockchain infrastructure.

Blockchain decentralization reflects consensus throughout a network and distribution of computing power, while security refers to a blockchain protocol’s defenses against network attacks. 

Both of these are non-negotiable to the function of a blockchain network.

Another thing essential is scalability, which refers to the network’s ability to support future growth and high transactional throughput. Scalability is extremely important because it represents the only way for blockchain networks to compete with legacy, centralized platforms.

The good news is that a whole new generation of scaling solutions and blockchains are built specifically to solve this problem with transaction capacity. Not only they are built for this, but they are also constantly increasing the scaling limits and making progress.

Layer 1 scaling solutions

Looking at a decentralized environment, a Layer 1 network refers to a blockchain, while a Layer 2 is a third-party combination that can be used in coexistence with a Layer 1 blockchain.

For example, Bitcoin, Ethereum, and Litecoin are Layer 1 blockchains. Scaling solutions for Layer 1 build up the base layer of the blockchain protocol in order to improve scalability. 

So, here is how it works; Layer 1 solutions switch the rules of the protocol directly to increase speed and transaction capacity while taking in more data and users. 

To achieve Layer 1 network scaling blockchain includes some foundational updates :

• Consensus protocol improvements
• Sharding

When talking about consensus mechanisms we see many projects move from proof of work to proof of stake. It provides much faster and less wasteful protocols. 

Sharding is one of the number one Layer 1 scalability methods. Instead of making a network constantly work on every transaction, sharding simply breaks these transactions into small data, and they can be parallelly processed by the network. 

On Layer 1, scaling solutions are often introduced by the project’s team of developers. Depending on the solution, the community will need to soft or hard fork the network.

This action creates two versions of the blockchain, one with the update and one without. Another option is to grow the network’s throughput is sharding, as we mentioned above. 

Layer 2 scaling solutions

As we mentioned above, Layer 2 refers to a technology or network that operates on top of an underlying blockchain protocol in order to improve its efficiency and scalability. 

This kind of solution requires shifting a portion of the blockchain protocol’s transactional weight to neighbor system architecture, which then handles the rest of the network’s processing and reports back to the main blockchain to finish its results. 

Other examples include:

• Nested blockchains
• State channels
• Sidechains
• Rollups

Nested blockchains

A nested blockchain is naturally a blockchain atop, or within another blockchain. Its architecture typically involves the main blockchain that sets parameters for a wider network, while performance is undertaken on an interconnected web of secondary chains. 

Multiple blockchain levels can be built upon the mainchain, using the parent-child connection. The parent chain presents work to the child that then processes and returns it back to the parent.

State channels

A state channel smoothes the two-way communication between an off-chain transactional channel and a blockchain and improves overall transaction speed and capacity. It doesn’t require validation by nodes. 

In the blockchain trilemma we mentioned above, state channels give up some degree of decentralization in order to achieve greater scalability. 

Sidechains

A sidechain is a blockchain neighboring transactional chain that’s typically used for large batch transactions. Sidechains use an individual consensus mechanism, one that is separated from the original chain, which can be optimized for scalability and speed.

With this kind of architecture, the main role of the mainchain is to keep overall security, confirm transaction records and resolve disputes. Sidechain transactions are publicly recorded in the ledger. Any security breaches do not impact the mainchain or any other chains. 

Rollups

The most common kind of roll-ups is the zero-knowledge one. They bundle off-chain Layer 2 transactions and give in them as one transaction on the main chain. These systems use verifying proofs to check the integrity of the transactions. 

Assets are held on the original chain with a linking smart contract, which confirms whether the rollup is functioning as it should. 

The Trilemma

The term scalability trilemma was invented by Vitalik Buterin, Ethereum’s founder. It’s a compromise that blockchain projects must make when deciding on optimization of their architecture. They have to balance between three properties: security, decentralization, and scalability. 

The solution to this trilemma is to build a protocol from zero with these solutions included, or rather built-in. There is a project called Algorand which is trying to do exactly this.

It uses a protocol called Pure Proof of Stake:

• The computation cost a single member faces only involves verifying and generating simple counting operations and signatures.
• The cost is not dependent on the number of users for each block. It is unaffected and constant by the size of the whole network.
• How computational power increases it directly improves performance, which makes this project scalable, and you can say even perfectly. This means that as the network grows in size, it supports a high transaction rate without any extra costs.

Limitations on scaling solutions

Both Layer solutions have their unique advantages and disadvantages. Working with Layer 1 can give the most effective solution for large-scale protocol upgrades. This also means that validators must be assured to accept changes via a hard fork.

Layer 2 provides a much faster way to improve scalability. On the other hand, depending on the method used, it can lose a lot of the security of the original blockchain. 

Users trust networks like Bitcoin and Ethereum for their track record of security and resilience. 

Conclusion

Layer 1 and Layer 2 scaling solutions and strategies are designed to make blockchain networks faster and more cooperative and helpful, to a fast-growing user base.

These strategies don’t necessarily cancel each other out, and many blockchain networks are exploring combinations of these two scaling solutions to gain increased scalability without giving up a part of decentralization or security.

Scalability itself is the main reason for slowing the mainstream adoption of cryptos. We need protocols that have been built specifically for this problem, in order to make sure that cryptocurrencies are fast and scalable enough. 

The question that arises is whether there will be any need for Layer 2 once Layer 1 becomes more scalable. Existing blockchains see upgrades and new networks are created with good scalability. 

The most likely option and the outcome is for Layer 1 to focus on security. With that, it can give Layer 2 networks to customize their services for specific use cases.

In the future, there is a high chance that large chains like Ethereum will still dominate thanks to their large developer and user community. 

Since crypto boomed across the globe, the hunt for upgraded scalability has created a two-factor approach with  Layer 2 solutions and Layer 1 improvements.