What Are Layer 1 and Layer 2 Blockchain Networks?

Because the good contract wars warmth up, Layer 1 vs. Layer 2 blockchains are differentiating.

From Proof-of-Work to Proof-of-Stake blockchains, every has its personal strategy to scale to accommodate transaction quantity.

All pc networks depend on bandwidth to relay knowledge, together with blockchain networks. Nevertheless, the latter are extra vulnerable to a bandwidth scaling downside than extremely centralized networks:

What Is the Blockchain Scalability Drawback?

Blockchain networks are decentralized, composed of nodes (computer systems in a community holding the whole ledger). Because of this every node has to exert appreciable computing, bandwidth, and storage sources to supply and preserve entry to the ledger.

The extra decentralized a blockchain is, the extra nodes it is going to have. Whereas this redundancy is nice for the community’s safety, it’s not good for its velocity. That’s as a result of extra nodes are contributing to transaction verification.

This balancing act between safety, decentralization, and scalability is called the Blockchain Trilemma. Merely put, if a blockchain community is very centralized, it’s much less safe and extra scalable. The low node depend would make transactions sooner as a result of the computing energy can be much less distributed.

In flip, the low node depend would improve the community’s vulnerability. In any case, it takes management of 51% of nodes to be compromised by hackers.

In such a situation, it will then be attainable to dam new transactions from being added to the blockchain. Furthermore, the transactions might be re-ordered and even reversed. The latter would then result in the double-spending downside, by which the identical quantity of digital money is spent greater than as soon as.

Evidently, the looming risk of the 51% assault would render all cryptocurrencies worthless. Because of this, it’s not a coincidence that probably the most decentralized blockchain networks are those which are the preferred: Ethereum (ETH) with 4,457 nodes and Bitcoin (BTC) with 15,733 nodes. Out of 1000’s of cryptocurrencies, the pair have a market capitalization of $503B, or 57% of the whole worth of all cryptocurrencies.

Nevertheless, as a result of they’re so decentralized and safe, they’re much less scalable. In follow, this interprets to excessive transaction charges and lengthy transaction affirmation instances.

So the extra decentralized the blockchain the extra standard it’s, but it turns into much less reasonably priced and slower. That’s fairly the conundrum.

How Is the Blockchain Trilemma Addressed?

What do you do with a protected however congested freeway? It’s fairly easy — you join a street to it with the intention to offload the visitors. That is precisely the distinction between Layer 1 and Layer 2 blockchain networks.

Layer 1 is the principle blockchain community answerable for on-chain transactions, whereas Layer 2 is the linked community answerable for off-chain transactions. The Bitcoin community is Layer 1.

It gives an abysmal velocity of 5 to seven transactions per second (tps). This resulted in transactions that generally took hours to finish. Suffice it to say, such a community might by no means allow Bitcoin for use as a cryptocurrency in common every day procuring.

Bitcoin’s Lightning Community is a Layer 2 scalability resolution making Bitcoin transactions with negligible charges and near-instant transaction time.

On a technical degree, Lightning Community is a peer-to-peer (P2P) system that opens channels between events, akin to a buyer and a store. Though the quantity of transactions is limitless and practically on the spot, one does should lock a sure Bitcoin quantity first. As soon as locked in, recipients successfully bill the locked quantity as wanted and as lengthy the channel stays open and funded.

Most significantly, as a result of there aren’t any Layer 1 confirmations wanted on an LN channel. When the transactions on a channel are accomplished, the channel is closed, and its fee file is consolidated as a single transaction. As such, it’s then added to Bitcoin’s Layer 1.

The tip result’s bundling a number of transactions off-chain (on Layer 2) and including them in a compact kind to Layer 1. Likewise, the identical precept of bundling off-chain knowledge to feed again to Layer 1 works with Ethereum and its many Layer 2 scalability options.

Though serving the identical goal, Layer 2 scalability options can additional be divided into:

State channels, akin to Lightning Community, which make use of two-way channel communication with out submitting transactions to miners. Except for LN, state channels are employed by Celer, Ethereum’s Raiden Community, and Liquid Community.
Nested blockchains, akin to Ethereum’s OMG Plasma Community, by which the 2 act in a parent-child relationship. Whereas Layer 2 executes transactions, Layer 1 points and verifies them.
Rollups, as the commonest Layer 2 scalability options. They rollup and run a number of transactions off-chain and produce them again to Layer 1 for everlasting file.
Sidechains, a hybrid between channels and nested blockchains. They hyperlink to Layer 1 mainchain by way of “bridges” and have their very own consensus mechanisms, which alleviates the mainchain from having to validate transactions. Sidechains are generally used to batch numerous transactions. For instance, the biggest blockchain recreation, Axie Infinity, has its Ronin sidechain linked to Ethereum.

Nevertheless, there are blockchain Layer 1 networks that don’t depend on exterior Layer 2 networks of any sort. They had been designed from the get-go to internally cope with scalability as layer 1 networks.

Layer 1 Blockchains and Scalability Options

Though Ethereum depends on exterior L2 scalability networks, it, too, has some Layer 1 scalability methods up its sleeve. Nevertheless, they’re more than likely to be carried out later in 2023 as part of the general ETH 2.0 improve from Proof-of-Work to Proof-of-Stake consensus.

The primary one is sharding. Even earlier than blockchain know-how grew to become standard, sharding has been a well-liked database administration technique. This Layer 1 scaling resolution breaks the community into chunks referred to as shards. Every shard processes and validates transactions in parallel.

Moreover, nodes assigned to shards don’t have to carry the whole blockchain file. As an alternative, they share knowledge (balances, addresses) between one another and feed proofs to the mainchain. Alongside Ethereum, blockchains which are utilizing or exploring sharding are Tezos, Zilliqa, and Qtum.

Listed here are some PoS blockchains which are Layer 1s:

Algorand (ALGO)

Algorand has its modified Pure Proof-of-Stake (PPoS) consensus. Merely put, it signifies that all ALGO holders with only one token acquire community rewards when individuals use the blockchain. In distinction, Ethereum has a slightly excessive barrier to entry at a 32 ETH (~$90k) stake.

With regards to scalability, Algorand has an built-in two-tier structure by which extra complicated transactions reserved for DeFi protocols are dealt with by one chain, whereas easy transactions (token transfers) are dealt with by one other. This manner, Algorand can inherently obtain tps as much as 1,000, drastically outperforming Ethereum’s Layer 1 at 14–17 tps.

Nevertheless, contemplating that Algorand has underneath 100 dApps accessible, in comparison with Ethereum’s practically 3,000, it stays to be seen whether it is really scalable. One might make a case {that a} low barrier to staking might make the community extra weak to malicious actors. Likewise, Algorand doesn’t have a slashing mechanism to punish dangerous actors, in contrast to Ethereum.

Elrond (EGLD)

Elrond makes use of sharding as its major Layer 1 scalability resolution. Theoretically, it may well course of as much as 100,000 tps due to the mix of safe proof-of-stake (SPoS) consensus protocol and Adaptive State Sharding (ASS).

ASS is dynamic sharding, by which shards both break up or merge, relying on the community’s visitors load. Moreover, not solely is the community sharded, however so are transactions themselves. The safety is boosted by the truth that validators are distributed throughout shards, making it much less probably for a malicious shard takeover to occur.

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Celo (CELO)

Celo is a tough fork from Go Ethereum (Geth), which occurred in 2017. After forking, it carried out proof-of-stake and a brand-new tackle system. This makes it attainable to make use of a telephone quantity as a public key, pushing Celo as the worldwide cellular fee resolution.

Celo has its personal stablecoin. The truth is, three of them: cEUR, cUSD, and cREAL. As a result of Celo makes use of PBFT (Sensible Byzantine Fault Tolerance) for its PoS consensus, it may well tolerate malicious nodes even when there’s a small variety of them. In different phrases, an additional node added will increase the community’s communication overhead exponentially.

Concord (ONE)

One other blockchain with its personal tweaked PoS, Concord makes use of efficient proof-of-stake (EPoS). Its mainchain consists of 4 shards that concurrently confirm and add new transactions. Not solely does each have separate validators, however each can execute transactions at totally different speeds, leading to totally different block heights.

Block top is crucial for blockchain safety as a result of it differentiates between the blocks. With each sharding and block top randomization, Concord strikes a steadiness between scalability and safety. That is additional boosted by Concord’s cross-chain Horizon bridge, permitting the community to hook up with Ethereum’s Layer 2 scalability options.

Will Self-Contained Layer 1 Blockchains Prevail?

There are a lot of extra layer 1 networks to think about: Cardano (ADA), Solana (SOL), THORChain (RUNE), Polkadot (DOT), Avalanche (AVAX), Fantom (FTM), Binance Good Chain (BNB), Tron (TRX), Kava (KAVA) Radix (DLT), and others.

Nevertheless, none of them have been stress-tested in real-world situations as a lot as Ethereum has been, with its massive portfolio of dApps. On paper, every L1 community makes a declare to resolve the Blockchain Trilemma not directly.

Probably the most reasonable and sensible method appears to be to dump the bottleneck to Layer 2 networks. This bridging does introduce some degree of complexity for the end-user, however so does cross-chain bridging as nicely.

Ultimately, the blockchain ecosystem can be diversified with many Layer 1 vs. Layer 2 options working collectively as a meta-blockchain community.

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