What are Layer 1 and Layer 2 in simple terms
There are two main layers in blockchain technology: Layer 1 and Layer 2. Layer 1 includes basic blockchains such as Bitcoin and Ethereum. They provide the underlying infrastructure for transactions, consensus, and security.
Layer 2, on the other hand, functions as an add-on aimed at optimizing and improving scalability, speed, and cost reduction. Both are equally important for the development of the blockchain ecosystem, but understanding their roles and interactions is key to assessing the current and future potential of the technology.
In this article, we will look at: what are Layer 1 and Layer 2 in blockchain, what are the main characteristics of each layer, how they work, and what their impact and blockchain network technology.
What is Layer 1 in the blockchain?
Layer 1 in blockchain is the second name for basic blockchains such as Bitcoin, Ethereum, or Solana. They are called the first layer because they are the main networks in their ecosystems. There are also off-chain solutions and Layer 2 solutions that also belong to the main ecosystems, but which are built on top of the main chains.
Thus, a protocol can be considered Layer 1 when it is responsible for recording transactions, maintaining consensus, and securing its network. Each of these protocols has its native token that is used to incentivize participants and pay transaction fees.
Layer 1 scaling
The main problem with Layer 1 networks is their inability to scale. Bitcoin, Ethereum, or any other large blockchain has serious issues with processing transactions during periods of high demand. For example, Bitcoin uses the PoW (Proof of Work) consensus mechanism, which requires a process of calculating a new block, which requires a lot of computing resources (in this specific case, Bitcoin requires a network of GPUs that will compete for the right to add a new block to the blockchain).
PoW is an excellent consensus that provides both security and decentralization of the network, but it tends to slow down when the volume of transactions exceeds a certain limit. The slowdown increases the time spent on transaction confirmation between users and makes fees higher. The developers themselves have been trying to solve the scalability problem for many years, looking for the best alternative, and have come up with the following solutions so far:
Sharding is a popular Layer 1 scaling solution. This method involves distributing databases to blockchain ledgers. The entire network and its nodes are divided into several shards to distribute the load, thus increasing the speed of transactions. Each shard takes on a portion of the activity of the entire blockchain, meaning it has its transactions, nodes, and individual blocks.
What is Layer 2 in the blockchain?
Layer 2 is a set of technologies and protocols designed to improve the scalability of the main blockchains (Bitcoin, Ethereum, Solana, etc.) without making any fundamental changes to them. The main idea of Layer 2 is to move some computation outside the main blockchain, which reduces transaction fees and allows more transactions to be performed in the same amount of time. Layer 2 blockchain solutions are superimposed on top of the main blockchain (Layer 1), performing all its functions faster and without compromising the security and decentralization of the main network. That is, the main purpose of Layer 2 is to improve the efficiency of Layer 1 networks.
Why do we need Layer 2 blockchains?
Layer 2 blockchains are designed to extend the fundamental limitations of mainstream blockchain networks: performance limitations, scalability limitations, and transaction cost. As we mentioned above, mainstream blockchains have limited bandwidth. As a result, during periods of peak network usage, fees increase and the transaction speed itself decreases. These limitations are a problem for global blockchain adoption, especially in areas where many cheap and fast transactions are required (networks with various micropayments and DeFi applications).
Layer 2 solutions take over parts of transactions and thus transfer the load outside the main blockchain chain without compromising decentralization and security. Their ability to increase network capacity helps to reduce transaction fees in the blockchain, which has a positive impact on usability and user experience. As a result, Layer 2 networks help to circumvent the current limitations of popular blockchains (such as Bitcoin, Ethereum, Solana, etc.) and expand the scope of blockchain applications for the mass market, which is saturated with non-tech-savvy users.
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How does Layer 2 work?
To summarize: Layer 2 functions on the principle of off-chain processing, in which transactions take place outside the main blockchain, thus reducing the load on Layer 1. The creation of off-chain channels allows you to perform many transactions without the need to immediately write each of them to the main blockchain. This practice improves throughput and reduces fees. High speed at low fees attracts more users and is better suited for different trading operations.
The foundation of Layer 2 networks are mechanisms such as state channels, blockchain roll-ups, and side-chains.
Why is Layer 2 so important for Layer 1?
When you need to test something or improve existing processes, it is not always possible to do so at the Layer 1 level. The technological limitations we have mentioned and the not-always-positive reactions of the community make changes to the underlying blockchain network either very difficult or impossible. For example, it took several years to update Ethereum to the Proof of Stake (PoS) consensus (the transition was made on September 15, 2022, 7 years after the blockchain was launched), and it is even hard to imagine something similar with Bitcoin.
With the development of decentralized applications, users have realized that many blockchain use cases are simply not possible due to the low scalability of Layer 1. Any application that has a process of interaction with the blockchain simply cannot use Bitcoin or Ethereum because of the long transaction time. This is where the use of Layer 2 is required, which will be built on top of the main network but will not leave the user without decentralization and security.
Layer 2 is built on top of Layer 1 to verify and record transactions being executed. Famous examples of such an add-on are the Lightning Network and Roll-ups. Under classic load, processing a transaction on the Bitcoin network can take up to several hours. Lightning Network allows combining many transactions into a single record that is transmitted to the blockchain one by one, saving time for users. This way, users can make many quick payments using Bitcoin tokens outside the main network, but the remaining balance is later transferred to the Bitcoin network.
Roll-ups for Ethereum work on a similar principle. It also combines several transactions to reduce waiting time and load on the Ethereum network.
Bottom line
Layer 1 and Layer 2 are two interconnected components of the blockchain ecosystem. Layer 1 is the foundation for transactions and security, while Layer 2 provides solutions for scalability, improving the user experience and economic parameters of transactions. Together, they create the foundation for innovation, allowing blockchains to adapt to the needs of the global market and enabling millions of users to build their advanced blockchain solutions.
The future of blockchain technology depends on the effectiveness of Layer 1 and Layer 2 interaction, which will allow any project with blockchain computing to be implemented, from financial applications to large-scale decentralized systems. This once again emphasizes the importance of a deep understanding of their interaction for building an efficient and sustainable digital environment. Understanding how these technologies work demonstrates how innovations at the basic level (Layer 1) and their improvement with the help of add-ons (Layer 2) can create synergies that open up new scenarios for blockchain applications.