Layer 1 vs Layer 2: Exploring Blockchain Solutions for Scalability

If you’ve been seeing discussions everywhere about layer 1 vs layer 2 blockchain networks, you’re not alone. It all started with Bitcoin and Ethereum’s scalability challenges. 

As more people adopted these cryptocurrencies and their blockchain technology, they started experiencing slow transaction speeds. In response, developers came up with these blockchain scaling solutions to ensure efficiency on the blockchain network. 

But what do these terms mean?

If you can’t wait to find out, this article is an in-depth discussion about layer 1 vs. layer 2 networks. It addresses the need for blockchain scalability and describes different types of layer 1 and layer 2 blockchain scaling solutions. 

Let’s break it down!

Layer 1 vs Layer 2 Blockchain: A General Overview

A layer 1 blockchain refers to a decentralized cryptocurrency network’s base architecture. It can be regarded as the network’s foundational layer or even the network itself. 

So, how does layer-1 blockchain work?

Layer1 blockchains can independently facilitate transactions and host other dependent blockchains on top of them. They can validate transactions, maintain the network’s distributed ledger, and secure it from malicious attacks. 

Some instances of layer-1 blockchains include the following: 

• Cardano
• Bitcoin
• Ethereum
• Solana 
• Polkadot

On the other hand, a layer-2 blockchain simply refers to another blockchain stacked on top of a layer-1 blockchain. This type of blockchain network relies on the layer-1 blockchain for data availability, architecture, and security. However, it is more flexible in terms of transaction processing and can upgrade the main network’s performance. 

How does a layer-2 blockchain work?

Layer-2 blockchains process bundles of transactions on behalf of the main network. Nonetheless, they still possess their own specialized consensus mechanism and execution layers, even though these are still synchronized with the main (layer-1 network)

Common examples of layer-2 networks include: 

• Lightning network 
• Polygon
• Arbitrum
• Boba network 
• Parastate

The lightning network (layer-2) layered on the Bitcoin network is a good example of a layer-2 blockchain layered on a layer-1 network.

What is Blockchain Scalability? 

Blockchain scalability refers to the ability of a blockchain network to handle higher transaction volumes as it gains popularity and onboard more users. 

As blockchain technology continues to gain mainstream adoption, blockchain networks have experienced an upsurge in users and a corresponding increase in the total number of transactions. Consequently, many networks have become so slow that it sometimes takes up to 10 minutes to complete a transaction. 

For instance, Bitcoin processes 4 – 7 transactions per second (TPS) compared to Visa’s thousands of transactions per second.

Source: Research Gate/A  Systematic Review on Blockchain Scalability

This problem stems from a core concept known as The Scalability Trilemma. 

It refers to the difficulty blockchain networks experience as a result of having to prioritize two out of three critical qualities: security, decentralization, and scalability. The concept suggests that prioritizing one or some of these qualities will result in forfeiting the others. 

Many networks forfeit scalability for security and decentralization, resulting in a platform’s throughput (transaction speed) suffering significantly. 

This lethargy can be frustrating for users, as most expect the blockchain network to exceed the efficiency of traditional financial systems. After all, the decentralized nature of blockchain technology is expected to facilitate fast transactions. 

To remedy this situation, blockchain projects can implement layer-1 and layer-2 solutions. These solutions help increase their capacity to handle a higher transaction volume without entirely sacrificing security and decentralization.

Can’t wait to learn how these work? 

The sections below will discuss some layer 1 and layer 2 blockchain solutions and how they can solve scalability issues. 

What is a Layer-1 Blockchain Solution? 

Put simply, a layer-1 blockchain solution is any technique that augments a blockchain network’s base layer (layer-1) to increase its throughput. These solutions make direct improvements, such as changing the blockchain network’s custom protocols in order to increase its overall network capacity.

The following are some common examples of layer-1 blockchain solutions:

1. Increasing Block Sizes

A single block in a blockchain network refers to a collection of transactions processed at once. Block size, on the other hand, represents the total amount of transaction data a single block can hold. 

This fundamental quantity is very crucial to the blockchain network’s efficiency. 

Here’s why: 

• A smaller block size ensures a more efficient storage utilization by reducing storage wastage. However, it fills up quickly, thus increasing the chances of longer wait times.
• A larger block size requires more resources from users. However, it allows for the processing of more transactions at once, potentially increasing the network’s throughput. 

While there is no consensus on the best approach, increasing the block size has been proven to be an effective method for improving a network’s overall capacity. 

For instance, in 2017, Bitcoin Cash (BCH) was created by hard forking the Bitcoin blockchain to increase transaction times while maintaining the status of a payment method. Bitcoin Cash increased the block size from 1 MB to 8 MB. As a result, Bitcoin Cash (BCH) could process 116 transactions per second compared to Bitcoin’s 7 TPS. Since then, Bitcoin Cash has increased its block size to 32 MB and can now process about 120 transactions per second.

2. Upgrading the Consensus Mechanism

You might have heard about Proof of Work (PoW) and Proof of Stake (PoS). 

These terms represent protocols that different blockchain networks use to validate transactions, verify their accuracy, and ensure the network’s security.

For instance, Bitcoin uses the PoW consensus protocol. This protocol validates transactions by mandating miners to add new blocks to the blockchain only after solving complex cryptographic algorithms. Although this approach is powerful and versatile enough to facilitate decentralized, peer-to-peer transactions, it requires a substantial amount of processing power. 

As a result, the PoW consensus mechanism tends to have slower transaction speeds compared to others. 

The PoS consensus mechanism, on the other hand, validates transactions by awarding block recordings to “stakers” using a lottery system. This mechanism avoids the high computational costs associated with the PoW mechanism by selecting validators based on their “stakes.” Consequently, blockchain networks that use the PoS mechanism tend to enjoy faster transaction speeds compared to those using the PoW mechanism.  

Clearly, the PoS mechanism is more efficient than the PoW protocol in terms of scalability. 

As such, blockchain platforms may solve its scalability by transitioning from a PoW protocol to a PoS mechanism.

In 2022, the popular blockchain network Ethereum underwent this change and switched from its legacy PoW mechanism to a PoS protocol, labeled Ethereum 2.0. This change has made Ethereum one of the most energy-efficient and sustainable blockchain networks in the world. You can also seamlessly make this switch with Debut Infotech’s custom layer 1 blockchain development services.

3. Sharding 

This technique increases a blockchain network’s overall capacity by breaking its database into smaller, faster, and more easily managed pieces or distinct datasets called “shards.” As a result, the blockchain network becomes more capable of processing the network shards simultaneously. 

Furthermore, by splitting the database, the entire network can process multiple transactions concurrently. Compared to requiring all the nodes to manage the entire network, the shards can be managed more easily. 

Sharding is a somewhat experimental mechanism adapted from the way distributed databases operate.

Wondering how it works?

The blockchain assigns individual network nodes to each shard rather than keeping a copy of the entire blockchain. In response, each shard interacts with others as they share addresses, balances, and general states via cross-shard communication protocols. Each shard also intermittently provides proof to the main chain. 

Due to this structure, the blockchain’s operations are evenly divided into smaller sections, and data is processed simultaneously instead of sequentially.

What is a Layer-2 Blockchain Scaling Solution?

A layer-2 blockchain scaling solution improves a blockchain network’s throughput by transferring some of its transactional burden to a different system architecture. 

While layer-1 scaling solutions focus on improving the network’s capacity to meet growing demands, layer-2 solutions cater to those demands by shifting the responsibilities to a supplementary architectural system. This system handles most of the transactional responsibilities, such as executing smart contracts off-chain and reverts to the main network for final settlement.

This decongests the main or underlying system, helping it scale better. Yet, it doesn’t alter the base of blockchain protocol.

The following are some common examples of Layer-2 Blockchain Scaling Solutions:

1. Rollups

As the name implies, rollups solve scalability issues by clustering and “rolling up” multiple transactions into one lone transaction. The multiple transactions are farmed out to the layer-2 blockchain and processed off-chain before returning them to the main chain for final settlement as a single entity. 

However, the assets remain on the original chain, which also holds a bridging smart contract for executing the transactions as soon as their validity and integrity are confirmed. 

By bundling up and processing these transactions off-chain and submitting only the compressed data to the main network, rollups help to reduce transaction fees and increase throughput on the main chain. 

There are two types of rollups, namely:

• Optimistic Rollups (ORs): Rollups that trustlessly record transactions that occur in layer 2. This implies that they assume that off-chain transactions are valid. Therefore, they do not publish validity proofs of each transaction batch on the main chain. E.g., Arbitrum, Base, and Opmtimism Mainnet.
  
  
• Zero-knowledge rollups (ZK-rollups): Rollups that submit summaries of state changes computed off-chain in batches. They differ from ORs in that they present validity proofs when submitting these changes to prove their correctness. E.g., Polygon, zkSync (PLONK), Aztec (zk-SNARKS)

2. Nested Blockchains

As the term denotes, nested blockchains are blockchains incorporated within or on top of another blockchain. This blockchain architecture often involves multiple secondary blockchains embedded or “nested” within a main chain. 

So, how does the entire setup function?

The main chain assigns transactions to be processed to the various secondary chains and maintains a parent-child connection with all of them. Depending on the unique circumstances, some nested blockchains may have multiple blockchain levels. Regardless of the situation, the parent blockchain doesn’t partake in any transaction execution processes except when there is a need to resolve a dispute. Instead, it delegates it to the secondary chains and receives feedback from them via the parent-child connection. 

This chain architecture promotes the entire network’s scalability by eliminating processing burdens on the main blockchain. 

The Ethereum plasma chain is a notable instance of a layer-2 nested blockchain solution. It is nested on the Ethereum Mainnet as the main or parent chain. However, the Ethereum Plasma contains its own native block validation mechanisms. As a result, it significantly increases the overall performance of the entire Ethereum network. In this setup, the main Ethereum chain serves as a trust and arbitration layer.

3. Side Chains

Side chains function almost similarly to nested chains. However, they exist as independent and autonomous blockchain networks with their own set of validators or consensus mechanisms. 

They are structured adjacent to the main chain (in parallel)  and help the main chain process large batches of transactions. Therefore, the smart contracts, which normally serve as a bridge between the parent and secondary chains, do not verify the validity of the side chain network. Instead, the sidechains have an independent third party that ensures there are no anomalies in the interactions between the side and main chain.

On the other hand, the main chain in a sidechain architecture is responsible for the entire network’s security. It also resolves disputes and confirms batched transaction records. 

The burden of processing the transactions rests entirely on the side chain, thus increasing the primary network’s capacity to handle more transactions. Furthermore, the sidechain’s own consensus mechanism ensures that any security breaches on the sidechain do not affect the main chain.  

Rootstock (RSK) side chain is a prominent example of a layer-2 side chain solution. Developers introduced it in 2015 to increase Bitcoin transaction times. 

This stateful smart contract platform increases Bitcoin’s scalability by facilitating the completion of other transactions on its secondary platform before being finally recognized on the Bitcoin network.

4. State Channels

State channels layer-2 scaling solutions function by facilitating off-chain transactions directly between users and minimizing on-chain operations. 

In this chain architecture, the main channel majorly serves as a valid arbitration mechanism. As a result, off-chain transactions are backed by the same level of security as on-chain activities. Yet, they consume less of the network’s security resources, thus increasing scalability. 

Here’s how it works. 

Two transacting parties seal off a part of the primary blockchain and plug it into an off-chain transaction channel. This is made possible with the help of a set smart contract or a multi-signature(multisig). A multisig is a standard requirement for a transaction to request two or more signatures before it is executed. 

So, when the conditions of the smart contract are fulfilled, or the required signatures are provided, the two parties proceed to execute the set batch of transactions. After execution, they broadcast the final “state” of the batch of transactions to the main chain for validation. 

This setup is advantageous because it reduces the load on the layer-1 blockchain. It also gives users a higher level of privacy without sacrificing security. For instance, users can send money to each other by mutual agreement without having to rely on the network’s usual miners to validate the transactions. 

The Bitcoin Lightning Network payment channel, which was integrated with Bitcoin in 2018, is one of the most prominent examples of a state channel application. Owing to this architecture, it reportedly processes millions of transactions per second.

Drawbacks of Layer 1 and Layer 2 Blockchain Solutions

Both layer 1 and layer 2 blockchain scaling solutions aim to solve the scalability trilemma via different approaches. 

Layer 1 blockchain scaling solutions make large-scale improvements by attempting to upgrade the layer 1 protocols or consensus mechanisms. However, these improvements often require a general agreement among network participants. As a result, implementing such changes may be slow and politically challenging. 

Furthermore, some layer 1 blockchain scaling solutions, like increasing block sizes, may lead to a more centralized architecture. 

On the flip side, layer 2 blockchain scaling solutions offer quicker ways to improve scalability, as very little or no changes affect the parent chain. Yet, most layer 2 solutions have potential security trade-offs. Additionally, other solutions are quite complex to implement and integrate. 

As such, both solutions have potential advantages and disadvantages that must be weighed before implementation.

As cryptocurrency and blockchain technology continue to gain widespread adoption, blockchain networks are bound to receive more transactions. This growing need automatically necessitates higher processing capacity to ensure efficiency and transparency across all operations. 

If your blockchain initiative is to gain and maintain a competitive advantage, it must increase its throughput, ensure data accuracy, and reduce transaction costs. 

Layer-1 and Layer-2 blockchain solutions help you upgrade your existing infrastructure to accommodate this growing number of transactions. 

However, identifying the exact solution that aligns with your business goals is very crucial to your development. It is also important to implement it accurately without disrupting the existing network.

Wrapping Up

As cryptocurrency and blockchain technology continue to gain widespread adoption, blockchain networks are bound to receive more transactions. This growing need automatically necessitates higher processing capacity to ensure efficiency and transparency across all operations. 

If your blockchain initiative is to gain and maintain a competitive advantage, it must increase its throughput, ensure data accuracy, and reduce transaction costs. 

Layer-1 and Layer-2 blockchain solutions help you upgrade your existing infrastructure to accommodate this growing number of transactions. 

However, identifying the exact solution that aligns with your business goals is very crucial to your development. It is also important to implement it accurately without disrupting the existing network.

Frequently Asked Questions: Layer 1 vs Layer 2