Layer 1 vs. Layer 2: Blockchain Layers Explained Simply

Blockchain networks can have interlinked, layered blockchain solutions. But what does that mean, exactly?

Cryptocurrency technology isn't going away, as much as some folks wish it would. However, cryptocurrency and blockchain technology have critical issues that hold back widespread crypto adoption.

One of those issues is scalability, sometimes referred to as the "scalability trilemma." In short, blockchains can't scale up to increase demand without compromising other core values.

One way around blockchain scalability issues comes from Layer 2 blockchain solutions, a new blockchain built on top of the original Layer 1 blockchain.

Layer 2 blockchains are already in use and will help to bring widespread crypto adoption—but how do they work?What Is the Blockchain Scalability Problem?

Within the blockchain and crypto world, scalability refers to a blockchain's ability to scale up the number of transactions it can process at a single time, adjusting to user demand. When you talk about a blockchain's scalability, you are talking essentially about transaction speed. The scalability problem results from various challenges present in the realization of the ideal blockchain, which ought to be decentralized, secure, and scalable.

These challenges have been conceptualized as the "blockchain trilemma" by Ethereum's co-founder, Vitalik Buterin. The blockchain trilemma posits that while the ideal blockchain should be decentralized, secure, and scalable, it can only have two out of the three characteristics.

Let's break the blockchain trilemma down to make its concepts easier to understand.

The Blockchain Trilemma Explained

The easiest way to image the blockchain trilemma is by comparing it to a city:

1. Security?in a city is like blockchain's defenses against fraud. The blockchain's cryptographic algorithms and consensus mechanisms (think, police, cameras, etc.) keep the blockchain (the city) safe from criminals.
2. Decentralization?is similar to distributing power and control among the residents, like a council making decisions instead of a mayor. In blockchain technology, multiple nodes validate transactions, preventing corruption, securing the network, and protecting against a single point of failure.
3. Scalability?is the city's capacity to handle more residents and traffic, like a blockchain's ability to process transactions quickly without backlogs and the side-effect of sky-high transaction fees.

Buterin's blockchain scalability trilemma suggests we cannot scale all three simultaneously. If you prioritize security and decentralization, scalability might suffer. Focusing on decentralization and scalability could compromise security. And if you emphasize security and scalability, you risk centralization.

The blockchain trilemma represents one of blockchain technology's major challenges to widespread adoption. It should still not be taken as a given, though, as there is no actual law preventing the technology from being improved and reaching a desired level of scalability without the need to sacrifice either decentralization or security. However, as per the trilemma, scalability is a fundamental challenge arising from the architectural design and principles of blockchain technology. It's not just a matter of improving the technology but about finding a balance between these three crucial characteristics.

Many blockchain developers are working to solve the blockchain trilemma. Techniques and ideas to solve the scalability problem are already being implemented. Core to solving blockchain scalability issues and overcoming the blockchain trilemma is the concept of Layer 1 and Layer 2 solutions.

What Are Blockchain Layers?

When we talk about scalability solutions in crypto, blockchain layers are often the first solution most folks consider. Blockchain layers are as they sound; a blockchain layered on top of another blockchain. Given how large some blockchains are, like Bitcoin and Ethereum, adding another blockchain to the mix can seem counterintuitive. However, the second blockchain is designed to provide additional capacity and processing capabilities without compromising security.

What Is Blockchain Layer 1?

Blockchain Layer 1 refers to the distributed database itself, the underlying peer-to-peer network that combines all the blockchain's nodes into a single system, and its underlying consensus mechanisms. For example, Bitcoin's Layer 1 is the Bitcoin network, Ethereum's is the Ethereum network, and Ripple's is the XRP Ledger.

How Do Layer 1 Blockchain Scaling Solutions Work?

Although blockchain scaling often focuses on introducing extra capacity outside the original blockchain, scaling solutions are also available on the Layer 1 blockchain. How successful they are or if they can even be implemented depends on the blockchain in question. In some cases, Layer 1 scaling solutions have been rolled out but haven't improved capacity.

Some Layer 1 blockchain scaling solutions include:

• Increase block creation speed:?If blocks can be created and added to the chain more quickly, more transactions can be processed in a given period.
• Increase the block size:?By allowing each block to hold more data (i.e., more transactions), the network can process more transactions with each block addition.
• Consensus protocol change:?Altering the consensus protocol for a blockchain is an enormous undertaking, but that is how Ethereum switched from proof of work (PoW) to proof of stake (PoS)?during the Ethereum 2.0 Merge. Switching consensus algorithms will allow Ethereum to process transactions faster and cheaper while adding more functionality like cryptocurrency staking.
• Sharding:?Sharding involves breaking up the blockchain's data?into smaller parts or "shards," each capable of processing transactions independently and simultaneously, which allows the blockchain to process several transactions at once, significantly increasing its capacity. The Ethereum 2.0 developers plan to implement sharding during a blockchain update in the future, further increasing capacity and processing speed, while some?blockchains like Zilliqa?have already implemented sharding.

However, while all of these Layer 1 blockchain solutions sound ideal, they're not without issues. For example, increasing the block creation speed may require more computational power, which could result in blockchain centralization (i.e., more power in fewer hands). Similarly, increasing the block size faces similar issues, and miners aren't always guaranteed to accept changes that force them to use more power or drop existing mining revenue levels.

What Is Blockchain Layer 2?

Blockchain Layer 2 refers to scaling solutions such as protocols or networks that operate on top of the original blockchain, essentially functioning as different layers of blockchain. For example, Bitcoin's Lightning Network (which enables off-chain transactions) or Ethereum's Polygon or Arbitrum (both of which have blockchain-specific tokens and their own burgeoning blockchain ecosystems).How Do Layer 2 Blockchain Scaling Solutions Work?

Blockchain Layer 2 solutions are where scalability becomes even more interesting. As a Layer 2 solution runs independently or in parallel with the Layer 1 solution, it allows for greater innovation and creativity than you might see with the established protocol of the main blockchain.

Some Layer 2 blockchain scaling solutions include:

• State channels:?Layer 2 state channels allow multiple transactions to be made off-chain while still ensuring that the state of these transactions can be settled on-chain. The?prime example is the Bitcoin Lightning Network, which allows two or more participants to open and transact within a channel. The opening of the channel and the final state are both recorded to the Bitcoin blockchain, increasing capacity and allowing for faster transactions.
• Sidechains:?A Layer 2 sidechain runs in parallel to the mainchain. The two blockchains are interoperable, allowing crypto and other assets to pass in both directions, reducing processing time and transaction fees. For example, the?Bitcoin Liquid Sidechain allows faster transactions, reducing the number of transactions on the main Bitcoin blockchain. Like state channels, sidechains can also introduce new features or boost the security and privacy of a transaction.
• Rollups:?Layer 2 rollups are one of the most popular scaling solutions, as they can bundle multiple off-chain transactions into a single on-chain transaction. There are two primary types of rollups: Optimistic Rollups and ZK-Rollups. These two solutions function differently in execution, but both effectively validate bundled transactions off-chain before submitting the completed transactions back to the main Ethereum blockchain.?Loopring is a good example?of a ZK-Rollup-based Layer 2 solution, while you can read more about Optimism in our?Arbitrium and Optimism comparison.
• Nested networks:?Nested networks are another popular Layer 2 solution. You may have even used one of the most popular nested networks: Polygon (MATIC). Nested networks adhere to a hierarchy of blockchains, which makes sense when considering the layers and numbering. For example, Ethereum is the Layer 1 parent chain, while Polygon is the Layer 2 child chain.

Like the Layer 1 scaling solutions, the Layer 2 scaling solutions aren't without issues. For example, there are often security concerns regarding the interaction between Layer 1 and Layer 2. Simply put, creating a wider attack surface with more users, more code, and more potential vulnerabilities lead to security issues.

The complexity that some Layer 2 solutions add to the blockchain experience is also a concern. Where scalability is important to increase the reach of crypto, adding multiple layers that can all interact can be confusing and overwhelming, even to those who have used crypto, let alone newcomers.

Finally, there is a risk that a Layer 2 solution could become part of the very issue it is meant to solve: blockchain centralization. If a Layer 2 solution isn't sufficiently decentralized or a small number of nodes control the network, it creates another issue entirely.

Layer 1 vs. Layer 2: Solving Blockchain Scalability

Even though the blockchain trilemma is a thorn in the side of blockchain technology and cryptocurrencies, the crypto industry isn't short of solutions.

If the blockchain trilemma limits a Layer 1 solution, developers have proven that off-chain, Layer 2 solutions offer an efficient alternative.f