Layer-1 vs. Layer-2: The Difference Explained

Introduction

As blockchain technology continues its rapid ascent, the challenge of scalability has become increasingly critical. With the proliferation of decentralized applications (dApps), complex smart contracts, and ever-growing transaction volumes, blockchains must evolve to meet global demand. The growing crypto market is driving the need for effective blockchain scaling solutions, as developers and researchers seek to address the demands of an expanding industry and user base. Two primary approaches have emerged to tackle this: Layer-1 (L1) and Layer-2 (L2) scaling solutions.

Layer-1 refers to the foundational blockchain protocol itself, such as Bitcoin or Ethereum. In contrast, Layer-2 encompasses protocols built on top of Layer-1 to enhance throughput, reduce transaction fees, and alleviate network congestion. This guide delves into the distinct roles of both layers and their collective contribution to the future of blockchain infrastructure and the broader landscape of blockchain scaling solutions.

Key Takeaways

• Layer-1 (L1) refers to the base blockchain protocol (e.g., Bitcoin, Ethereum), while Layer-2 (L2) refers to protocols built on top of L1 to enhance performance.

• L1 scaling involves direct modifications to the blockchain’s core protocol, such as adjusting block size, changing consensus mechanisms (e.g., PoW to PoS), or implementing sharding.

• L2 scaling processes transactions off-chain, then settles them back on L1, reducing congestion and fees on the main network. Examples include rollups (ZK-rollups, optimistic rollups), state channels, nested blockchains, and sidechains.

• The Blockchain Trilemma highlights the trade-off between security, decentralization, and scalability. There is no one solution that maximizes all three, so no single blockchain currently achieves this, leading to design choices that prioritize two over one.

• L1 solutions aim for fundamental improvements but can be slow to deploy and often require hard forks.

• L2 solutions offer immediate scalability benefits without altering the underlying L1, but they might introduce challenges related to interconnectivity and varying security levels.

• Both L1 and L2 solutions are crucial and complementary for achieving the necessary scalability for widespread blockchain adoption.

Layer-1 Scaling Solutions

Layer-1 (L1) scaling involves making direct improvements to the base blockchain protocol to boost performance and capacity. The structure of Layer-1 blockchains refers to their architectural organization, where the foundational layer underpins the entire network and enables core operations. This can include modifications to consensus mechanisms, adjustments to block sizes, or the implementation of innovative features like sharding to enhance the ability and capabilities of the blockchain.

Layer-1 blockchains provide essential services such as sending cryptocurrency, minting tokens, and executing smart contracts, all of which require the use of the network’s native token.

Key Examples of L1 Blockchains

• Cardano, Solana, Avalanche: These networks are designed as highly scalable Layer-1 blockchains with inherent architectural improvements.

• Bitcoin network: Optimized for decentralization and security, the Bitcoin network’s throughput is intentionally limited by its design choices, serving as the foundational Layer-1 blockchain.

• Ethereum: Transitioned from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism to significantly improve scalability and energy efficiency.

L1 scaling solutions enhance the core foundation of the blockchain layer to facilitate improved scalability. This offers a wide range of methods to increase the capacity of blockchain networks. For instance, L1 solutions can enable direct modifications to protocol rules, thereby increasing transaction capacity and speed. Similarly, L1 scaling can provide greater capacity to accommodate more data and users.

Layer-1 Scaling Techniques

• Block Size and Block Time Adjustments: Increasing block sizes and shortening block intervals allows for more transactions per second (TPS). However, this can potentially impact network decentralization.

• Consensus Mechanism Upgrades: Shifting from energy-intensive Proof-of-Work (PoW) to more efficient Proof-of-Stake (PoS) reduces energy consumption and enables faster transaction finality.

• Sharding: This technique divides the network state into smaller, parallel-processed segments known as "shards." Ethereum 2.0, Zilliqa, and Polkadot are notable examples utilizing sharding.

Advantages of Layer-1 Scaling

• Fundamental Scalability: The most evident advantage is the direct improvement to the blockchain's core scalability. L1 solutions necessitate fundamental protocol modifications for enhanced performance.

• Integrated Security and Decentralization: A well-designed L1 blockchain protocol can offer high scalability while maintaining its core principles of decentralization and security, alongside economic viability.

• Ecosystem Enhancement: L1 scaling solutions can integrate new tools, technological advancements, and various other improvements directly into the base protocols, fostering broader ecosystem development.

Disadvantages of Layer-1 Scaling

• Requires Hard Forks: Implementing significant L1 upgrades often necessitates a hard fork, a backward-incompatible change to the protocol.

• Slow Deployment: Due to complex governance processes and the need for widespread network coordination, L1 upgrades can be slow and challenging to deploy.

Layer-1 Limitations

Even with inherent upgrades, Layer-1 blockchains can encounter scalability ceilings. Bitcoin's PoW mechanism inherently limits throughput, and Ethereum famously faced high gas fees during periods of network congestion. Two prominent solutions addressing these limitations are:

• Proof-of-Stake (PoS): This mechanism replaces energy-intensive miners with validators who "stake" their tokens as collateral to participate in block validation. Ethereum, Cardano, and Tezos are examples employing PoS.

• Sharding: As mentioned, sharding breaks the blockchain into parallel-processing segments. Ethereum 2.0 and Polkadot leverage sharded designs to significantly boost throughput.

These approaches are crucial in addressing the blockchain trilemma: the inherent trade-off between scalability, decentralization, and security.

Improvements to the Consensus Protocol

Some consensus mechanisms are inherently more efficient than others. While PoW, used by networks like Bitcoin, is highly secure, it can be slow. Consequently, PoS has become the consensus mechanism of choice for many newer blockchain networks. This is a critical factor in the Layer-1 vs. Layer-2 discussion.

PoS systems do not require participants to solve complex cryptographic puzzles using vast amounts of computing power. Instead, network participants with staked tokens validate and process transaction blocks. Ethereum's transition to a PoS consensus algorithm aims to increase the network's capacity while simultaneously enhancing decentralization and preserving network security.

Sharding

Adapted from distributed databases, sharding has emerged as one of the most popular L1 scaling solutions. Sharding is the process of dividing the entire blockchain network's state into separate data sets called "shards." This makes the task of validation easier, as individual nodes only need to manage a specific shard rather than maintaining a complete copy of the entire network.

The network processes these shards in parallel, enabling multiple transactions to be processed concurrently. Each network node is assigned to a specific shard, and these shards communicate proofs to the main chain and share information like addresses, general states, and balances through cross-shard communication systems. Beyond Ethereum 2.0, protocols like Zilliqa, Qtum, and Tezos are also exploring sharded architectures.

Layer-2 Scaling Solutions

Layer-2 (L2) refers to technologies built on top of existing Layer-1 blockchains to improve scalability without altering the underlying protocol. L2 solutions process transactions off-chain, offloading transaction data from the base blockchain, and then post the final results back to the base layer, thereby alleviating pressure on the main network.

The primary goal of Layer-2 scaling is to utilize networks or technologies that operate independently but are anchored to a blockchain protocol. Only essential data or proofs are stored on-chain to maintain efficiency. An off-chain protocol or network can significantly enhance a blockchain network’s scalability and efficiency.

L2 scaling solutions efficiently and flexibly delegate data processing tasks to supporting architectures. When a payment channel or rollup is closed, the final state is transmitted back to the Layer-1 blockchain for settlement. As a result, the core blockchain protocol avoids congestion, making substantial scalability possible.

Key Examples of L2 Protocols

• zkSync, StarkNet: These solutions are examples of zero knowledge rollups (zk-rollups), which process transactions off-chain and submit cryptographic proofs to the main chain, providing high security, privacy, and efficiency.

• Lightning Network (Bitcoin): Enables near-instant micropayments through payment channels, a type of state channel.

• Optimism & Arbitrum (Ethereum): These use optimistic rollups to scale Ethereum without compromising its security.

• Side chain solutions: Side chains are separate blockchain networks that process transactions independently and then report back to the main layer 1 blockchain, helping reduce congestion and increase scalability.

Advantages of Layer-2 Scaling

• No Impact on L1: One of the most significant advantages of L2 solutions is that they do not affect the performance or functionality of the underlying blockchain, thus preventing degradation of the main network’s overall performance.

• Faster Transactions and Lower Fees: L2 solutions, such as state channels and the Lightning Network, expedite the execution of multiple micro-transactions by avoiding minor verifications or unnecessary fees on the main chain. In the same way that some Layer-1 improvements aim to reduce congestion and costs, Layer-2 solutions also help lower transaction fees and increase speed.

Disadvantages of Layer-2 Scaling

• Interconnectivity Challenges: The current lack of interconnectivity between different blockchains (e.g., direct communication between Ethereum and Bitcoin users) can be exacerbated by L2 solutions. L2 users are often restricted to the protocols of the specific solutions they employ, which can limit broader network interoperability.

• Varying Security and Privacy: While L2 solutions offer different levels of security and privacy, none provide the same level of foundational security as the major Layer-1 chains. Users must consider their priorities regarding security and privacy when choosing an L2 solution. Fraud proofs in some L2s allow the network to identify and reject wrong or invalid transaction data, helping to maintain integrity during dispute resolution.

Types of Layer-2 Solutions

Several distinct approaches fall under the umbrella of Layer-2 scaling. These solutions use various forms of cryptographic proofs, such as signatures, fault proofs, and validity proofs, to ensure security and enable dispute resolution.

Rollups

Rollups batch multiple transactions off-chain and submit them as a single, compressed proof to the Layer-1 blockchain. The most popular rollup designs are Zero-Knowledge (ZK) rollups and optimistic rollups, which differ in their approach to securing the blockchain’s state.

• ZK-Rollups: A Layer-2 scaling solution that batches transactions off-chain and uses zero-knowledge proofs to cryptographically verify their validity on-chain. These validity proofs demonstrate that all computations are correct, ensuring high security and fast finality with minimal data posted to the base layer.

• Optimistic Rollups: By contrast, an optimistic rollup assumes transactions are valid by default. They only verify transactions if someone submits a fraud proof during a designated challenge period. The key difference lies in verification: ZK-rollups prove correctness upfront using cryptographic proofs, while optimistic rollups rely on economic incentives and a delay window for fraud detection.

Nested Blockchains

A nested blockchain is essentially a blockchain operating "within" or on top of another blockchain. This typically involves a primary blockchain that establishes parameters for a larger network, with executions occurring within an interconnected network of secondary chains.

Multiple blockchain tiers can be built on top of a main chain, each with its own parent-child connection. The parent chain delegates tasks to child chains, which complete them and return the results. Unless dispute resolution is needed, the base blockchain does not actively participate in the network functions of subsidiary chains. This model's distributed workload significantly reduces the processing load on the main chain, leading to exponential improvements in scalability. The OMG Plasma project exemplifies Layer-2 nested blockchain infrastructure built on top of the Layer-1 Ethereum protocol.

State Channels

A state channel enables bidirectional communication between a blockchain and off-chain transactional channels, significantly enhancing transactional capacity and speed. A state channel does not require validation by Layer-1 network nodes. Instead, it is a network-adjacent resource isolated via multi-signature or smart contract mechanisms.

Payment channels, a type of state channel, are typically pre-funded with a certain amount of funds. These funds are locked in the channel to enable off-chain transactions between participants, allowing for rapid and low-cost transfers until the final state is settled on the blockchain.

When transactions are finalized on a state channel, a final “state” of the channel and its changes are written to the underlying blockchain. Examples of state channels include the Liquid Network, Ethereum’s Raiden Network, Celer, and Bitcoin Lightning. In the blockchain trilemma trade-off, state channels typically sacrifice a degree of decentralization for greater scalability.

Sidechains

A sidechain is a transactional chain adjacent to a blockchain, primarily used for processing bulk transactions. Sidechains operate independently from the main blockchain and use their own consensus mechanisms, meaning they utilize a consensus mechanism independent of the main chain and can be optimized for speed and scalability. In a sidechain architecture, the main chain’s primary functions are to maintain overall security, validate batched transaction records, and resolve disputes.

Sidechains differ from state channels in several fundamental ways. Firstly, sidechain transactions are not private between participants; they are recorded publicly on the sidechain’s blockchain. Additionally, security breaches on a sidechain typically do not affect the main chain or other sidechains. The infrastructure of a sidechain is generally built from the ground up, which can require significant developmental effort.

What is the Blockchain Trilemma?

The scalability trilemma refers to a blockchain’s inherent challenge in balancing three core properties: security, decentralization, and scalability.

The trilemma posits that a blockchain can only effectively possess two of these three properties simultaneously, never all three in their absolute maximum form. Consequently, current blockchain technology often needs to sacrifice one of these fundamental properties for optimal functionality in others. Bitcoin is a prime example: it has optimized decentralization and security but at the expense of scalability.

Crucially, no single cryptocurrency currently achieves the absolute maximum of all three features. Instead, cryptocurrencies prioritize two or three features, often to the detriment of the remaining one.

Many developers are diligently working to solve the blockchain trilemma, with various techniques and ideas already implemented to address the scalability problem. Depending on their level of blockchain implementation, these concepts and techniques manifest as either Layer-1 or Layer-2 solutions.

Consensus in blockchains relies on the majority of network participants to validate and secure transactions. The secure settlement of transactions depends on the majority consensus, ensuring that disputes are resolved fairly and correctness is enforced within payment channels and Layer 2 solutions.

While a wide range of blockchains can process thousands of transactions per second, they often do so by making compromises on decentralization or security. Most blockchains today sacrifice one of the three:

• Ethereum aims to balance all three via Layer-2 rollups and sharded PoS.

• Bitcoin maximizes security and decentralization at the expense of scalability.

• Solana prioritizes scalability and performance but reduces decentralization.

No blockchain has fully resolved the trilemma, but continuous innovations at both Layer-1 and Layer-2 continue to push the boundaries of what’s possible.

Layer-1 vs. Layer-2: Key Differences

Understanding the fundamental distinctions between Layer-1 and Layer-2 scaling solutions is crucial. Here are some of the key differences:

1. Definition:

• Layer-1 scaling solutions involve directly modifying the blockchain protocol's base layer to achieve desired enhancements. For example, the block size can be adjusted to accommodate more transactions, or consensus protocols can be altered to improve speed and efficiency.

• Layer-2 scaling solutions function as off-chain solutions that share the computational load of the primary blockchain protocol. Specific information processing and transaction processing tasks are delegated to Layer-2 protocols, networks, or applications by the mainnet of a blockchain protocol. The off-chain protocols complete the designated tasks and report the final outcome back to the main blockchain layer.

2. Method of Operation:

• With Layer-1 blockchain networks, the actual scaling method focuses on modifying the core protocol. This means that with L1 solutions, you must change the fundamental blockchain protocols. This approach can make it difficult to immediately revert modifications if transaction volume drastically decreases or if unforeseen issues arise.

• In contrast, Layer-2 scaling solutions function as off-chain solutions that operate independently of the primary blockchain protocol. These off-chain protocols, networks, and solutions report only the ultimate results required by the underlying blockchain protocol, reducing the burden on the main chain.

3. Types of Solutions:

• In the context of Layer-1 blockchain solutions, consensus protocol enhancement and sharding are two prominent types of solutions. Layer-1 scaling also includes alterations to block size or block creation speed to ensure desired functionality.

• Regarding blockchain Layer-2 scaling solutions, there is virtually no restriction on the types of solutions that can be implemented. Any protocol, network, or application can serve as an off-chain Layer-2 solution for blockchain networks, offering immense flexibility.

4. Quality and Functionality:

• Layer-1 networks serve as the definitive source of information and are ultimately accountable for transaction settlement. On L1 networks, a native token is used to access the network's resources. Another essential characteristic of L1 blockchain networks is innovation in consensus mechanism design.

• Layer-2 networks provide similar functionality to Layer-1 blockchains, along with additional characteristics. For example, L2 networks boost throughput and programmability while significantly lowering transaction costs. Each Layer-2 solution has its own unique method for relaying and remapping transactions back to its respective base layer.

The Future of Scaling

Both Layer-1 and Layer-2 solutions play indispensable roles in scaling blockchain networks. Layer-1 focuses on ensuring foundational integrity and implementing protocol-level changes, while Layer-2 delivers practical, immediate scalability improvements without burdening the base chain.

Understanding how these layers interact is key to evaluating modern blockchain ecosystems, whether you're a developer building applications or an investor assessing scalability roadmaps. The synergistic relationship between L1 and L2 is paving the way for a more efficient, accessible, and robust decentralized future. For more insights on blockchain, check more related articles in our Blog.

FAQ

What is the difference between Layer-1 and Layer-2?

Layer-1 refers to the foundational architecture of a blockchain (e.g., Bitcoin, Ethereum). Layer-2, on the other hand, is a network or protocol that operates on top of and interacts with the Layer-1 blockchain. Think of Bitcoin as Layer-1 and the Lightning Network built on it as Layer-2.

Is Ethereum a Layer-1 or Layer-2 blockchain?

Ethereum is a Layer-1 blockchain. It serves as the foundational base layer upon which Layer-2 networks and decentralized applications are built. Layer-2 solutions like optimistic rollups (Optimism, Arbitrum) and ZK-rollups (zkSync, Starknet) operate on top of Ethereum to enhance its scalability.

What is a Layer-0 blockchain?

Layer-0 blockchains provide the fundamental infrastructure that enables the creation of other blockchains and facilitates cross-chain interoperability. They lay the groundwork for Layer-1 blockchains. Chains built on top of Layer-0 can communicate with each other or become compatible with other non-native blockchains. Examples include Cosmos, Polkadot, and Avalanche. Cosmos, for instance, serves as a foundation for chains like the Binance Chain (BNB).

Is there a Layer-3 blockchain?

Yes, the concept of Layer-3 blockchains generally refers to the Application Layer. These layers host decentralized applications (dApps) and associated protocols, focusing on user-facing functionalities. This can include APIs, user interfaces, scripting, and smart contracts that interact with the underlying Layer-1 and Layer-2 infrastructure.