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Layer 1 vs. Layer 2: Solving the Problem of Blockchain Scalability

Layer 1 vs. Layer 2: Solving the Problem of Blockchain Scalability

Most of the blockchain solutions within the industry operate on layer 1 (L1).

However, some of the most popular layer 1 (L1) blockchains (e.g., Bitcoin, Ethereum) have put the main focus in design on security and decentralization at the cost of scalability. Consequently, their networks have become congested during times of heavy usage, significantly increasing transaction fees and processing times.

As scalability plays a crucial role in blockchain adoption, many layer 1 projects have been looking for ways to solve this issue.

Some decided to sacrifice a level of decentralization (or security) to create high-throughput blockchains to challenge established players like Ethereum.

At the same time, developers have been building layer 2 (L2) solutions on popular limited-throughput layer 1 (L1) blockchains to achieve inexpensive and fast off-chain transactions while benefiting from the security and decentralization of the first layer.

Last year, we saw quite some developments around both areas. While Ethereum’s high-throughput competitors experienced significant growth last year, the total value locked (TVL) in layer 2 (L2) chains surged 2,200% from 67,526 ETH on January 1, 2021 to 1.56 million ETH, further increasing in 2022 to 4.91 million ETH by June 9.

But what is the difference between layer 1 and layer 2 blockchains, and which is better to improve scalability? Let’s find out!

Table of Contents

The Blockchain Trilemma

Before we jump right to layer 1 and layer 2 blockchains, it is essential to explore the blockchain trilemma (also called the scalability trilemma) to understand our main topic.

Coined by Ethereum co-founder Vitalik Buterin, the blockchain trilemma introduces the concept that distributed ledger networks can only achieve only two of the three following qualities: security, decentralization, and scalability with “simple” techniques.

Of course, all the above three properties are super important. High security is crucial to make the network resilient against both internal and external threats.

At the same time, putting the primary focus on decentralization eliminates (or minimizes) counterparty risks, empowers the community to govern and manage the ecosystem, and achieves a truly trustless and permissionless network.

Finally, a highly scalable blockchain features excellent throughput and can process a large number of transactions per second (TPS), which helps in serving a fast-growing user base with fast and cheap transfers.

Most importantly, the scalability trilemma only applies to standard blockchain designs but not experimental techniques. The latter category is where layer 2 blockchains and future developments, such as the ETH 2.0 upgrade‘s sharding feature, fall to.

What Is The Difference Between Layer 1 and Layer 2?

Layer 1 (L1) Blockchains

As the base level of a blockchain’s architecture, layer 1 forms the primary structure of distributed ledger networks.

Simply put, layer 1 (L1) is the mainnet of every chain that hosts the components – such as the consensus mechanism, communications protocol, and the virtual machine – that are critical for the network’s operation.

And, as per the scalability trilemma, layer 1 is responsible for providing two of the three most important qualities of blockchains. For Bitcoin and Ethereum, this is security and decentralization, while high-throughput blockchains like Solana, Avalanche, and Binance Smart Chain remain less decentralized to become more scalable and secure.

By conventional methods, the easiest way to enhance scalability on Layer 1 (L1) networks is by increasing the block size (like Bitcoin Cash and Bitcoin SV did), capping the number of validators that can participate in consensus, or requiring validators to use custom, high-performance equipment.

While all of the above methods can be utilized to raise the layer 1 (L1) throughput of the blockchain significantly, all of them increase the barriers for users to become validators, which comes with the sacrifice of some degree of decentralization and can also negatively affect the network’s resilience.

After the ETH 2.0 merge, Ethereum developers plan to use sharding, an experimental technique that seeks to enhance the network’s scalability on layer 1 without sacrificing security or decentralization.

Layer 2 (L2) Blockchains

Layer 2 blockchains are built on top of the mainnet of layer 1 blockchains to enhance the network’s qualities, improve usability, and introduce additional functionality.

Since the two top DLT solutions (Bitcoin and Ethereum) struggle with limited scalability, most layer 2 (L2s) focus on providing increased throughput by relieving stress from the layer 1 (L1) blockchain and routing a part of transactions to secondary networks.

Based on their type, layer 2 (L2) blockchains can run in parallel with the layer 1 (L1) blockchain and operate completely independently or rely on the mainnet’s mechanisms and components to achieve greater decentralization and security.

Some of the most popular types of layer 2 blockchains include:

  • Rollups: As their name suggests, rollups roll up (or bundle) hundreds of transactions into a single transaction, executing them on layer 2 to reduce fees significantly but submitting data to the mainnet to benefit from its security. Examples: Optimism, Arbitrum, Loopring
  • Channels: Layer 2 channels offer an inexpensive way to send and receive instantaneous off-chain transactions between users while benefiting from layer 1 (L1) security and decentralization. The main disadvantage of this setup is that it requires increased network monitoring, and users have to lock funds in multisig contracts before transacting. Examples: Raiden, Lightning Network, Connext
  • Sidechains: By achieving interoperability with the main chain via a two-way bridge, sidechains operate independently from layer 1 (L1) blockchains, making them less secure and decentralized. Examples: Ronin, xDAI, Skale

Layer 2 Enhances Scalability Without Major Trade-Offs

Until an experimental technique like sharding gets developed and properly implemented in the future that solves this problem, crypto projects have to sacrifice security or decentralization to achieve high scalability on layer 1.

That said, layer 1 blockchains can offer great value for users by making crypto services more accessible via inexpensive fees and fast transfers.

However, to avoid this trade-off, users can leverage layer 2 (L2) scalability solutions to access low-cost and fast secondary-chain transactions while benefiting from layer 1 (L1) security and decentralization.

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