Layer 1 vs. Layer 2 blockchains - what are the differences?

Layer 2 blockchains are designed to complement Layer 1 blockchains, providing a solution for the scalability and cost challenges associated with decentralized applications and services.

Layer 1 & Layer 2 differences

Layer 1 is known as the base blockchain protocol. Layer 2 represents a third-party solution integrated with layer 1, allowing for better scalability. Layer 2 blockchains and Layer 1 blockchains are different in several ways:

1. Purpose: Layer 1 blockchains serve as the foundation for decentralized applications and services, providing the underlying security, trust, and consensus mechanism. Layer 2 blockchains, on the other hand, are designed to offload some of the processing and storage requirements from the main blockchain, enabling faster and more efficient transactions.
2. Scalability: Layer 1 blockchains have limited scalability due to the processing and storage requirements of every transaction. Layer 2 blockchains can help increase scalability by offloading some of these requirements, enabling faster and more efficient transactions.
3. Costs: Transactions on Layer 1 blockchains can be expensive, especially when the network is congested. Layer 2 blockchains can help reduce costs by offloading some of the processing and storage requirements, enabling faster and more efficient transactions.
4. Security: Layer 1 blockchains provide the security and trust of the underlying blockchain, and all transactions are recorded on the main blockchain. Layer 2 blockchains rely on the security and trust of the main blockchain, but handle the majority of transactions and data storage off-chain.
5. Complexity: Layer 1 blockchains can be complex and difficult for users to understand and use, especially for those with limited technical knowledge. Layer 2 blockchains can help improve the user experience by reducing complexity and enabling faster and more efficient transactions.

Layer 1 scaling

Layer 1 blockchains, also known as base-layer or first-layer blockchains, can face scalability limitations due to their decentralized design and the need to maintain consensus across all nodes in the network. The more nodes there are in a network, the more difficult it becomes to maintain consensus and validate transactions in a timely manner. However, there are several approaches to scaling Layer 1 blockchain that is being explored and developed, such as:

1. Sharding: This approach involves dividing the network into smaller sub-networks or "shards" that can validate transactions in parallel, improving scalability and transaction processing speed.
2. Off-chain transactions: This approach involves moving some transactions off the main blockchain and into off-chain channels, reducing the amount of data that needs to be processed and stored on the main blockchain.
3. Increasing block size: This approach involves increasing the maximum size of blocks on the blockchain, allowing for more transactions to be processed per block.
4. Optimizing consensus algorithms: This approach involves improving the underlying consensus algorithms used by the blockchain to validate transactions, such as switching to a more efficient algorithm like Proof of Stake.

While these approaches can help to improve the scalability of Layer 1 blockchains, they also come with trade-offs and challenges, such as increased centralization risk and the need for more complex and specialized infrastructure.

Layer 2 scaling

Layer 2 scaling refers to solutions that allow for increased scalability and transaction processing speed on top of the existing Layer 1 blockchain. The goal of Layer 2 scaling is to offload some of the processing and storage demands of the main blockchain to a separate layer, without sacrificing the security and decentralization provided by the underlying blockchain. These solutions can take many forms, including state channels, side chains, and rollups. By utilizing these solutions, it is possible to process a large number of transactions off-chain and then settle them on-chain as a single transaction, reducing the cost and increasing the speed of transactions. As well as this, Layer 2 solutions are seen as a key way to address the scalability limitations of Layer 1 blockchains, and many blockchain projects are exploring and developing these solutions to improve the overall performance of their networks.

Examples of Layer 2 solutions include the following:

State channel networks

State channel networks are a type of layer 2 scaling solution for blockchain networks. They allow for multiple transactions to occur off-chain between parties, rather than on the main blockchain. In a state channel network, two or more parties open a channel between them, deposit funds into the channel, and can then transact with each other as many times as they like without needing to write each transaction to the blockchain. The final state of the channel, including any updates to the balances of the parties, is only written to the blockchain when the channel is closed. By allowing transactions to occur off-chain, state channel networks can significantly reduce the number of transactions that need to be written to the blockchain, thereby reducing the burden on the network and increasing its transactional throughput. Examples of state channel networks include the Lightning Network for Bitcoin and the Raiden Network for Ethereum.

Plasma chains

Plasma is a framework for building scalable decentralized applications on blockchain networks. It operates as a layer 2 solution, allowing for off-chain transactions to be processed in parallel to the main blockchain. Plasma works by creating child blockchains, known as "Plasma chains," that are attached to the main blockchain. These Plasma chains can process transactions and store data independently of the main blockchain, greatly increasing the network's transactional capacity. The state of each Plasma chain is periodically written to the main blockchain in the form of a "commitment," which ensures the security and integrity of the data stored on the Plasma chain. In the event of a dispute, users can challenge the validity of a commitment and have their claims resolved through a smart contract on the main blockchain. This helps to ensure the security and reliability of the Plasma framework, even though the majority of transactions are being processed off-chain. Plasma has the potential to significantly increase the scalability and performance of decentralized applications, enabling them to process large amounts of transactional data without sacrificing security or decentralization.

What’s next?

The future of Layer 1 and Layer 2 blockchains will likely be shaped by a number of factors, including the ongoing development of new technologies, the increasing adoption of blockchain-based applications, and the evolving needs and requirements of businesses and users. It is likely that Layer 1 blockchains will continue to play a key role in the infrastructure of the decentralized web, providing a secure and decentralized foundation for a wide range of applications and use cases. At the same time, Layer 2 solutions are expected to become increasingly important as a way to address the scalability limitations of Layer 1 blockchains and improve the overall performance and user experience of blockchain-based applications.

In the future, it is possible that we will see a growing number of hybrid solutions that combine the security and decentralization of Layer 1 blockchains with the scalability and efficiency of Layer 2 solutions. This could result in a more flexible and scalable ecosystem, capable of supporting a wider range of applications and use cases.

Ultimately, the future of Layer 1 and Layer 2 blockchains will be shaped by the needs and demands of the market, and it is likely that the most successful solutions will be those that are able to effectively address the scalability, security, and usability needs of businesses and users.

Learn more about Layer 2 scaling & Optimistic Roll-ups