The popularity of crypto and blockchain is growing exponentially, and so is the number of users and transactions. While it's easy to see how revolutionary blockchain is, scalability – a system’s capacity to grow while accommodating increasing demand – has always been a challenge. Public blockchain networks that are highly decentralized and secure often struggle to achieve high throughput.
This is often described as the Blockchain Trilemma, which states that it’s virtually impossible for a decentralized system to simultaneously achieve equally high levels of decentralization, security, and scalability. Realistically, blockchain networks can only have two out of three factors.
Fortunately, however, thousands of enthusiasts and experts are working on scaling solutions. Some of these solutions are designed to tweak the architecture of the main blockchain (Layer 1), while others target Layer 2 protocols that operate on top of the underlying network.
With a large number of blockchains and cryptocurrencies available, you might not know if you’re using a Layer 1 or Layer 2 chain. There are benefits in hiding blockchain complexity, but it’s worth getting to understand a system you’re investing in or using. With this article, you’ll understand the differences between Layer 1 and Layer 2 blockchains and various scalability solutions.
What is a blockchain Layer 1 vs. Layer 2?
Why is blockchain scalability important?
Imagine a new highway being built between a major city and its fast-growing suburb. As the amount of traffic passing through the highway increases and congestion becomes common – especially during rush hours – the average time to get from A to B can increase significantly. No wonder, given that road infrastructure has its limited capacity and the demand is ever-growing.
Now, what can the authorities do to help more commuters travel via this route faster? One solution would be to improve the highway itself, adding extra lanes to each side of the road. This, however, is not always practical as it is an expensive solution that would cause considerable trouble to those already using the highway. An alternative is to get creative and consider various approaches not associated with making changes to the core infrastructure, such as building additional service roads or even launching a light rail transit line along the highway.
In the world of blockchain technology, the primary highway would be a Layer 1 (the main network), while the additional service roads would be Layer 2 solutions (secondary network to improve the overall capacity).
Current Layer 1 issues
In other words, all transactions require the independent verification of several nodes before getting confirmed. This is an efficient way of logging and recording correct, verified data to the blockchain while mitigating the risk of attack by bad actors. However, once you have a network as popular as Ethereum or Bitcoin, the throughput demand becomes an ever-increasing issue. In times of network congestion, users will face slower confirmation times and higher transaction fees.
How do Layer 1 scaling solutions work?
How do Layer 2 scaling solutions work?
As discussed, Layer 2 solutions rely on secondary networks that work in parallel or independent of the main chain.
Sidechains are independent blockchain networks with their own sets of validators. This means the bridging smart contract on the main chain doesn’t verify the validity of the sidechain network. Therefore, you need to trust the sidechain is operating correctly as it’s able to control assets on the original chain.
Limitations of Layer 1 and Layer 2 scaling solutions
Both Layer 1 and Layer 2 solutions have unique advantages and disadvantages. Working with Layer 1 can provide the most effective solution for large-scale protocol improvements. However, this also means that validators must be convinced to accept changes through a hard fork.
One possible example where validators may not want to do this is changing from Proof of Work to Proof of Stake. Miners will lose income by this switch to a more efficient system, disincentivizing them from improving scalability.
Layer 2 provides a much quicker way to improve scalability. However, depending on the method used, you can lose a lot of the security of the original blockchain. Users trust networks like Ethereum and Bitcoin for their resilience and track record of security. By taking aspects off the Layer 1, you often have to rely on the Layer 2 team and network for efficiency and security.
What’s next after Layer 1 and Layer 2?
One key question is whether we will even need Layer 2 solutions as Layer 1s become more scalable. Existing blockchains see improvements, and new networks are created with good scalability already. However, it will take a long time for major systems to improve their scalability, and it’s not guaranteed. The most likely option is for Layer 1s to focus on security, and allow Layer 2 networks to tailor their services to specific use cases.
In the near future, there’s a good chance large chains like Ethereum will still dominate due to their large user and developer community. However, its large, decentralized validator set and trusted reputation creates a solid base for targeted Layer 2 solutions.
Since crypto began, the hunt for improved scalability has created a two-pronged approach with Layer 1 improvements and Layer 2 solutions. If you’ve got a diverse crypto portfolio, there’s a good chance you already have exposure to both Layer 1 and Layer 2 networks. Now, you understand the differences between the two as well as the different approaches to scaling that they offer.