What is Layer 1 and Layer 2 crypto

Among various challenges associated with blockchain technology, the issue of scalability is definitely one of the most crucial. The term refers to the number of transactions per second — this parameter determines its effectiveness on many levels. With cryptocurrencies becoming a part of everyday life and slowly yet steadily pushing back traditional systems, it is no wonder that further evolution of this technology requires dealing with scaling problems. Of course, you don’t necessarily have to know about the crypto Layer 1 vs Layer 2 dilemma unravelling behind the crypto curtain. Modern instant exchange services, such as Exolix, allow you to convert coins without any previous experience, simplifying your acquaintance with the subject. However, a little bit of technical knowledge won’t hurt. After all, the more you know about these mechanisms, the better your chances are at predicting what cryptocurrency may become the next big thing. Hence, let us look closer at what these Layers are and why they are so important.

Blockchain Scalability: Starting from the basics

Scalability in blockchain technology is defined as the system’s ability to increase both the number of transactions per second and the number of involved nodes. Why is it so important? Firstly, blockchain networks are supposed to grow. Without further development, even such advanced technology will quickly become obsolete. Secondly, blockchain systems are supposed to provide efficient and secure services. A blockchain network clogged with unfulfilled and simply too slow transactions is unable to justify its existence. Sure thing, if you want to be able to swap, trade, and stack cryptocurrencies with satisfying effectiveness, scalability would become your key concern.

What is the difference between Layer 1 and Layer 2 solutions

The term “Layer 1” essentially describes the basic blockchain architecture, whereas the term “Layer 2” refers to an additional network stacked on top of the basic one. Crucial differences between these solutions include the following:

• Functional environment. Scaling solutions associated with Layer 1 change the basic blockchain protocol. Layer 2 scaling solutions rely on off-chain networks and services.
• Functional goal. Layer 1 scaling solutions facilitate scalability by introducing large changes, such as modifying the block size or introducing new consensus mechanisms. Off-chain solutions tend to increase the network’s functionality by transferring the workload to another system architecture, such as dealing with transaction ordering.

In addition, both types of scaling solutions may be further divided according to the methods they rely on. Layer 1 scaling solutions include the following:

1. Sharding;
2. Improvements of the fundamental consensus protocol;
3. Block size changes.

Sharding

Sharding is one of the most popular Layer 1 scaling solutions. This approach makes it possible to break all transaction sets into smaller ones, creating “shards”. Next, the blockchain network processes these “shards” independently. Hence, increased transaction speed and improved network performance.

Consensus Protocol Changes

This approach represents a transfer from one protocol to another, most commonly a decision to abandon a Proof-of-Work protocol in favor of a faster and more nuanced (not mentioning much more eco-friendly) Proof-of-Stake protocol. Probably the most famous example of such a switch is the Ethereum Merge. Layer 2 scaling solutions include the following:

1. Side chain;
2. State channels;
3. Nested blockchain.

Side Chain

The side chain is an independent blockchain network, which is connected to the main network through a set of smart contracts. An additional blockchain network greatly increases the effectiveness of the main chain.

State Channels

State channels work as a two-way communication channel between the participants, allowing them to conduct interactions, which under normal conditions occur solely within the main blockchain. Usually, the interaction happens due to the pre-agreed or multi-signature smart contract. This approach significantly boosts both the transaction speed and the overall network capacity.

Nested Blockchain

Developers create a set of multiple blockchains on top of the main one, forming a parent-child form of connection. The “parent” delegates the workload to the branching networks. The “child” chains execute the orders and transfer the obtained results back to the main chain. This approach significantly reduces the workload in the main blockchain, boosting the transaction speed and increasing overall network performance.

Pros and Cons of Layer 1 and Layer 2 scaling solutions

As we can see, the main difference between Layer 1 and Layer 2 blockchain scaling solutions lies in their primary role. Layer 1 scaling solutions strive to improve the already existing fundamental blockchain architecture. Layer 2 scaling solutions create third-party networks on top of the already existing network to alleviate its workload and spread its functionality with additional tools. Consequently, there is no clear winner in a Layer 1 against Layer 2 race. Both approaches come with several significant pros and cons. For instance, Layer 1 scaling solutions usually require a hard fork — and such an event may be difficult to handle. All users have to agree with the new conditions and accept all new changes. On the other hand, Layer 2 scaling solutions may compromise the network’s security by involving third parties.

Blockchain Layer 1 vs Layer 2 scaling solutions: common problems

Both Layer 1 and Layer 2 scaling solutions have two common problems:

• Adding new pieces of code to the already working system is an exceptionally difficult task. In many cases, it may result in further complications.
• Even those blockchain platforms that are created from scratch to avoid this issue eventually run into a new scalability challenge.

Both issues are closely tied with the famous “scalability trilemma” invented by Vitalik Buterin. According to this principle, every optimization of a blockchain network eventually comes to a trade-off between three parameters:

• Scalability;
• Security;
• Decentralization.

Therefore, even though both Layer 1 and Layer 2 scaling solutions have their respective pros and cons, their implementation is always tied to a decrease in either decentralization or security. Hence, the goal is to facilitate the exchange, creating the most prosperous conditions for the next iteration of the blockchain network.

Conclusion

The problem with scalability is arguably the most serious obstacle to the further application of blockchain technology. The industry is in dire need of truly effective approaches, capable of increasing the effectiveness and safety of day-to-day transactions. This is exactly why Layer 1 and Layer 2 solutions have become so important. However, we should remember that the difference between Layer 1 and Layer 2 crypto refers only to their scope of application. In general, we should view them not as competing forces, but rather as complementing and extending each other. Because of this, many blockchain networks successfully combine both approaches, significantly improving their scalability, without damaging their security and/or decentralization.