The skyrocketing adoption and popularity of blockchain technology have triggered an accelerated interest in blockchain-related education among the common public. The total value of the blockchain technology market alone will be $69 million by 2030, growing at a CAGR of 68% between 2022 and 2030. If you are in crypto just for making money, chances are you don’t know whether the tokens you are investing in are Layer 1 or Layer 2. However, the terms are at the centre of discussions among blockchain enthusiasts across the world. In this blog, we will understand the difference between blockchain Layer 1 and Layer 2.
Why Is It Important To Understand The Different Between Layer 1 and Layer 2
Terms like Layer 1 and Layer 2 are new to retail investors because protocols hide blockchain complexity for several reasons. However, with thousands of cryptocurrencies trading on various platforms, it is important to understand what you are getting into before putting in your money. Before we dive deeper into the concept, it is important to understand Blockchain Scalability.
What Is Blockchain Scalability?
Scalability is a blockchain’s capability to support the increase of transactions without compromising on speed or security. Consider a network with n number of transactions. Suppose the number of transactions on the network increases five times over a period of time. This will result in congestion and may affect the efficiency of the network. The concept of Layer 2 addresses this problem. Now, let’s dig deeper!
Blockchain Layer 1
Layer 1 refers to the base level of a blockchain architecture. It is the main network of any crypto ecosystem. Bitcoin, Ethereum, and BNB are some examples of Layer 1 blockchains. If you have been in the industry for some time, you would know that developers prefer alternatives like Solana and Avalanche to Ethereum. It is due to the scalability issues that Layer 1 poses. Layer 1 blockchains require a hard fork for major updates like increasing the block size. For smaller operations, a soft fork is required. The biggest challenge with Layer 1 blockchains is the throughput demand. It leads to network congestion, resulting in delays. In an architecture where every transaction needs to be verified by multiple nodes before validation, the challenges continue to get bigger with the increasing adoption of the network. Therefore Layer 2.
Layer 2 Blockchain
Layer 2 addresses the challenges we encounter in Layer 1. It operates on top of the underlying blockchain protocol for better scalability and increased efficiency. Layer 2 simply reduced the transaction load on the main blockchain. It handles the processing load and reports to the main blockchain for faster processing and minimum congestion. Thus, Layer 2 is a solution to make Layer 1 more scalable.
How Does Layer 2 Work?
Layer 2 is the secondary blockchain that works parallel to the main blockchain. It utilizes three key methods: rollup, sidechain, and state channel.
- Rollup: Zero-knowledge or ZK rollups combine all the Layer 2 off-chain transactions. ZK rollups further send this combination as a single transaction on the main chain. The integrity of the transactions is ensured through validity proofs, and assets are stored on the main chain, bridged by the smart contract. The smart contract confirms the rollup progress, enhancing security on the original network.
- Sidechain: Sidechains are independent chains with authority to control assets on the main chain. They have their own set of validators, and smart contracts bridge sidechains with the main chain to ensure proper functioning.
- State Channel: A state channel mostly comes into play in case of a pre-agreed or multi-sig smart contract. It facilitates communication between two transacting parties, who seal off part of the main chain and connect it to an off-chain transaction channel. A state channel allows the parties to execute a transaction or a batch of transactions, without having to submit transaction data to the main chain. The final status is broadcasted to the main chain once all the transactions are completed, for validation. The Bitcoin Lightning Network uses state channels.
Final Verdict
To sum it up, Layer 2 compensates for the limitations of the Layer 1 blockchain. The two key goals that protocols achieve with it are scalability and security. However, blockchain platforms are undertaking efforts to become more scalable. One question that often arises is, whether Layer 2 be required in the future. Well, leading blockchains like Ethereum are aggressively working toward scalability. But it is an ongoing process, and security is another challenge with rising hacks and exploits. Hence, Layer 2 is likely to remain relevant for a substantial amount of time.