What are Blockchain Layers?

The widespread adoption of cryptocurrencies and blockchain technology has undoubtedly led to a rapid increase in the number of users and transactions. However, the ability of these decentralized networks to scale in proportion to accommodate this surge in growth has been an ongoing and persistent hurdle faced by developers. Public blockchain networks, which prioritize decentralization and security, often struggle to achieve high throughput and scalability. This problem is commonly referred to as the Blockchain Trilemma, which posits that it is practically impossible for a decentralized system to simultaneously achieve equally high levels of decentralization, security, and scalability. According to this theory, blockchains in their current state may at best achieve two out of three of these elements, but never all three.

As a result, blockchain networks often have to make trade-offs to decide which of the three factors they wish to prioritize. Despite this challenge, there is a growing community of enthusiasts and experts who are working on developing scaling solutions. Some of these solutions focus on modifying the architecture of the primary blockchain (Layer 1), while others concentrate on Layer 2 protocols that are built on top of the underlying network. These scaling solutions aim to improve the performance of blockchains by utilizing techniques such as sharding, sidechains, and off-chain processing. As a result, there is hope that these efforts will eventually enable blockchain to achieve the necessary scalability and throughput to evolve into a more practical piece of technology, hence opening the doors to widespread mass adoption and everyday use.

In the current landscape of blockchain technology, there exists a multitude of options available which can often create confusion for users regarding the distinction between Layer 1 and Layer 2 chains. Although there are advantages to simplifying the complexity of blockchains for users, it is essential to first comprehend the system you are utilizing or investing in. In this article, we will explore the differences between Layer 1 and Layer 2 blockchains, as well as several scalability solutions that are being developed to address the inherent limitations of these systems.

Understanding Layer 1 and Layer 2 Blockchains

Layer 1 blockchains refer to the primary blockchain infrastructure that supports the core functionalities of the network, and are often characterized by their decentralized nature as well as their focus on maintaining a high level of security. However, due to their design, Layer 1 blockchains may struggle to scale efficiently as network activity increases, leading to slow transaction throughput and increased fees.

In contrast, Layer 2 solutions are designed to operate on top of existing Layer 1 blockchains, providing additional functionalities while alleviating some of the scalability issues. These protocols can achieve this by reducing the amount of data that needs to be processed on the main chain, thus improving the network's overall throughput. Layer 2 solutions can take many forms, such as sidechains, state channels, or off-chain processing.

Why is blockchain scalability important?

To better understand what blockchain scalability is and the important role it plays in maintaining overall usability, you may consider the following analogy:

In the realm of transportation infrastructure, a new highway between a major city and its growing suburb can face issues of congestion due to limited capacity and increased demand. One solution to alleviate traffic is to improve the highway infrastructure itself, such as by adding extra lanes. However, this solution may not always be practical and can be costly and time-intensive to implement. Alternative approaches, such as building additional service roads or implementing a light rail transit line, can provide additional capacity without changing the core infrastructure.

Similarly, in the world of blockchain technology, Layer 1 blockchains like Bitcoin, Ethereum, and Polkadot serve as the base-layer blockchains that process and record transactions for their respective ecosystems. Layer 2 scaling solutions like Polygon provide secondary networks to enhance the overall capacity of the blockchain. These solutions regularly commit checkpoints to the primary blockchain to update its status.

The throughput capability of a blockchain is a crucial factor that measures the speed and efficiency of transaction processing and recording within a given timeframe. Layer 1 blockchains can face issues with slow processing and high costs as the number of users and simultaneous transactions increases, especially for those that use a Proof-of-Work mechanism instead of Proof-of-Stake. Therefore, Layer 2 solutions can serve as a practical alternative to improving blockchain scalability without resorting to costly changes to the core infrastructure.

Existing Problems with Layer 1s

Bitcoin and Ethereum are prominent examples of Layer 1 networks that utilize a distributed consensus model to secure their networks. This model requires multiple nodes to independently verify each transaction before it can be validated, ensuring the integrity and accuracy of the recorded data on the blockchain. Specifically, this is achieved through the use of mining nodes that engage in a competitive process of solving a complex computational puzzle. Successful miners are then rewarded with the network's native cryptocurrency.

While this distributed consensus model provides a secure and efficient means of logging and recording verified data, it also presents scaling issues for popular networks such as Bitcoin and Ethereum. With increasing network traffic, the demand for transaction throughput becomes a significant challenge. As a result, users may experience slower confirmation times and higher transaction fees during periods of network congestion.

How can Layer 1 Scaling Solutions be Improved?

Layer 1 blockchains face challenges with increasing network traffic and transaction throughput. Several solutions are available to improve overall network capacity. For blockchains utilizing Proof-of-Work, a potential solution is transitioning to Proof-of-Stake, which cuts down on processing fees and allows for higher transactions per second (TPS). However, there is a debate within the crypto community about the long-term implications and benefits of this solution.

Scaling solutions on Layer 1 networks are typically developed and implemented by the project’s development team. Depending on the solution, the community may need to hard fork or soft fork the network. Backward compatible changes, such as Bitcoin’s SegWit update, require only a soft fork. On the other hand, significant changes like increasing Bitcoin’s block size to 8MB require a hard fork, resulting in the creation of two versions of the blockchain, one with the update and one without it.

Another approach to increasing a network’s throughput is sharding. Sharding divides a blockchain's operations into multiple smaller sections that can process data concurrently rather than sequentially. This improves overall network capacity and allows for higher TPS. However, sharding may also pose security risks, as each shard becomes vulnerable to attack. Therefore, it is crucial to implement robust security measures and carefully consider the potential risks and benefits of this approach.

Types of Layer 2 Scaling Solutions

Layer 2 scaling solutions are designed to address the scalability issues of Layer 1 blockchains. Layer 2 solutions work by utilizing secondary networks that function in parallel or independently of the main chain. The most common Layer 2 scaling solutions are rollups, sidechains, state channels, and nested blockchains.

Rollups

Rollups use off-chain Layer 2 transactions that are bundled together and submitted as one transaction on the main chain. Zero-knowledge rollups use validity proofs to verify the integrity of transactions. Assets are held on the original chain with a bridging smart contract, and the smart contract confirms that the rollup is functioning as intended. This approach provides the security of the original network while leveraging the benefits of a less resource-intensive rollup.

Some examples of prominent rollups include zkSync and StarkNet. The former is a popular zero-knowledge rollup solution that supports Ethereum and other EVM-compatible chains, and has been designed to be scalable, secure, and user-friendly, offering fast and low-cost transactions with high throughput.

StarkNet, on the other hand, is a new rollup technology developed by StarkWare that uses STARK proofs instead of zero-knowledge proofs. This allows for more efficient and cost-effective rollups that can support a wider range of use cases, including complex computations and privacy-preserving applications.

Sidechains

Sidechains are independent blockchain networks with their own set of validators. The bridging smart contract on the main chain does not verify the validity of the sidechain network, so trust in the sidechain is necessary to ensure correct operation. Sidechains are capable of controlling assets on the original chain.

State Channels

A state channel is a method of conducting interactions off the blockchain through a two-way communication channel between participants. This approach helps to eliminate the waiting time that is typically associated with relying on third parties such as miners, and involves sealing off a portion of the blockchain using multi-signature or a smart contract that has been agreed upon by the relevant participants. The participants can then interact directly with each other without the need to submit anything to miners, creating a trustless system.

Once the entire transaction set is complete, the final state of the channel is then added on to the blockchain.Two of the most popular state channel solutions are Bitcoin's Lightning Network and Ethereum's Raiden Network. Both utilize Hashed Timelock Contracts (HTLCs) to execute state channels. The Lightning Network allows participants to conduct numerous microtransactions in a short period of time, while the Raiden Network enables participants to run smart contracts through their channels. By using state channels, participants can enjoy faster transaction times, lower fees, and increased scalability, making it an attractive option for individuals and businesses looking to conduct frequent or high-volume transactions on the blockchain.

Nested Blockchains

Nested blockchains rely on a set of secondary chains that sit on top of the main, "parent" blockchain. These chains operate according to the rules and parameters set by the parent chain, with the main chain only participating in dispute resolution when necessary. Day-to-day work is delegated to "child" chains that return processed transactions to the main chain upon completion.

Weighing the Viability of Layer 1 and Layer 2 Scaling Solutions

Both Layer 1 and Layer 2 scaling solutions present their own advantages and challenges. While Layer 1 solutions can provide an effective method for improving protocol scalability, they require a hard fork to implement. Convincing validators to adopt such changes, especially those that may impact their revenue streams, can be difficult, as seen in the transition from Proof of Work to Proof of Stake.

Layer 2 solutions, on the other hand, offer a quicker way to enhance scalability. However, depending on the approach taken, they may compromise the security of the original blockchain. Ethereum and Bitcoin are trusted for their track record of security and resilience, and moving certain aspects of the network to Layer 2 requires relying on the efficiency and security of the Layer 2 team and network.

It's important to consider the potential limitations and risks of both Layer 1 and Layer 2 solutions when deciding on the best approach to scaling a blockchain network. The decision should take into account the unique characteristics and needs of the network and its users. It's also essential to balance the desire for scalability with maintaining the security and decentralization of the blockchain network.

Closing

The scalability of blockchain technology has been a longstanding challenge, prompting a two-pronged approach involving both Layer 1 improvements and Layer 2 solutions. As existing blockchains and new networks make strides towards scalability, it remains uncertain whether Layer 2 solutions will be necessary. While major systems may take a while to improve their scalability, the focus on security for Layer 1s creates a foundation for tailored Layer 2 solutions to specific use cases. Large chains like Ethereum are likely to dominate in the near future due to their established user and developer communities, but their decentralized validator set and trusted reputation also make them an ideal base for targeted Layer 2 solutions.

Moving forward into 2023, Bitget Wallet (Previously Bitget Wallet (Previously BitKeep)) will continue to work towards providing full support to Zk-Rollup ecosystems, and is also currently working closely with developers to produce attractive and interesting campaigns that can incentivize our users to try their hands on them. This will in turn also provide opportunities for builders to continue improving and upgrading their scaling solutions as we grow the broader rollup ecosystem together.