Blockchain continues to transform how businesses operate. However, scalability remains a major challenge. Blockchain technology has emerged as one of the key pillars of the global economy. However, it faces a major challenge – the Blockchain Trilemma. Modern blockchain infrastructures need to strike a balance between security, scalability, and decentralization. If you have been in the industry for some time, you must have come across terms like ‘Layer 1’ and ‘Layer 2’ blockchain solutions. So what are these solutions?
Understanding Blockchain Stability
Blockchain scalability has a lot to do with transaction speed. It is a blockchain network’s ability to support high transactional throughput and expansion. Since the emergence of Bitcoin, it has been positioned as an alternative to traditional payment systems. While Bitcoin processes up to 7 transactions per second, Visa, one of the most popular payment giants, processes thousands of transactions per second.
Scalability has emerged as a competitive differentiator between different cryptocurrencies, which have primarily been positioned as alternatives to traditional currencies. While daily transactions using $BTC and $ETH have increased substantially over the past few years, increasing TPS remains a major challenge. Blockchain solutions are great when it comes to transferring of information between two or more parties with mistrust between them. But these solutions come at a cost.
The Need For Scalability In Blockchain Solutions
The sudden increase in average daily transactions has led to more unconfirmed transactions. The graph below illustrates a substantial rise in daily $BTC transactions since October 2015.
Source: https://www.codementor.io/blog/blockchain-scalability-5rs5ra8eej
As the number of daily transactions increased, the average transaction time for a transaction increased automatically, leading to more than 200,000 unconfirmed transactions. Consequently, the transaction fee also increased to $60 per transaction in 2018. As a result, existing blockchain solutions became slower and more expensive. Thus the need for scalability. Instead of looking for directed solutions for particular problems like high transaction costs and slower transactions, protocols must look for better scalability to find a long-term solution. Layer 1 and Layer 2 solutions reflect two distinct approaches to solving the scaling problem in the blockchain architecture.
Layer 1 vs Layer 2 Scaling Solutions
Layer 1 refers to the underlying blockchain protocol that forms the foundation of a network. On the other hand, Layer 2 is an overlaying network or a separate blockchain. Also known as L2, Layer 2 blockchains operate in conjunction with the Layer 1 blockchain. Bitcoin and Ethereum are the biggest examples of Layer 1 blockchain networks. Therefore, they are also referred to as Layer 1 cryptocurrencies.
Layer 1 Scaling Solutions
Layer 1 scaling solutions form the basic building block of the blockchain protocol. Layer 1 blockchain executes all the on-chain transactions. Also known as mainnet, layer 1 blockchains have their own native token, which is used to cover transaction fees. Layer 1 scaling solutions follow two key consensus mechanisms: Proof-of-Work (PoW) and Proof-of-Stake (PoS). Determining which consensus mechanism to use is the biggest challenge as scaling solutions face the trilemma of which feature to prioritize over the three: security, scalability, and decentralization.
Layer 2 Scaling Solutions
Layer 2 scaling solutions work on top of Layer 1 protocols, as an extension of the latter. The key purpose of Layer 2 solutions is to enhance the speed and efficiency of the underlying blockchain. Layer 2 solutions exist to solve the problem of scalability, that Layer 1 protocols are unable to solve due to the Blockchain Trilemma. Layer 2 protocols increase the transaction speed and reduce the gas fees, without compromising the security of the network. Bitcoin Lightning Network and Ethereum Plasma are the most popular examples of Layer 2 scaling solutions. Besides these, $MATIC (Polygon) is the most popular L2 chain out there.
Improved Scalability Is The End Goal
Contrary to the popular trend that positions it as a Layer 1 vs Layer 2 debate, the two scaling solutions are being increasingly used in a combination to achieve the desired scalability. The use of Layer 2 scaling ensures transactions are consolidated into one package before getting recorded on the mainnet. As a result, gas fees reduces substantially. While Layer 1 and Layer 2 may appear as two distinct sides of the same industry, both are designed to make blockchain infrastructures more secure, efficient, and scalable. Lack of scalability is undoubtedly one of the most significant challenges to the widespread adoption of the technology.