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Why are Layer-1 and Layer-2 Blockchains so important

Why are Layer-1 and Layer-2 Blockchains so Important?

Introduction

Blockchain technology has grown rapidly since Satoshi Nakamoto brought Bitcoin to the world’s attention. Since then, in the race to fulfill every requirement of decentralized financial networks, blockchains have had to adapt and scale accordingly. An increase in scalability also means risks to the chain’s integrity and security, which means that the developers must make the blockchain scalable while also maintaining the network’s security. 

What are layer 1 and layer 2 blockchains, and what is the importance of blockchain layers? Well, layer 1 and layer 2 blockchain protocols are meant to optimize the blockchain and also improve its efficiency in working with third-party protocols. Now, we need to understand the blockchain layers’ importance to properly comprehend these two terms. Without further ado, let’s see the answer to the big question: “what are layer 1 and layer 2 blockchains?”

What is Blockchain Layer 1?

What is Blockchain Layer 1
Source: Binance Academy / what is a layer 1 blockchain

Let’s understand ‘what is blockchain layer 1?’ first. A layer 1 blockchain is the protocol changes or additions made for scaling purposes. It is done through a consensus mechanism and mainly adds new features and scalable solutions to the blockchain. Bitcoin, BNB Chain, and Ethereum are all examples of a layer-1 blockchain.

How do Layer 1 Scaling Solutions Work?

Layer 1 protocols are simple additions to the existing base layer of a blockchain. Some prominent examples are Ethereum and Bitcoin, where the layer 1 protocols have helped the blockchain adapt and scale. These protocols direct the blockchain to increase the data storing capacity of each block along with transaction speed. It also helps add more users to the blockchain simultaneously. Currently, the technology revolves around adding more protocols to the base layer, but effective research is undergoing to add layer 1 directly to the blockchain for scalability solutions.

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What is Blockchain Layer 2?

What is Blockchain Layer 2
Source: RNDR Knowledge Base / what is a layer 2 blockchain

Scalability opens up the option of getting more end users but poses security threats. This is why the need for layer 2 blockchain arose. A layer 2 blockchain solution helps solve the problems of overburdening and security threats on a blockchain by working with third-party protocols. Suppose a large amount of transactional data has to be processed by the blockchain. A layer 2 solution passes on this task to a side chain, and when it is completed, the data is transferred back to the main chain. This helps keep the main chain safe from loopholes and overburdening.

How do Layer 2 Scaling Solutions Work?

Bitcoin introduced its layer 2 blockchain with the launch of ‘Lightning Network.’ It helps the blockchain scale according to user requirements and keeps the main chain burden free. The scaling solution that a layer 2 blockchain provides adds a side chain protocol to the main chain. It means whenever excessive transactional load occurs on the main chain, it gets transferred to the side chain for validation and processing, and is finally reported back to layer 1 (main chain). It helps to improve the network’s efficiency and keeps it safe from any loopholes that threaten the security of the framework.

1. Rollups

Rollups are layer 1 solutions that aim to improve the scalability of blockchains by aggregating multiple transactions into a single transaction. There are two types of rollups: optimistic rollups and zk-rollups. In optimistic rollups, transactions are initially processed off-chain and then later verified on-chain, while in zk-rollups, transactions are verified off-chain using zero-knowledge proofs before being committed to the blockchain. Rollups allowed for increased transaction throughput and reduced gas fees by minimizing the amount of data that must be stored and processed on the main blockchain while maintaining security through the verification process.

2. Sidechains

Sidechains are separate blockchains connected to the main blockchain, allowing for transactions to occur off-chain. Sidechains operate independently but can transfer assets and data back and forth with the main blockchain. This helps alleviate congestion on the main blockchain and allows faster and cheaper transactions. Sidechains can have their own consensus mechanisms, rules, and token economies, enabling experimentation and innovation in the blockchain ecosystem. However, they also require trust in the sidechain operators, as they may have different security assumptions than the main blockchain.

3. State Channels

State channels are a Layer 1 solution allowing off-chain transactions between two parties. State channels are essentially private off-chain channels where parties can transact without broadcasting every transaction to the main blockchain. Only the final state of the channel is recorded on the blockchain. State channels enable instant transactions, low transaction fees, and high scalability, as transactions are only processed off-chain between the parties involved. State channels are suitable for frequent and small transactions between known parties, such as gaming or micropayments.

4. Nested Blockchains

Nested blockchains, also known as “sharding,” is a Layer 1 solution that involves breaking up the blockchain into smaller chains called shards, each capable of independently processing transactions and smart contracts. These shards can operate in parallel, increasing the throughput of the blockchain network. Nested blockchains can be designed with different consensus mechanisms and rules, allowing flexibility and customization. However, coordination and communication between shards can be challenging, and special protocols need to be in place to ensure the integrity and security of the overall blockchain network.

Importance of Blockchain Layers

The importance of blockchain layers arises from the simple fact that blockchain technology needs to keep up with the world. Along with adding new features and more data capacity, there is a requirement for proper network security. Blockchain layers add to the underlying protocols to provide scalability solutions to the blockchain. For decentralized finance to replace the centralized system, it needs to be faster and safer than the current options. Layer 1 and layer 2 blockchain protocols provide new features as well as safety assurance to the blockchain.

What is the Blockchain Scalability Problem?

Consider this; the Visa network processes transactions at a speed of more than 24,000 transactions per second. In contrast, blockchains like Bitcoin, can process just 3 to 7 tps. This is primarily because of the higher requirements for transactional security and processing power. Validating the addition of a block takes a lot of time, posing scalability problems amongst the blockchain networks. Adding layer 1 and layer 2 blockchain protocols would help with efficiency by adding new features and side-chain support to the main framework.

Why is Blockchain Scalability Important?

Why Is Blockchain Scalability Important
Source: Medium / The trilemma that layer 1 and layer 2 blockchain protocols address

Scalability in the crypto world is referred to as the richness of experience for the end users using the blockchain. Since the decentralized finance processes provide complete control of data and assets to the users, its scalability is very important. If blockchain has to hold a strong position in the finance world, blockchain networks must keep adapting to the scalability requirements. Adding layer 1 and layer 2 blockchain protocols will help improve the blockchain’s transaction speed and data capacity.

Challenges of layer 1 and layer 2 blockchain scaling solutions

Of course, layer and layer 2 blockchains are not without their challenges. These include:

  • Layer 1 and layer 2 blockchain protocols require changes or additions to the base protocols. This means that the whole blockchain network gets interrupted in the process. In the case of popular blockchains like ETH or BTC, it will take a lot of time and investments.
  • The scalability trilemma refers to “scalability, security, and decentralization.” Layers 1 and 2 face the ‘scalability trilemma,’ meaning that even after imposing these two, any of the three aspects have to be compromised upon, which is an experimental proof of its own.

What’s next after Layer 1 and Layer 2 blockchains?

Learning about the limitations of these two layers directs the blockchain technology towards future improvements. The current situations demand the development of another layer over these existing ones that can tackle their limitations. Another area of research is to add protocols through layer 1 and layer 2 that can help the blockchain defeat the ‘scalability trilemma.’ So, the importance of the blockchain layers is imperative at the moment, and in the future the blockchain technology might have more layers added to support its scalability and security.

Conclusion 

We hope your questions like ‘what is blockchain layer 1?’ and  ‘what is blockchain layer 2?’ were answered in this article. The blockchain technology is undoubtedly the future of global finance, and the addition of layer 1 and layer 2 blockchains have definitely tackled some of the scalability issues plaguing this industry. Now it is upon future research and the addition of new features to see how the infamous trilemma of issues can be completely solved.

Frequently Asked Questions (FAQs)

1. What is the Difference Between a Layer 1 and Layer 2 Blockchain?

Layer 1 blockchains are the main blockchains that serve as the foundation of a blockchain network. They handle the core functionalities of a blockchain, such as transaction processing, consensus, and smart contract execution. Examples of layer 1 blockchains include Bitcoin, Ethereum, and Binance Smart Chain. layer 2 blockchains, on the other hand, are built on top of layer 1 blockchains and provide additional scalability and functionality. Layer 2 solutions are designed to alleviate the limitations of layer 1 blockchains in terms of transaction throughput, transaction fees, and processing times. They can include technologies such as state channels, rollups, sidechains, and nested blockchains.

2. What is a Layer 1 Blockchain Example?

An example of a layer 1 blockchain is Ethereum, a widely used blockchain platform for decentralized applications (dapps) and smart contracts. Ethereum is a layer 1 blockchain because it operates as the primary blockchain that processes transactions, executes smart contracts, and maintains its own consensus mechanism. Ethereum has its native cryptocurrency, Ether (ETH), which fuels transactions and smart contracts on the platform.

3. What is a Layer 2 Blockchain Example?

An example of a layer 2 blockchain is the Lightning Network, a layer 2 solution built on the Bitcoin blockchain. The Lightning Network is designed to enable faster and cheaper Bitcoin transactions by creating off-chain payment channels between users. Transactions can be conducted instantly and with lower fees than on-chain Bitcoin transactions. The Lightning Network operates as a layer 2 blockchain because it relies on the Bitcoin blockchain as the base layer for security and final settlement while processing most transactions off-chain within the Lightning Network’s payment channels.

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