Abstract

The popularity of cryptocurrencies and blockchain is growing exponentially, and the number of users and transactions is growing rapidly. While blockchain’s groundbreaking nature is clear, scalability (the system’s ability to grow while meeting increasing demand) will always be a challenge. Highly decentralized and secure public blockchain networks often struggle to achieve high throughput.

This is often described as the blockchain trilemma, that is, it is almost impossible for a decentralized system to achieve the same high level at the same time. levels of decentralization, security and scalability. In fact, blockchain networks only have two of the three factors.

But luckily, thousands of enthusiasts and experts are working hard to find scaling solutions. Some of these solutions aim to adapt the architecture of the main blockchain (Layer 1), while others target Layer 2 protocols that run on top of the underlying network.

Introduction

There are so many blockchains and cryptocurrencies available that you may not know whether you are using a Layer 1 or Layer 2 chain. While sidestepping the complexity of blockchain certainly has its benefits, it pays to understand the system you are investing in or using. Through this article, you will learn about the differences between Layer 1 and Layer 2 blockchains and various scalability solutions.

What are blockchain Layer 1 and Layer 2?

Layer 1 refers to the basic layer of the blockchain architecture. This is the main structure of a blockchain network. Bitcoin, Ethereum and BNB chains belong to Layer 1 blockchains. Layer 2 refers to networks built on top of other blockchains. Therefore, if Bitcoin belongs to Layer 1, then the Lightning Network running on top of Bitcoin is an example of Layer 2.

Blockchain network scalability improvements can be divided into Layer 1 and Layer 2 solutions. Layer 1 solutions will directly change the rules and mechanisms of the original blockchain. Layer 2 solutions utilize an external parallel network to facilitate transactions outside the main chain.

Why blockchain scalability is so important ?

Imagine a new highway between a large city and its rapidly growing suburbs. As the amount of traffic passing through the highway increases, congestion becomes very common, especially during rush hours, and the average time from point A to point B increases significantly. This is not surprising given the limited capacity of road infrastructure and growing demand.

What can authorities do now to help more commuters travel on this line faster? One solution is to improve the highway itself, adding extra lanes on both sides of the road. But this is not always possible, as this solution would be costly and cause considerable trouble for those traveling on this highway. Another option is to get creative and consider a variety of approaches that have nothing to do with changing core infrastructure, such as building additional service roads or even running a light rail transit line along the highway.

In the world of blockchain technology, the main highway is Layer 1 (the main network), and the additional service roads It is a Layer 2 solution (a secondary network that increases overall capacity).

Bitcoin, Ethereum, and Polkadot are all considered Layer 1 blockchains. They are the underlying blockchains that process and record transactions for their respective ecosystems, and have native cryptocurrencies – often used to pay fees and provide broader utility. Polygon is an example of an Ethereum Layer 2 scaling solution. The Polygon network regularly submits checkpoints to the Ethereum mainnet to update its status.

Throughput capability is an important element of blockchain. It is a measure of speed and efficiency, indicating how many transactions can be processed and recorded within a certain time frame. As the number of users increases and the number of simultaneous transactions increases, using a Layer 1 blockchain can be slow and costly. This is especially true for Layer 1 blockchains that use a proof-of-work mechanism instead of proof-of-stake.

Layer 1 current issues

Bitcoin and Ethereum are both Layer 1 networks with scalability issues. Both ensure the security of the network through a distributed consensus model. This means that all transactions must be verified by multiple nodes before being verified. So-called mining nodes all compete to solve a complex computational puzzle, and successful miners are rewarded with the network’s native cryptocurrency.

In other words, all transactions require independent verification by several nodes before being confirmed. This efficient method records correct and verified data to the blockchain while reducing the risk of attacks by bad actors. However, once your network becomes as popular as Ethereum or Bitcoin, throughput requirements become an increasing problem. When the network is congested, users will face slower confirmation times and higher transaction fees.

How does the Layer 1 scaling solution work?

For Layer 1 blockchains, there are several options to increase throughput and overall network capacity. If the blockchain uses proof-of-work, moving to proof-of-stake may be an option, which can increase transactions per second (TPS) while reducing processing fees. Still, the crypto community has mixed views on the benefits and long-term impact of proof-of-stake.

Scalability solutions on Layer 1 networks are usually introduced by the project's development team. Depending on the solution, the community will need to perform a hard or soft fork of the network. Some small changes are backwards compatible, such as Bitcoin’s SegWit update.

Larger changes, such as increasing Bitcoin’s block size to 8MB, would require a hard fork. This will create two versions of the blockchain, one with updates and one without updates. Another option to increase network throughput is sharding. It splits the operations of a blockchain into multiple smaller parts, processing data simultaneously rather than sequentially.

How does the Layer 2 scaling solution work?

As discussed above, Layer 2 solutions rely on secondary networks that operate in parallel or independently from the main chain.

Summary

Zero Knowledge aggregation (the most common one) bundles off-chain Layer 2 transactions and submits them to the main chain as one transaction. These systems use proofs of validity to check the integrity of transactions. Assets are saved on the original chain via bridging smart contracts, and the smart contract confirms that the aggregation function works as expected. This not only ensures the security of the original network, but also reduces aggregate resource consumption.

Side chain

Sidechains are independent blockchain networks with their own set of validators. This means that the bridging smart contract on the main chain does not verify the validity of the side chain network. Therefore, you need to trust that the sidechain is operating correctly because it has control over the assets on the original chain.

Status channel

A state channel is a two-way communication environment between transaction parties. Parties sequester a portion of the underlying blockchain and connect it to off-chain transaction channels. This is usually done through pre-agreed smart contracts or multi-signatures. Subsequently, parties execute a transaction or batch of transactions off-chain without immediately submitting transaction data to the underlying distributed ledger (i.e., the main chain). Once all transactions in the set are completed, the final "state" of the channel is broadcast to the blockchain for verification. This mechanism improves the processing speed of transactions and increases the overall capacity of the network. Solutions such as Bitcoin’s Lightning Network and Ethereum’s Raiden operate on state channels.

Nested Blockchain

This This solution relies on a set of secondary chains that sit on top of the main "parent" blockchain. Nested blockchains operate according to the rules and parameters set by the parent chain. The main chain does not participate in executing transactions and its role is limited to resolving disputes when necessary. Day-to-day work is delegated to "sub" chains, which complete processing under the main chain and return processed transactions to the main chain. OmiseGO’s Plasma project is an example of a Layer 2 nested blockchain solution.

Layer 1 and Layer 2 expansion solutions Limitations

Both Layer 1 and Layer 2 solutions have unique advantages and disadvantages. Focusing on Layer 1 can provide the most effective solution for large-scale protocol improvements. However, this also means that validators must be convinced to accept the changes through a hard fork.

Validators may not want to do this, such as when moving from proof-of-work to proof-of-stake. Moving to a more efficient system will cause miners to lose revenue, thus giving them no incentive to improve scalability.

Layer 2 provides a faster method to improve scalability. However, depending on the method used, the security of the original blockchain may very well be compromised. Users trust networks like Ethereum and Bitcoin because of their resilience and security records. If you abandon certain aspects of Layer 1, you often have to rely on Layer 2 teams and networks to improve efficiency and security.

What is after Layer 1 and Layer 2?

A key question is whether we still need Layer 2 solutions as Layer 1 becomes more scalable. Existing blockchains have been improved and new networks with good scalability have been created. However, improving the scalability of major systems will take a long time and is not guaranteed. The most likely option is to have Layer 1 focus on security and allow Layer 2 networks to tailor services to specific use cases.

It is very likely that large chains like Ethereum will remain dominant in the near future because of their large user and developer communities. But its large, decentralized group of validators and solid reputation lay a solid foundation for its Layer 2 solution goals.

Summary

Reflections on improvements since the beginning of cryptocurrency trading The pursuit of scalability has given rise to a two-pronged approach of Layer 1 improvements and Layer 2 solutions. If you have a portfolio of cryptographic products, there's a good chance you've been exposed to Layer 1 and Layer 2 networks. Now you know the difference between the two and the different extension methods they provide.