What are Layer-1 & Layer-2 Blockchains, and why are they so important to you?

First proposed by Ethereum co-founder Vitalik Buterin, the Scalability Trilemma refers to a blockchain’s ability to balance three core fundamentals that determine its functionality and operability– security, scalability, and decentralization.

Vitalik stated that any blockchain technology could only possess two properties and never have all three. Therefore, any blockchain technology will always need to compromise on one or more of the fundamental properties. Bitcoin is a good example. While it has optimized decentralization and security it has had to compromise upon scalability.

Introduction

Since the days of Satoshi’s whitepaper, crypto has advanced a lot. They not only have Bitcoin, but also other competing chains (known as alts), that are also built with the stated goal to create a permissionless, decentralized financial network.

This is possible because blockchain networks must be highly scalable, capable of growing quickly enough to handle the growing number and users of their services, as well as the data and transactions that they store every day.

Therefore, decentralized networks need to balance the principles of decentralization and the requirements for security and scalability. Blockchain networks will be able to compete with legacy systems if they incorporate all three elements properly.

Blockchain technology is rapidly expanding as new solutions are introduced. This leads to the problem of scaling. Along with security and decentralization, scaling is a pillar of the blockchain trilemma.

The scaling problem of blockchain networks is something that must be solved. Layer 1 is the structure that underlies blockchain performance. Layer 2 is third-party protocols which integrate with Layer 1 blockchains to improve output and efficiency.

Layer-1

Blockchains were never tested as well as they are today. With all the hype surrounding scaling while also encouraging security and decentralization, one must always give. Blockchain networks can scale to compete with central networks for transactions, offering more processing capabilities and functionality.

BNB and Terra are some of the most popular Layer-1 Blockchains. Layer 1 solutions refer to a group of solutions that enhance the network in order to make it more scalable. They can be used to solve the scaling problem.

How does it all work?
Layer-1 solutions modify the protocols directly to increase throughput, speed, and allow for more users, projects, or applications. For example, Layer-1 scaling can result in an increase in the number or speed at which blocks are confirmed. This will increase overall network throughput.

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C-Corner graphic illustration of PoS and PoW models

There are generally three main approaches to implementing Layer 1 solutions – Proof of stake or PoS, Proof of work or PoW, and Sharding.

  1. Proof-of Work, or PoW is the traditional consensus mechanism of large chains like Bitcoin, Ethereum, and ETH. It excels in security and decentralization by using miners for complex cryptographic algorithms to decode, thus removing all authority from a single entity. PoW needs to sacrifice scalability to allow the other two to work. It’s also slow and takes a lot of resources and energy, particularly computing power.
  2. Proof-of-Stake, or PoS, is a consensus mechanism that accommodates a distributed “stake” over a network. Based on the stake they have or the number tokens they own, users authenticate block transactions directly. PoS is weak in security, but strong in scalability.  In order to scale up, decentralize and support the increasing number activities on its network, Ethereum has made a move to a PoW consensus system. As the Layer-1 market becomes more competitive, many newer blockchain networks prefer PoS to speed adoption and accelerate adoption.
  3. Sharding, an experimental approach to Layer 1, uses the power and flexibility of distributed databases. It involves the breaking up of a network into a series of separate database blocks known as “shards” making the blockchain more scalable. Each network node is assigned to one shard, rather than maintaining a complete copy. This frees up processing power and allows for faster transaction processing.

Layer-2

Layer-2 solutions are networks that run on top of Layer-1’s blockchain protocol in order to increase its scalability, and operations. This allows Layer-1 the ability to shift a portion their transactional burden to an adjoining network. It then processes the transactions and sends them back to the main Blockchain to finish its work. The base layer blockchain is made less congested by transferring large amounts of processing power to external networks. This makes it more scalable.

Polygon and Ethereum are two excellent examples. Polygon is an interoperability layer-2-scale solution for Ethereum compatible blockchains. Polygon allows users to deposit Ethereum tokens into a smart contract and interact with them within Polygon. They can then withdraw the Ethereum mainchain tokens back to complete transactions.

Bitcoin has a Layer-2 option, the Lightning Network. This was designed to speed up transactions on the Bitcoin network.

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Example of Layer 2 scaling solutions for the Ethereum Blockchain. Credit – Coin98Analytics

Another example of Layer-2 solutions are:

Nested blockchainsA nested block is a combination of two blockchains. The main chain can set conditions and delegate work to nested blockchains that then process the data and return it back to the main. This reduces the main chain’s processing burden and allows it scale.

State channelsA state channel is interoperable communication that allows for interoperability between a blockchain channel and an off-chain channel. This improves overall transaction capacity as well as speed. To deploy its solutions to the off-ramp channel and blockchain, it usually uses smart contracts or multisignatures (multisig). The transaction details are recorded on the underlying Blockchain after it is complete on the state channel. State channels include Ethereum’s Raiden Network and Bitcoin Lightning.

Sidechains: A sidechain is a network “by the side” of a blockchain (hence the name) that’s typically used for large transactions. Sidechains can be built from scratch. They also have their own consensus mechanism, which can be optimized to speed up and scale. The underlying blockchain is responsible for transaction processing. However, the sidechain speeds up the speed of transactions and accelerates their scalability. Sidechains differ from state channels in that they are publicly recorded to the ledger. Any sidechain security breaches won’t affect the main chain.

Final Thoughts

Both Layer-1 and Layer-2 scaling solutions serve the same purpose. They are designed to speed up the mass adoption and make networks more accessible to a rapidly expanding user base.

They don’t necessarily have to be mutually exclusive. Ethereum, for instance, is moving to a PoS layer. However, Layer-2 solutions such as Polygon will be vital for Ethereum’s scalability without having to abandon the two other parts of the blockchain trilemma. The more, the better.

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