What are the differences between Layer 1 and Layer 2 blockchain solutions? In cryptocurrency, which is based on blockchain technology, scalability is something that is extremely necessary and drives the people towards it.
If you have been treading in the crypto space for some time now, you probably would have come across terms like ‘Layer 1’ and ‘Layer 2’ solutions.
Also, you may have wondered what exactly these are and how it helps the blockchain network in functioning.
In that case, this article will demystify both these terms and tell you about the merits and demerits of both these blockchain solutions.
Ideally, when it comes to blockchain technology, scaling is a particular term that refers to an augmentation in the throughput rate of the system.
This is actually measured by the number of transactions made in one second.
Over the years, cryptocurrency has become quite popular and is now commonly and increasingly used in everyday life.
Therefore, it is required to create blockchain Layers to ensure better security of the network, recordkeeping, and more and that is the reason companies ensure they have Layer 1 and Layer 2 blockchain solutions to offer to the users.
If you use a DeFi platform you surely have paid high fees to make a transaction and been frustrated.
With these blockchain solutions in place the scalability issue is resolved and therefore the high transaction fees do not act as a roadblock to banks the unbanked with permission-less finance.
With them, the DeFi platforms are no more a playing field for the rich.
As of now, there are several Layer 2 blockchain solutions being implemented because these specific solutions help to leverage smart contracts as well as automate transactions.
Layer 1 vs Layer 2 Blockchain Solutions – The Differences
Mainstream acceptance of crypto depends largely on its scalability which needs to be improved to make sure transactions made on the blockchain every day are fast enough.
For that, protocols that are designed especially to solve the scalability issue are required.
Thankfully, several research teams all over the world have been working closely over the years to upgrade the blockchain Layer 1 with Ethereum.
Apart from that, they have also come up with a set of Layer 2 solutions as well which operates as a superimposed network that lies over the Layer 1 blockchain solution.
Here are some of the differences between Layer 1 and Layer 2 solutions for you to know.
A Layer 1 blockchain solution is actually the base blockchain in a decentralized ecosystem. Typically, Ethereum is the underlying Layer 1 blockchain architecture.
This layer provides the key utilities of the network and functions by themselves. It relies on the validators and miners for confirmation of transactions and security.
However, sometimes, a Layer 1 blockchain needs to compromise on scalability and speed of transaction to ensure a bulletproof security.
On the other hand, a Layer 2 blockchain solution is actually third-party integration. This is combined with the Layer 1 solution which helps in increasing the number of nodes, and, in turn, the throughput rate of the system.
It makes the base layer more efficient for mass usage by alleviating all encumbrances of the base chain while making a transaction to an outside computing protocol.
The Layer 2 solution executes batches of transactions on a side chain. It then reports back to the base blockchain so that the final results can be recorded on the ledger of the Layer 1 blockchain block.
This ensures more security and complete immutability of the Layer 1 blockchain to the users who can now make an instant transaction.
As for the Layer 1 blockchain solution, the network itself works as the infrastructure of other protocols, networks and applications on top of it.
If it is a public decentralized Layer 1 network, its specific characteristic is its consensus mechanism. Depending on the type of this consensus mechanism the network varies in its security, speed, and throughput.
On the other hand, in the case of the Layer 2 networks, its characteristics and features allow it to widen the functionality of the Layer 1 base blockchain that acts as its counterpart.
This not only improves the performance of the base blockchain but also increases its programmability and reduces the fees to make a transaction apart from reducing the latency in a transaction.
Today, most of the scaling Layer 2 solutions function on cryptographic systems that enhance their performance level by a significant margin.
Perhaps the best and most notable quality of the Layer 1 solution is that it acts as the ultimate source of truth and it is typically in charge of the settlement of transactions.
In most cases, this means that it is accountable for the accounts of the users and their wallets. It does it effectively by using asymmetric key pairs and the subsequent crypto coins or token balances.
You will find that every Layer one network comes with a native token. This provides the users with access to the resources of the network.
You can also use this native token of the network to pay for the transaction fees and use other services provided by the network such as sending and receiving crypto coins, minting new tokens, and calling a smart contract.
On the other hand, the qualities of the Layer 2 networks are pretty similar to the Layer 1 networks but they have a much different approach when it comes to consensus mechanisms.
Each of these blockchain networks implement a scaling solution or ways in which it can map transactions back to the Layer 1 network.
One of the most discussed qualities of the Layer 2 network scaling solution is its ability to implement zero-knowledge rollups.
The basic idea behind it is to ensure that the side chains perform all their responsibilities such as transaction ordering, processing, and submitting mathematical proof that has been processed by it in the best possible way.
This ensures a fair and fast transaction.
There are two most common types of Layer 1 solutions that improve the base protocol and make the system more scalable overall. These are:
- Consensus protocol changes – There are several projects like Ethereum that are moving from a clunky and old consensus mechanism like PoW or Proof of Work to PoS or Proof of Stake via Casper protocol which is not only much faster but is also a less wasteful protocol. The PoW consensus is secure but is pretty slow. While Bitcoin can make only 7 transactions per second, Ethereum can manage anywhere between 15 and 20 transactions per second on a good day. This makes it quite difficult for the miners to solve the equations that are cryptographically hard. It requires a lot of computational power and time for solving them.
- Sharding – This is also one of the most commonly used Layer 1 scalability solutions by multiple projects now. While dealing with each transaction it does not make the network work sequentially. Instead, it breaks down the transactions into multiple smaller sets of data. These are called ‘shards’ that can be processed simultaneously by the network.
On the other hand, there are two specific Layer 2 solutions used today as well. These are:
- State Channels – These are two-way communication channels between participants of a transaction. This enables them to interact off the blockchain which typically happens on it. This helps in reducing the wait time because the participants do not have to rely anymore on a third party such as a miner.
- Nested Blockchain – This is also called Plasma. This solution comes with a pretty straightforward design principle. The base blockchain typically lays down the ground rules of the whole system but it does not take part directly in the operation provided there are no disputes that need to be resolved. It ideally refers to the multiple levels of blockchain that are located on top of the base chain. All these levels are connected to each other to form a parent-child chain wherein the parent chain distributes the jobs among the child chains that execute the necessary actions and send back the results to the parent chain. This type of Layer 2 solution not only reduces the workload in the parent chain significantly but also makes the network more exponential and scalable, if it is executed properly.
Some of the top Layer 1 blockchain solutions that you will find in the crypto space today are:
- Bitcoin – This is the original cryptocurrency and is considered to be the initial practical accomplishment of blockchain technology. Though it was initially created with a purpose to become a P2P digital payment network, it now has become a store of value instead due to its lack of speed.
- Ethereum – This is the first blockchain that is smart contract enabled. This has allowed deploying decentralized apps and there are now a lot of Layer 2 solutions built on it that improves the speed, efficiency, and cost of it.
- Solana – This is considered to be the rising star in the crypto space. It is also considered to be the fastest Layer 1 blockchain available out there as of now to perform transactions that are incredibly fast. It offers smart contract ability. It can also be used to create NFTs or Non-Fungible Tokens for cheap and also in DeFi.
- Polkadot – The ecosystem of this Layer 1 blockchain allows creating another blockchain upon it as well as supports direct interoperability of the side chains. Ideally, this blockchain sets the outline for the future of web 3.0.
On the other hand, here are some of the major and most successful Layer 2 solutions of the crypto space:
- Polygon – This Layer 2 solution was previously known as Matic and it allows better scalability of the Ethereum network. It also helps in creating NFTs and dApps by providing self-determining smart contracts autonomously using the gas fees of Ethereum.
- The Lightning Network – This is the most commonly used state channel for making faster Bitcoin transactions. You can use this Layer 2 solution as a Bitcoin payment network for mass usage like it is done in countries such as El Salvador and others.
- Arbitrum – This is another notable Layer 2 solution for Ethereum. This solution allows the developers to scale any decentralized app off-chain.
All these types of Layer solutions come with their own benefits which bring to the next point of difference.
As for the advantages of the Layer 1 solution, the most significant one is that you will not require adding anything on top of the existing architecture of the network. This is because the base Layer itself is changed.
On the other hand, as for the advantages of the Layer 2 solution, one of the biggest benefits is that it does not affect the performance or functionality of the underlying base blockchain to reduce the overall performance of the network.
Also, Layer 2 solutions such as the state channels, and Lightning Network in particular, helps in making multiple micro transactions quite quickly.
This is because it does not need to go through miner verifications or pay any unnecessary fees to make such transactions.
Which is Better – Layer 1 or Layer 2 Blockchain Solutions?
Both Layer 1 and Layer blockchain solutions are good for the network today.
Both these solutions come with their distinct functionalities and serve different purposes to make the network perform much better and faster overall.
However, the Layer 2 solution seems to be preferred a bit more than its counterpart due to several good reasons.
But, if you want to understand that you will need to understand the basics, the differences between them as well as a few other relevant facts.
The fact that today the Decentralized Finance or DeFi industry is booming is simply due to the smart contract Layer 1 and Layer 2 solutions both.
Recently, Ethereum launched the much long-awaited Phase 0 transition to Ethereum 2.0 and PoS or Proof of Stake consensus mechanism.
This enables lower centralization risks, lower electricity consumption, faster transactions, and reduced carbon footprint of the network.
In fact, a Layer 1 solution seeks to be World War III resistant.
And, with both Layer 1 and Layer 2 solutions available now, it has resulted in much better and more effective blockchain interoperability.
Ideally, nowadays the Layer 2 blockchain solution is required to overcome the deficiencies of the original blockchain networks which may have been programmed on purpose or by mistake as such.
This will enable the network to handle more users as well as meet their needs in a much more comprehensive manner.
Today, in fact, the Layer 2 solutions are very important to use for improving popular base blockchain networks such as Bitcoin and Ethereum.
The Layer 2 solutions also help in ensuring that the blockchain network is high in:
- Security and
In addition to the above, this particular blockchain solution also helps in alleviating the transaction dreariness and expedites the process while executing apps off-chain.
However, at this point, it is good to remember that all Layer 1 networks support making transactions but all of them may not offer the same kind of services.
Therefore, you should know about the specific consensus mechanism used in order to compare Layer one networks along with the advantages and disadvantages provided by it.
This is important because it is the consensus mechanism of the blockchain that generally results in the trade-offs between speed, security, and decentralization.
Of late, there has been a lot of development and innovations made in the consensus mechanisms by the blockchain developers.
It is this continuous evolution of the consensus mechanisms that contribute to the range of distributed ledgers that you know today.
There are even a few networks that ensure that the decentralization and security are provided at the Layer 1 level and the speed factor is delegated to the Layer 2 solutions.
No matter how useful both these solutions are, both come with their own set of limitations as well.
- First, adding them to the existing protocols is the main problem because it tends to complicate the process with experimentation and coding that is sometimes felt as unnecessary. This also needs a lot of money. Moreover, the fact that the existing protocols are good enough to support trading crypto coins worth millions of dollars every day does not make any sense in complicating the process.
- The second significant issue is the ‘scalability trilemma,’ a term that the founder of Ethereum, Vitalik Buterin, came up with. It refers to the ability, or inability to be precise, of the blockchain to cope with three organic properties such as scalability, security, and decentralization.
Typically, the main reason for this trilemma is that any blockchain network can feature only two properties at the most but can never handle all the three at the same time.
This means that, given the existing architecture of the blockchain, it will always have to compromise with one of the three fundamental properties, and that too for no fault of its own.
All these can be probably solved with only one solution which is to build a new protocol right from scratch with these solutions built in it.
As for the scalability trilemma, it is also required to use an entirely different consensus protocol called PPoS or Pure Proof of Stake consensus protocol.
This actually helps in several ways such as:
- The Selected Verifiers and the leader are chosen from every step of the Byzantine Agreement
- The cost will no more be dependent on the number of preferred users for each block since this is fixed and is not affected by the size of the entire network and
- Every user pays the cost of computation that involves only simple counting operations and generating and verifying signatures.
Ideally, when the computational power is increased directly it also improves its performance.
This will make the entire network more scalable and perfect in all respects.
This means that the network will grow in size and will therefore be able to handle more transactions and produce results at a much faster rate without incurring any additional cost for it.
However, the current blockchain needs the Layer 2 solution and the simple reason behind it is the higher costs and the increased demand for transactions.
This solution will ensure that the blockchain network is not clogged and the transactions are not left pending.
If this happens, the transactions will be held in the memory pool and it will take more time to get completed.
In order to solve this issue, the miners typically prioritize transactions which lead to even higher gas fees in order to get a transaction confirmed which increases the minimum cost to make a transaction.
This makes the situation quite bad for everyone. And, Layer 2 scaling provides a feasible solution to this issue by reducing the cost of transactions.
The problem with the Layer 1 solution is that it is a blockchain in a decentralized system and is changed to make the network scalable.
This means that it also changes the rules of the protocols in order to accommodate more users, more data, more transactions, and expedite the transaction speed.
However, it seems to be falling behind with the number of users and demand for transactions which results in the incompetence of the network due to excessive workload.
As for the future of Layer 1 and Layer 2 blockchain solutions, no one really knows about it.
However, as of now in spite of the bottlenecks in these two solutions, the blockchain developers typically have two options available in front of them namely:
- Alleviate the scaling crisis and
- Look for feasible alternatives.
They have sensibly opted for the former by migrating to the Layer 2 blockchain solution with Ethereum 2.0 thereby helping the users significantly.
Both Layer 1 and Layer 2 solutions are good to use today but they both come with their significant differences. One who is unaware of them would find this article and others like this to be very useful to boost their knowledge and make a choice.