Layer 1 vs Layer 2 — Differences Between Blockchain Layers

So, Layer 1 vs Layer 2 — what do these concepts mean for blockchain? Blockchain is made up of layers, each serving a different purpose.

In this guide, we’ll talk about Layer 1 and Layer 2. On that note, you’ll find out how they function, what differentiates them, and what are their main pros and cons. We’ll also list their scaling solutions.

What Is Layer 1 in Blockchain?

Layer 1, or the implementation layer, is the base of the blockchain. Its goal is to keep the network functional. It records and processes transactions within the chain. The best examples of Layer 1-based networks are Bitcoin, Ethereum, Cardano, and Dogecoin. Layer 1 uses a decentralized consensus model and nodes to make transactions more secure.

The main limitation of Layer 1 blockchains is scalability. Namely, the greater the number of users on the network, the more computing power will be needed to validate transactions. This equals higher crypto gas fees and slower processing times.

Layer 1 Blockchain Scaling Solutions

Level 1 scaling solutions include increasing the size of blocks, improving consensus mechanisms, and sharding.

Increasing the Size of Blocks

The scalability problem can be solved by increasing the block size. This will expand the capacity of the network, which will enable more transactions to be verified at the same time. For example, the Bitcoin Cash network increased the size of its blocks within the network from 1 MB to 32 MB. This made it possible to process over 100 transactions per second.

Improving Consensus Mechanisms

A consensus mechanism is a system that enables accurate and safe validations. Its task is to ensure that all validators adhere to the protocol rules.

The most popular consensus mechanisms are proof-of-work and proof-of-stake. The former uses miners to validate transactions, while the latter uses staking. I.e., network users must lock their tokens to create new blocks.

That said, the scalability problem of Layer 1-based networks can be solved by improving consensus mechanisms. That is, by moving from PoW to PoS consensus. Why? First of all, PoS consensus requires less computing power. Secondly, PoS networks are faster and more scalable.

Sharding

Sharding refers to dividing data into smaller fragments called shards. In this way, the amount of data that the nodes have to process is reduced. This increases network capacity and transaction speed.

Layer 1 Pros and Cons

The main advantages of layer 1 scaling solutions include:

• They do not require a separate chain: Layer 1 solutions change the rules of the protocol to increase the capacity and speed of the network.
• They can reduce transaction fees: Layer 1 solutions try to reduce network congestion by introducing permanent changes that can lead to lower transaction fees.
• Layer 1 solutions aim to keep the network decentralized: This means that the network is controlled by its users, not entities.

The main limitations of Layer 1 scaling solutions include the following:

• No income for miners: By switching from PoW to PoS consensus, miners will not be able to receive rewards for their contribution to the network.
• Congestion issues: By increasing the number of transactions, the number of blocks will also increase. This can lead to network congestion.

Examples of Layer 1 Solutions

Examples of Layer 1 crypto solutions include:

• Ethereum 2.0
• Cardano’s Ouroboros PoS consensus mechanism
• Bitcoin’s SegWit
• Algorand’s pure PoS consensus
• Fantom’s aBFT consensus mechanism

What Is Layer 2 in Blockchain?

Layer 2 is a protocol built on top of a Layer 1 solution. Its goal is to improve the way main networks operate.

On that note, Layer 2 takes transactions from Layer 1 and processes them off-chain. This increases the scalability and speed of transactions. After processing them, it returns them to Layer 1. This means that Layer 2 depends on Layer 1.

Layer 2 doesn’t have to be an independent blockchain. Namely, it can also serve as a payment channel that is used for transferring funds via smart contracts.

Layer 2 Blockchain Scaling Solutions

Layer 2 solutions are divided into rollups, side chains, and state channels.

Rollups

Rollups refer to the processing of multiple transactions that are wrapped into a single transaction. This significantly speeds up the validation process. As mentioned above, Layer 2 processes transactions off-chain. After they process them, they will return them to the main network where they will be validated as a single entity.

Side Chains

Side chains are self-standing networks that have their validators. This enables parallel transactions. They also use a consensus method that best suits a specific transaction. Side chains benefit developers the most as they allow them to test various features that are not available on the mainnet.

State Channels

State channels also record off-chain transactions. Moreover, they serve as a two-way communication channel between two contracting parties. Their main goal is to close part of the central blockchain by connecting it to a transaction channel outside the chain. They do this via pre-negotiated smart contracts. This increases the speed of transactions and network capacity.

Layer 2 Pros and Cons

The main benefits of Layer 2 scaling solutions are:

• Faster transactions per second and reduced transaction fees — This is achieved by wrapping multiple transactions into a single one.
• Accessibility — Due to lower fees, more users can join the network.
• They are designed to optimize specific features — Layer 2 solutions use consensus methods that are based on the needs of specific transactions.

The main drawbacks of Layer 2 scaling solutions are:

• Vulnerability to validator fraud — Layer 2 blockchain is more vulnerable to fraud since it uses a separate set of validators.
• Longer withdrawals — Withdrawal of tokens from Layer 2-based blockchains can take up to seven days.

Examples of Layer 2 Solutions

Examples of Layer 2 crypto solutions include:

• Arbitrum’s Optimistic Rollups
• Bitcoin’s Lightning Network
• Polygon’s Plasma solution
• Ethereum Plasma
• Metis

Layer 1 vs Layer 2 — Main Differences

Both layers provide solutions to scalability problems. However, the main difference between Layer 1 and Layer 2 is that the former is a basic blockchain, while the latter is an overlaying network. Other differences include the following:

Conclusion

As you can see, both blockchain layers play an important role in solving scalability problems. That said, Layer 1 offers solutions such as modifying block sizes, changing the consensus mechanism, and sharding. On the other hand, Layer 2 tries to solve the problem of scalability through rollups, side chains, and state channels.

Examples of Layer 1-based blockchains include Bitcoin, Ethereum, and Cardano, while the most notable Layer 2-based blockchains are Arbitrum, Polygon, and Metis.

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