The number of users and transactions is increasing at an exponential rate along with the adoption of cryptocurrencies and blockchain. Although it’s simple to understand how revolutionary blockchain is, scalability—the ability of a system to expand while meeting rising demand—has always been a problem. Highly secure and decentralized public blockchain networks frequently have trouble reaching high throughput.
The Blockchain Trilemma, which asserts that it is nearly impossible for a decentralized system to concurrently attain equally high degrees of decentralization, security, and scalability, is frequently used to explain this situation. Blockchain networks can, in reality, only include two of the three elements.
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However, thousands of enthusiasts and professionals are fortunately working on scalable solutions. While some of these solutions focus on Layer 2 protocols that run on top of the underlying network, others aim to modify the architecture of the primary blockchain (Layer 1).
You might not be aware that you are utilizing a Layer 1 or Layer 2 chain due to the abundance of blockchains and cryptocurrencies. Although there are advantages to masking blockchain complexity, it is still important to comprehend any system you plan to use or invest in. You will comprehend the distinctions between Layer 1 and Layer 2 blockchains as well as alternative scaling options after reading this text.
What is a blockchain Layer 1 vs. Layer 2?
The fundamental core blockchain architecture is referred to as “Layer-1.” On the other hand, the layer-2 network sits on top of the underlying blockchain. Think about Bitcoin and the Lightning Network. The lightning network is a layer-2 network, whereas bitcoin is a layer-1 network. Now that the basic distinction has been made, let’s examine the layer-1 and layer-2 solutions that companies are currently working on. Layer-2 solutions will be discussed first.
Blockchain Layer 2 Scaling Solutions
Layer 2 blockchain operates on the native layer to increase efficiency. By shifting some of the transactional load from Level 1 blockchain to another system design, Layer 2 effectively offloads transactions.
The Layer 2 blockchain takes up the processing load after that, reporting to Layer 1 for result finalization. Network congestion is decreased since this nearby auxiliary architecture handles the majority of the data processing load. As a result, the Layer 1 blockchain is less crowded and more scalable.
The Lightning Network is a Layer 2 scaling solution that simultaneously absorbs Bitcoin’s load and reports to it. Bitcoin’s Lightning Network is an example of a Layer 1 blockchain.
As a result, the Lightning Network accelerates the processing of the Bitcoin blockchain. The Level 1 Bitcoin blockchain also has smart contracts thanks to the Lightning Network.
Blockchain Layer 1 Scaling Solutions
A Layer-2 protocol is a third component that might be used in conjunction with a Layer-1 blockchain, whereas a Layer-1 network is a blockchain in the decentralized ecosystem. Ethereum, Litecoin, and Bitcoin are all part of layer-1 blockchains. Scalability is increased by adding layer-1 scaling solutions to the base layer of the blockchain protocol. Numerous approaches are constantly being developed and put into practice in order to improve the scalability of blockchain networks.
The process is as follows: In order to boost transaction capacity and speed while accepting more users and data, layer-1 solutions directly adjust the protocol’s rules. To increase overall network throughput, layer-1 scaling methods may include increasing the quantity of data in each block or speeding up the rate at which blocks are validated.
Why is blockchain scalability important?
The term “scalability” can indicate several different things in the blockchain business. In one argument, you can hear about a technology’s inability to scale in terms of how big a blockchain gets over time, confusing the affordability of adding new network members with the technology’s capacity to stand the test of time. Another debate may use analogies to outdated systems, such as conventional payment processors and the spikes in transaction volume they experience around holidays, to describe what is necessary for a scalable solution.
Another passionate argument may try to convince the listener that scalability and decentralization are fundamentally mutually exclusive, and that only one of the two is a sacrosanct characteristic of blockchains.
There isn’t a universal agreement (no pun intended) on what a scalable blockchain is or ought to be. The promise of blockchain has not yet been realized by the mass market, and when it does, we will require scalable solutions for every issue that blockchains aim to solve.
I provide a straightforward and general definition of scalability to emphasize the idea that it is a gating factor for broad market adoption: Scalability is the capacity of a blockchain to offer users a rich experience regardless of the number of people who get it.
The user experience must be top-notch to gain broad market acceptance, whether the user is joining a blockchain network, interacting with a decentralized application (DApp) during a rush hour, or leaving a centralized walled garden. Therefore, scalability is important to take into account if a technology wants to become widely used.
Current Layer 1 issues
Examples of Layer 1 networks with scalability concerns include Bitcoin and Ethereum. Both use a distributed consensus architecture to protect the network. This indicates that each node independently verifies each transaction before it is validated. The so-called mining nodes compete with one another to solve a challenging computational challenge, and the winners are rewarded with the native coin of the network.
In other words, before a transaction can be validated, it must first pass the independent verification of many nodes. This is a productive approach to log and store accurate, validated data on the blockchain while reducing the danger of attack from malicious parties. However, the throughput demand becomes an ever-growing problem once you have a network as well-known as Ethereum or Bitcoin. During times of network congestion, users will experience slower confirmation times and higher transaction fees.
How do Layer 1 scaling solutions work?
A Layer-2 protocol is a third-party integration that may be utilized with a Layer-1 blockchain in the decentralized ecosystem. A Layer-1 network is referred to as a blockchain. Blockchains at layer one include Bitcoin and Ethereum. Scalability is increased by adding layer-1 scaling solutions to the blockchain protocol’s base layer. There are numerous approaches being developed right now that directly increase the scalability of blockchain networks.
In order to boost transaction capacity and speed while accepting more users and data, layer-1 solutions directly adjust the protocol’s rules. In order to boost total network throughput, layer-1 scaling solutions may involve, for instance, increasing the amount of data contained in each block or speeding up the rate at which blocks are validated.
To accomplish Layer-1 network scale, a blockchain may also undergo other fundamental modifications.
Consensus protocol improvements
There are more effective consensus procedures than others. The consensus protocol now in use on well-known blockchain networks like Bitcoin is known as Proof of Work (PoW). PoW is safe, although it can be slow. Because of this, a lot of more recent blockchain networks prefer the Proof-of-Stake (PoS) consensus algorithm. PoS systems process and validate new blocks of transaction data based on users staking collateral in the network, as opposed to needing miners to solve cryptographic algorithms employing significant processing power.
With the release of Ethereum 2.0, the network will switch to a PoS consensus mechanism, which is anticipated to significantly and fundamentally enhance its capacity while boosting decentralization and maintaining network security.
Sharding, a concept borrowed from distributed databases, has grown to be one of the most well-liked Layer-1 scaling solutions despite the blockchain industry’s tendency to view it as still in an experimental phase. The process of “sharding” requires dividing the current state of the entire blockchain network into various databases (a more manageable task than requiring all nodes to maintain the entire network). The network processes these network shards concurrently in parallel, enabling sequential work on several transactions.
Furthermore, rather than keeping a copy of the blockchain in its entirety, each network node is assigned to a certain shard. Using cross-shard communication protocols, individual shards exchange addresses, balances, and general states in order to communicate proofs with the main chain. Along with Zilliqa, Tezos, and Qtum, Ethereum 2.0 is one well-known blockchain protocol that is researching shards.
How do Layer 2 scaling solutions work?
A layer-2 network or technology enhances the scalability and efficiency of a blockchain protocol by running on top of it. This class of scaling solutions comprises offloading a portion of the transactional weight of a blockchain protocol to a neighboring system architecture, which then manages the bulk of the network’s processing and only later reports back to the primary blockchain to finalize its results. The base layer blockchain becomes less crowded— and therefore more scalable—by abstracting the majority of data processing to auxiliary architecture.
For instance, the Lightning Network is a Layer-2 solution designed to increase transaction speeds on the Bitcoin network. Bitcoin is a Layer-1 network. Additional illustrations of Layer-2 solutions include:
In essence, a nested blockchain is a blockchain that is placed inside or rather on top of another blockchain. The nested blockchain architecture typically consists of a core blockchain that establishes the rules for a larger network, with executions taking place on a web of subsidiary chains that are connected to one another. A mainchain can serve as the foundation for multiple blockchain tiers, each of which uses a parent-child relationship. The parent chain assigns tasks to kid chains, who complete them and pass them back to the parent chain. Unless it becomes required for dispute resolution, the underlying base blockchain does not participate in the network operations of subsidiary chains.
A state channel increases total transaction capacity and speed by enabling two-way communication between a blockchain and off-chain transactional channels. Nodes in the Layer-1 network are not required to validate a state channel. Instead, a multi-signature or smart contract technique is used to lock down a network-adjacent resource. The ultimate “state” of the “channel” and all of its inherent transitions are documented to the underlying blockchain when a transaction or batch of transactions is completed on a state channel. State channels include things like the Liquid Network, Celer, Bitcoin Lightning, and Ethereum’s Raiden Network. State channels make a trade-off in the Blockchain Trilemma, giving up some decentralization for more scalability.
A sidechain is a transactional chain that is contiguous to the blockchain and often used for huge batches of transactions. The separate consensus method used by sidechains can be accelerated and made more scalable. With a sidechain design, the mainchain’s main responsibilities are to uphold general security, validate batch transaction records, and settle conflicts. There are several key ways that sidechains differ from state channels. First off, transactions made on a sidechain are not private between participants; rather, they are made public on the ledger. The mainchain and other sidechains are unaffected by sidechain security flaws. As a sidechain’s infrastructure is typically created from the ground up, establishing one could involve a significant amount of work.
Limitations of Layer 1 and Layer 2 scaling solutions
Layer 1 and Layer 2 solutions each have specific benefits and drawbacks. The most efficient way to improve protocols on a broad scale is through working with Layer 1. This calls for convincing validators to accept changes made via a hard fork, though.
Validators might decide against doing this in the case of switching from Proof of Work to Proof of Stake, for instance. By switching to a more effective approach, miners will lose money, which will dissuade them from enhancing scalability.
It is significantly easier and quicker to increase scalability using Layer 2. However, a significant portion of the security of the original blockchain may be lost, depending on the technique utilized. Users rely on networks like Ethereum and Bitcoin because of their sturdiness and security reputation. When parts of Layer 1 are removed, efficiency and security are frequently dependent on the Layer 2 team and network.
What’s next after Layer 1 and Layer 2?
As Layer 1 solutions become more scalable, one important question is whether we will even need Layer 2 solutions. Existing blockchains are getting better, and new networks are being built that are already scalable. Major systems may eventually increase their scalability, but this is not a given and will take time. The most likely scenario is that Layer 1s concentrates on security while letting Layer 2 networks customize their services for certain use cases.
Large chains like Ethereum, which have a sizable user and developer community, are likely to continue to rule in the foreseeable future. However, it provides a strong foundation for focused Layer 2 solutions thanks to its broad, decentralized validator set and well-regarded reputation.
The quest for greater scalability in cryptography has resulted in a two-pronged strategy that combines Layer 1 advancements with Layer 2 solutions. There’s a significant probability that you already have exposure to both Layer 1 and Layer 2 networks if your cryptocurrency portfolio is broad. You now comprehend the distinctions between the two as well as the many scaling strategies each provides.