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What is Layer 1 Vs. Layer 2 Blockchain Solutions?

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


If you’ve been in the world of blockchains for some time now, you would have definitely heard of terms like layer 2 blockchains, helping alleviate the scaling troubles that blockchains are infamous for. The scaling trilemma is seen to be one of the greatest limitations stopping blockchains from being popularly adopted – one could argue that this would solve the adoption problem that cryptocurrencies are facing currently.
When web 3.0 entrepreneurs attempted to solve the scalability issues – it was always at the stake of decentralization or the overall integrity of the network, leading to the infamous blockchain trilemma.
But that hasn’t stopped the brightest minds on the planet to figure out solutions that aim to increase scalability, without putting the integrity and decentralization of the blockchain at risk.
Blockchain layer 2 solutions.

What is a Blockchain Layer 1 Vs. Layer 2?

Ethereum, one of the most popular blockchain networks in existence, has definitely reached a point where scalability is a real issue. Network congestion, increased gas fees, and particularly low throughput have been a real problem, especially during the peak of the crypto boom in 2022. At its peak, Ethereum was only able to process 30 transactions per second, which pales in comparison to payment processors like Visa and Mastercard, which can reportedly process over 65,000 transactions in a single second.

If Ethereum was truly adopted, and everyone started using Ethereum – the network would be plagued with slow and costly transfers, making Ethereum literally unusable.

Enter Layer 2 solutions. With the help of a data link layer, a second blockchain now sits on top of the Ethereum blockchain, to help reduce the load on the Ethereum main net. By creating an additional layer of blockchain on top of the existing layer, not only is the scalability issue solved but the same level of decentralization and security is also maintained. Reduced gas fees, faster transactions, and potentially widespread adoption are now possible. 

Why is Blockchain Scalability Important?

One of the main things that the crypto community, as a whole, wants to achieve is mass adoption. It’s to get more and more people to use cryptocurrencies for the myriad of different benefits that it offers. That being said, if two big countries, say India and Australia, adopt Ethereum as legal tender – it would take forever for a person to buy anything, at the current stage.

The number of transactions on cue will literally clog up the system, making it highly essential for some improvement in scalability. As it stands, the fact of the matter is, cryptocurrencies like Ethereum and Bitcoin cannot handle widespread adoption, as that would simply drive up the transaction costs to an insanely new height. 

That being said – the way the current consensus algorithms like Proof of Work are constructed is carefully designed to ensure the highest levels of decentralization and security while acting as the major chokehold in the scalability front as well. The importance of a good consensus algorithm cannot go understated, as if you open this chokehold too much, you will give way to increased centralization, or even the potential for an attack on the entire network.

Blockchain will become the very thing that it set out to destroy. This is the reason why the brightest minds of our generation are working to find a fix to this seemingly impossible scaling trilemma

Current Layer 1 Solutions 

Does that mean are there ways to increase the scalability of blockchains without going to the 2nd layer? Do we really need to add on another blockchain on top of a blockchain, not to mention a Data link layer, and make the whole thing entirely complicated?

Well, no – but not without tradeoffs. 

There are several layer 1 solutions that are very well implemented currently in different blockchain networks.
This could simply be an improvement in the consensus protocol – a recent example being Ethereum’s shift to faster Proof of Stake mechanism, while still not losing out too much in terms of decentralization and security. Or it could also be in the form of sharding (we’ll discuss this in a little while). 

There are many people advocating for simply updating the block sizes of the existing blockchains – for instance, increasing the 8MB hard limit for Bitcoin’s blocks – but that would require a hard fork, and creating two strings of Bitcoin – one without the size increase, and one with.


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How Do Layer 1 Scaling Solutions Work? 

The two commonly accepted solutions (albeit not without tradeoffs) on layer 1 are improvements to the consensus protocol and sharding. 

1. Consensus Protocol Improvements

Simply changing the consensus protocol would be a massive improvement in terms of the number of transactions that you can achieve, but there is still ongoing debate within the community on how much of a slippery slide this becomes. Proof of Stake, for instance, is without a doubt, less secure than proof of work, and some other consensus protocols like Proof of Importance, or Delegated Proof of Stake go further down the line in terms of security and decentralization. However, the community widely accepts Proof of Stake to be an improvement on Proof of Work, especially considering the environmental impacts and the fact that you need specialized machines to take part in the mining process.

This popular sentiment is also reflected in Ethereum’s recent merge, where the network shifted to a Proof of Stake consensus mechanism

2. Sharding 

Another solution that’s gained a lot of traction in recent days is sharding. Sharding allows for the network to be broken down into small pieces, allowing for the processing to happen simultaneously and not sequentially. Sharding allows for low gas fees forever, not to mention the fact that all transactions are processed immediately, with the same levels of finality. 

Organizations like Shardeum use the Proof of Quorum consensus algorithm, along with Proof of stake to ensure the highest levels of scalability without having to sacrifice much on security. 

How Do Layer 2 Scaling Solutions Work? 

As mentioned earlier, Layer 2 solutions use another layer of blockchain on top of the current layer to ensure that the load is taken off the mainnet. Blockchain networks like Polygon allow for smart contracts of the network to be validated in the Ethereum network, with the final results being pushed out to the mainnet over time to ensure the same levels of security, and decentralization with increased scalability. 

1. Rollups 

Rollups basically bundle up several transactions on the layer-2 blockchains and submit them to the mainnet. Validity proofs are utilized to ensure the integrity of the transactions, not to mention the fact that the assets continue to exist on the mainnet. 

2. Sidechains 

These are independent blockchains with their own validators. Even though the mainnet plays no role in validating the transactions, this is still one of the most secure layer-2 chains, due to the chains containing its own validators. 

3. State Channels 

State channels are typically two-way communication environments between the two parties. The parties then seal off a part of the blockchain and connect it to a new, off-chain transaction channel. Usually done via an agreed-upon smart contract, the parties execute the transactions off-chain, and only the final state of the transaction is submitted to the main chain. Popular examples of this method include bitcoin Lightning Network and Ethereum’s Raiden operate based on state channels.

4. Nested Blockchains 

Nested blockchains are multiple secondary blockchains that exist on top of the main chain. The rules and regulations are entirely dependent on the parent chain. However, the main chain is not involved in the participation of the transactions, and the routine transactions are delegated to the nested blockchains. 

Limitations of Layer 1 and Layer 2 Scaling Solutions 

At the end of the day, it comes down to whether or not the community is ready to commit to a hard fork. Solutions like improving consensus algorithms and sharding allow for robust, secure, and scalable solutions – but they may not be the best for all stakeholders involved. For instance, Ethereum’s merge was not all smooth sailing, as there were many miners who stood to lose their income – a hard fork would be very difficult to achieve.
Layer 2 solutions, on the other hand, would make perfect sense, but would not come with the robust track record of blockchains like Ethereum and Bitcoin.
Sharding feels like the perfect solution, enabling dApps to exist on the mainnet, without having to pay an insane amount in gas fees, while still enabling near-instant finality. 

To Sum Up About Blockchain Layer 1 vs Layer 2 Scaling Solutions

The layer 1 vs layer 2 scaling solutions would continue on till a “perfect” solution is found. With the type of talent that’s currently working on this problem, such a solution might not be that far off. As it stands right now, no solution is perfect – it is up to the community to decide which solutions suit the case at hand best.

Hope this blog gave you a clear insight into the layer 1 vs layer 2 debate. For more such informative blog posts – do visit Shardeum’s blog page.

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Last Updated on August 29, 2023

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