With the popularity of cryptocurrency and the wider web3 world growing exponentially, so is the number of users they are attracting on a regular basis — and that poses a problem for the blockchain technology that they are so heavily reliant upon. Most blockchain networks simply weren’t designed to scale to the extent that they have to today.
Fortunately, we now have what the industry refers to as layer 1 and layer 2 scaling solutions, which can be added to the main architecture of a blockchain to help it cope with greater demand, and to enhance its functionality or feature set. In this AAG Academy guide, we’ll look at the differences between layer 1 and layer 2 solutions, their pros and cons, and more.
The AAG Academy has an in-depth guide on what a blockchain is and how it works at a fundamental level for those who aren’t familiar or want to learn more — and we recommend reading that before diving into scaling solutions. If you already have a good understanding of the basics, then comprehending the differences between layer 1 and layer 2 won’t be difficult.
A blockchain’s layer 1 is its base infrastructure or “mainnet,” and it serves as the foundation for the entire project. A layer 2 is, as its name suggests, a secondary layer or network that can be built upon that foundation to provide better scalability or new features. For instance, Bitcoin is a layer 1 protocol, while the Bitcoin Lightning Network is a layer 2 protocol.
When it launched in 2009, very few could have predicted that Bitcoin would be as popular as it is today, and so its main blockchain was not designed to handle the sheer volume of users that now rely upon it for processing transactions. As its popularity has increased, the network has become slower and more expensive to use because of the demand it sees on a regular basis.
That’s a big problem for a cryptocurrency of Bitcoin’s magnitude — not because of its popularity, but also because of what it represents for the cryptocurrency industry — so a solution was badly needed. The Lightning Network was created as a faster, more affordable way of handling Bitcoin transactions so that the main chain didn’t have to deal with all the pressure by itself.
Both of these layers are critical to the industry today. Without layer 1 protocols, cryptocurrency, NFTs, the metaverse, and lots of other faucets of web3 as we know them simply wouldn’t exist. And without layer 2 protocols, many layer 1 blockchains would struggle to meet the demands of their users as they grow, and they would essentially be crushed by their own success.
A layer 1 scaling solution involves making changes or enhancements to a blockchain’s base layer. One of the reasons why many blockchains aren’t very scalable is that they rely on the proof-of-work (PoW) consensus mechanism for verifying transactions and creating new blocks. This requires every mining node on the network to look at the transaction and decide if it’s valid.
This process requires a lot of computational power, and while it may work well for smaller projects that don’t become overwhelmed, it has proven to be a significant bottleneck for larger, more popular cryptocurrencies that have to process and validate large numbers of transactions every day. It is considered to be one of the biggest downsides of the decentralized model.
To put this into perspective, let’s compare a decentralized system with a centralized one. Visa, the biggest payment network in the world, is capable of processing more than 65,000 transactions per second. Bitcoin, due to its reliance on the PoW consensus mechanism, can process just seven transactions per second.
Implementing layer 1 solutions usually means making changes to the fundamental design of the network or its consensus mechanism to speed things up. This could include increasing its block size so that more transactions can be grouped together, or using a process called “sharding” to split up a blockchain’s operations and share them out across smaller groups of nodes.
Alternatively, it could mean transitioning to a different consensus mechanism altogether. In 2022, Ethereum became the largest cryptocurrency to ditch the PoW system it had relied on since its launch in favor of the proof-of-stake (PoS) mechanism that is more scalable and more efficient. Rather than requiring computational power, it uses cryptocurrency staking instead.
Once a blockchain network is in operation, making any tweaks, changes, or enhancements to its foundations is a scary prospect — particularly if it is used by a great number of people. There is always a chance, as there is with any piece of software, that an inadvertent error or bug is introduced that could cause unintended consequences or bring the whole network down.
So, while the pros of layer 1 scaling solutions could mean increased speed and throughput, better security, and more seamless transactions, developers are often reluctant to risk making alterations to the primary chain for fear of breaking something that could cause complete failure.
A blockchain layer 2, as we outlined above when referring to the Bitcoin Lightning Network, is essentially a secondary network that runs alongside a blockchain layer 1, such as Bitcoin or Ethereum. You can think of it as a road that sits next to and runs in parallel with a highway; traffic can move into it when the highway is busier, alleviating some of the congestion.
The layer 2 is a network itself, so it can offload some of the computational work from the main blockchain. This usually consists of processing off-chain transactions (those that are not handled by the main network) independently using a different system, like establishing direct channels between two parties for near-instant transaction processing.
As we noted earlier, Bitcoin itself can handle just seven transactions per second, while Visa can handle up to 65,000. However, the Bitcoin Lightning Network can process as many as 1 million transactions per second, making it the fastest payment processing solution on the planet. And because it is insanely fast, it is also significantly more affordable to use.
There are a number of different types of layer 2 scaling solution in use today, the most common of which are:
State channels, like the Lightning Network, create a two-way channel between two parties so that direct transactions can take place almost instantaneously. This negates the need for a third-party, such as a miner, to confirm transactions. Only after a channel is closed is its final “state” relayed to the main blockchain so that wallet balances can be finalized.
Zero-knowledge (ZK) rollups
Zero-knowledge rollups, otherwise known as ZK rollups, consolidate a bundle of transactions that take place off-chain and submit them as one transaction, which is called a cryptographic proof or validity proof, to the mainnet. This effectively means that the primary blockchain only has to worry about one transaction as opposed to a large number of them.
Optimistic rollups are somewhat similar to ZK rollups, except instead of using validity proofs, they rely on fraud proofs. Transaction aggregators send as little information as possible to the main blockchain and assume that the data is correct. If a fraudulent transaction takes place, a fraud-proof is performed and the sender is penalized.
Unlike layer 1 protocols, which are developed and implemented by a blockchain’s own development team, layer 2 protocols are often created by third parties. This means layer 2 protocols can take longer to implement, but they can bring more substantial changes or improvements that a project’s own development team are more reluctant to make.
One of the biggest advantages of layer 2 protocols is that they require no changes to an existing layer 1. They can bring significant improvements, new features, and more to an established mainnet without fear that bugs and other vulnerabilities could be introduced accidentally. Furthermore, layer 2 protocols can be designed around a specific feature or function.
Another major advantage to layer 2 protocols is that any number of them can be built upon an existing blockchain, each with their own abilities, whereas you can only have one layer 1. However, they have their downsides, too — one of which is that they often require you to tie up funds in the layer 2 protocol while you’re using it, or move funds from the main blockchain.
This comes with risks that users must be aware of before using layer 2 protocols. For instance, funds tied up in a layer 2 protocol become temporarily unavailable if it experiences downtime or other issues. We also have to be mindful that some layer 2 protocols may be malicious and designed specifically for stealing any assets that are transferred to them.
Despite the potential risks that come with layer 2 protocols, they are by far the most common scaling solution in use today — especially on Ethereum. Their many strengths currently outweigh their weaknesses, and as things stand, there is no alternative that competes in terms of flexibility, compatibility, and security.
It’s difficult to predict whether an alternative to layer 2 protocols will be available in the future, but given the fast-evolving nature of the cryptocurrency industry, it’s certainly plausible.
Some of the biggest and best-known layer 2 blockchain protocols include Bitcoin, Ethereum, and BNB Chain.
Cryptocurrency has become increasingly popular over the years, which means a significant increase in users. Most blockchains were not built to cope with the kind of demand they are seeing today, but scaling solutions help ensure they can continue to run smoothly.
Some of the most popular layer 2 blockchain projects include the Bitcoin Lightning Network, Polygon, and Loopring.
This article is intended to provide generalized information designed to educate a broad segment of the public; it does not give personalized investment, legal, or other business and professional advice. Before taking any action, you should always consult with your own financial, legal, tax, investment, or other professional for advice on matters that affect you and/or your business.
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