Layer 1 and Layer 2 Blockchains: What Is The Difference?
For many, the concept of blockchain technology is difficult to understand. Most understand that a blockchain enables the creation and use of cryptocurrencies, but not everybody knows that there are actually different types of blockchains: Layer 1s and Layer 2s.
Learn more about the difference between Layer 1 and Layer 2 blockchains, the advantages and disadvantages of each, and some of the most popular blockchain networks.
What is a Blockchain?
A blockchain is a distributed ledger on which transactions or data is stored. Blockchains are immutable, which means that the information contained on them cannot be changed, and distributed, meaning that data is kept in multiple places on a computer network.
Data is stored in a “block”, which is essentially a container of information. Once a block is filled with information and has reached its capacity, it is locked, encrypted and linked to the previous block in the chain.
Blockchains are not limited to cryptocurrency-related uses, although they are best known for the role they play in maintaining a secure, decentralised record of transactions.
What Is a Layer 1 Blockchain?
Layer 1 blockchains utilise distributed ledger technology (DLT) to record transactions securely and transparently. It is possible to build applications on top of a Layer 1 blockchain, although these applications will use the rules and protocols implemented at the foundational, Layer 1 level.
All Layer 1 networks operate using their own, native cryptocurrency. For example, the Bitcoin blockchain uses bitcoin (BTC), Ethereum uses ether (ETH), Injective uses the Injective (INJ) token, and so on.
Layer 1 blockchains use consensus mechanisms to incentivise network participants to secure and validate the network. These consensus mechanisms could include, although are not limited to:
- Proof of Work (PoW): Validators, or miners, will solve complex mathematical equations to validate the next block of transactions. Successful miners will be rewarded with a set amount of the network’s native cryptocurrency.
- Proof of Stake (PoS): Validators will offer an amount of the network’s native cryptocurrency as collateral. These individuals will be entered into a lottery for the chance to validate the next block of transactions, and successful validators are awarded an amount of the cryptocurrency in question.
Layer 1 blockchains also provide the necessary infrastructure for the building of Layer 2 (and Layer 3) blockchains.
What Are The Benefits of Layer 1 Blockchains?
There are many benefits attached to Layer 1 blockchains. Firstly, they often have very high levels of security and decentralisation. Acting as the foundational layer of any blockchain network, Layer 1s typically uphold incredibly high security standards. The very nature of blockchain technology ensures that transactions are encrypted, permissionless and immutable, and Layer 1 blockchains are virtually immune to malicious attacks.
As the base layer of any network, Layer 1 blockchains work independently to any other blockchain. This means that they have their own, native cryptocurrency tokens and consensus mechanisms, and are not reliant on the performance, decentralisation or tokenomics of any other network. This independence goes hand-in-hand with greater control and additional security.
Layer 1 blockchains often see wider adoption than other networks, partly because of their increased recognition. These blockchains are utilised across numerous industries, from healthcare to finance, and are ideal for use within areas that require anonymity, trust and security.
What Are The Disadvantages of Layer 1 Blockchains?
Despite their obvious advantages, there are several issues with Layer 1 blockchains. For one, many Layer 1s struggle to scale to accommodate high numbers of transactions. Limited block sizes and times will inhibit transaction processing times, potentially leading to congestion. To put it into perspective, Bitcoin is thought to have an average TPS (transactions per second) of 7, while VISA is believed to have a TPS of over 24,000. This is one of the key issues faced in the push for the mainstream adoption of cryptocurrency and blockchain technology.
Layer 1 blockchains also often have issues with governance and upgrades. These networks require participants to agree to making modifications to the blockchain modifications; this is a positive factor in terms of decentralisation, but can mean that improvements are implemented slowly.
Finally, many Layer 1 blockchains lack interoperability. For a blockchain to be interoperable, it needs to be able to communicate with, and send and receive data to and from, other blockchain networks. This inability to do so limits the usefulness of Layer 1 blockchains outside of their own network, thus restricting potential adoption.
What Are The Most Popular Layer 1 Blockchains?
There are lots of popular Layer 1 blockchains. They all differ slightly from one another, and each has different use cases.
Bitcoin (BTC)
Bitcoin is the oldest, most popular Layer 1 network. It functions using the bitcoin cryptocurrency, which has a limited supply of 21 million tokens. Designed primarily as a digital payment method, bitcoin is now considered a store of value and is often referred to as “Digital Gold”.
Ethereum (ETH)
Ethereum is the most popular Layer 1 network for decentralised finance (DeFi) and decentralised application (dApp) development. Ethereum was originally built using a Proof of Work consensus mechanism, but transitioned to become a Proof of Stake blockchain following “The Merge” in 2022.
Ripple (XRP)
The Ripple blockchain uses the XRP cryptocurrency to facilitate cross-border transactions, primarily between large financial institutions. Ripple built its own blockchain called the XRP Ledger (XRPL). The XRPL uses the Ripple Protocol Consensus Algorithm (RPCA), a unique consensus mechanism that sees trusted validators process and validate transactions.
Unlike other Layer 1 blockchains, XRP was not designed as a decentralised currency, and instead acts as a bridge currency, facilitating the almost instant transferral of value between different fiat currencies.
What is a Layer 2 Blockchain?
A Layer 2 blockchain is an off-chain blockchain built on top of an existing Layer 1 network. Layer 2 blockchains are designed to enhance, improve or extend the capabilities of the underlying Layer 1 blockchain. Layer 2s typically look to increase transaction throughput or network scalability, or decrease transaction fees. This is often why Layer 2s are referred to as “Layer 2 scaling solutions”.
Layer 2 networks inherit the security of the Layer 1 that they are built on. Transactional data is confirmed by the Layer 1, although the way in which this happens will differ depending on the Layer 2 network in question.
What Are The Different Types of Layer 2 Blockchains?
There are many different types of Layer 2 scaling solutions, all of which work slightly differently and have unique overall goals.
Rollups
As the name suggests, rollups work by executing transactions off-chain and bundling them (“rolling them up”) into batches together. These batches of transactions are submitted to the Layer 1 blockchain, where they are confirmed simultaneously.
There are two main types of rollup technology:
- Optimistic rollups: Optimistic rollups assume that all Layer 2 transactions are valid until challenged – and proven wrong – by a network validator.
- Zero-knowledge rollups (zk-rollups): Zero-knowledge rollups assume that all transactional data is invalid until proven true. This can be done without any transaction details being revealed, hence the name “zero-knowledge” rollups.
Sidechains
Sidechains differ slightly to traditional Layer 2 blockchains, and could technically not be considered Layer 2s. However, they do perform similar functions and are designed to improve upon the underlying Layer 1 technology.
Unlike Layer 2 blockchains, which are built on top of a Layer 1 network, sidechains are separate, independent blockchains, complete with their own consensus mechanisms and native tokens.
Although sidechains do not inherit the security of the Layer 1 blockchain, they can enable developers to introduce additional features to the network that are otherwise unavailable on the original Layer 1. This can include increased privacy, quicker transactions, or something else.
State Channels
State channels are scaling solutions that enable two or more parties to conduct transactions off-chain. Unlike Layer 1 networks, however, state channel Layer 2 blockchains do not require transactions to be broadcast to the entire network, thus increasing the network’s scalability and potentially reducing fees.
What Are The Benefits of Layer 2 Blockchains?
Fundamentally, Layer 2 blockchains are designed to improve upon the Layer 1 network that they’re built on. Layer 2 networks can lead to faster transactions, and the ability to manage much higher transaction volumes than would otherwise be possible.
Because of their ability to handle higher volumes of transactions, transaction fees are often significantly reduced on Layer 2 blockchains compared to Layer 1 blockchains. For example, on the Ethereum network, users will pay gas fees in order to execute transactions. These gas fees will increase depending on network demand, causing them to be incredibly volatile and often unrealistically expensive. Layer 2 scaling solutions increase the number of transactions that can be executed at any one time, thus limiting the potential gas fees required.
Because all Layer 2 blockchains (excluding sidechains) are built on top of a Layer 1 network, they benefit from the underlying blockchain’s security. The Layer 1 network is responsible for verifying and settling transaction data, meaning that all transactions are secure.
Layer 2 blockchains offer increased speed and scalability compared to Layer 1 blockchains, allowing developers to build more diverse applications. These applications are able to handle higher computational demands and user volume compared to the underlying Layer 1 network.
What Are The Disadvantages of Layer 2 Blockchains?
Although Layer 2 blockchains are fundamentally stronger than Layer 1 networks, they still have some drawbacks. Some Layer 2 scaling solutions are more centralised than others, and may need a central authority or operator to run effectively. Considering one of the primary benefits of blockchain technology is decentralisation, some disagree with the increased centralisation of certain Layer 2 networks.
From a development standpoint, the creation and operation of Layer 2 blockchains can also be complicated and time-consuming, requiring significant resources and expertise. They also introduce additional security risks that are unlikely to be seen on Layer 1 blockchains, with Layer 2 networks more likely to have exploitable vulnerabilities introduced by faulty smart contracts or code.
Layer 2 blockchains built on the same Layer 1 network are also not guaranteed to be interoperable with one another. Different Layer 2s are built independently and may use different technologies as a result.
What Are The Most Popular Layer 2 Blockchains?
Although there are Layer 2 scaling solutions designed for use on other networks, most Layer 2 blockchains are built to improve the scalability and transaction processing speed of Ethereum.
Polygon (MATIC)
Polygon is one of the most widely used scaling solutions for Ethereum. It is Ethereum Virtual Machine (EVM) compatible and acts as a bridge between different chains. Polygon uses the “Plasma Bridge” to move MATIC tokens from the Ethereum mainnet to the Polygon chain. Polygon has implemented a range of solutions to improve throughput and speed on Ethereum, including zk-rollups and sidechains.
Arbitrum (ARB)
Arbitrum is another Layer 2 scaling solution built on Ethereum. Arbitrum uses optimistic rollups to process transactions off-chain. ARB, the blockchain’s native cryptocurrency, allows users to access the Arbitrum network, which offers low fees and is EVM compatible.
Immutable X (IMX)
Immutable X is a scaling solution for Ethereum that specifically focuses on the secure, scalable creation of applications for non-fungible tokens (NFTs) and blockchain games. Immutable X benefits from Ethereum’s security, is 100% carbon neutral and utilises zk-rollups to process transactions quickly and affordably.
Conclusion
Layer 1 and Layer 2 blockchains work together to process transactions, maintain security and ensure decentralisation. Layer 1 blockchains were named as such retrospectively, after the first Layer 2 networks were created to improve upon the scalability issues of their predecessors.
Both blockchain types have their advantages and disadvantages, although it’s unlikely that Layer 1 blockchains alone would have ever seen true mainstream adoption, without the introduction of Layer 2 scaling solutions.
FAQs
What Is The Blockchain Trilemma?
The “Blockchain Trilemma” is a phrase coined by Ethereum co-founder Vitalik Buterin. The idea behind this trilemma is that blockchains are incapable of being simultaneously secure, decentralised and scalable. Most blockchains will sacrifice one of these elements in favour of the other two.
What Is a Layer 3 Blockchain?
Layer 3 blockchains focus on connecting different blockchains and enabling straightforward communication between them. Similar to Layer 2 blockchains, they look to scale the blockchain network, but Layer 3 blockchains operate on top of Layer 2 solutions. Layer 3 blockchains typically allow transactions across different blockchains, which is often not possible on traditional Layer 2 networks.
What Are The Fastest Layer 1 Blockchains?
Although Layer 2 scaling solutions can help to improve the speed of the Layer 1 blockchains they’re built on, there are some Layer 1 blockchains that are very fast on their own. Solana (SOL) is a Layer 1 capable of processing over 700,000 transactions per second, although its actual TPS is closer to 4,000. Injective (INJ) is a DeFi-focused blockchain that can achieve over 10,000 transactions per second. Hedera Hashgraph (HBAR) is a Layer 1 distributed ledger that does not use blockchain technology specifically, but can process 2,443 transactions per second.
