The terms “layer 1” and “layer 2” get tossed around a lot in cryptoland. They are important concepts to grasp in reference to the blockchain, but they can also be a bit confusing.
We totally get it. What even is a layer? Where do these layers come from? What do they do? Are we talking about making a parfait?
These are all reasonable questions, and look, we could be like one of those cooking blogs that makes you scroll through a novel and 1700 pictures before it gives you the recipe for spinach dip that you came for, but we are not those type of people.
We are just going to give you the explanation upfront, because that is what most of you want. (If you are not one of those people, might I refer you to our Purpose dumpling recipe, found here.)
So, what are these blockchain layers?
Layer 1 refers to a base blockchain protocol, (e.g., Bitcoin or Ethereum) while layer 2 refers to a third-party protocol built to have integrated functionality with that base blockchain.
There, that’s it. If you wanted a high-level overview, that’s pretty much all you needed to know.
- Layer 1 and layer 2 refer to different types of blockchain scaling solutions that attempt to improve throughput and the speed of a given blockchain.
- A layer 1 scaling solution refers fundamental changes made to a base-layer blockchain in order for it to process more transactions.
- A layer 2 scaling solution is a third-party protocol that uses various tools to improve the speed of the base layer blockchain without making any fundamental changes to its code or architecture.
Of course, for those who want to delve deeper into the topic, there is quite a lot more information to cover, so let’s break it down a little further.
While our definition above is accurate, it’s not complete, because, when layer 1 and layer 2 are mentioned by people in crypto, they are almost always talking about “scaling solutions.” Or, in other words, ways in which developers and programmers can increase the ability of a given blockchain to process more transactions per minute while maintaining security and decentralization.
A layer 1 scaling solution would refer to changes made directly to a main blockchain in order to improve its transaction time.
A layer 2 scaling 2 solution is a third-party protocol that works on top of or beside an existing layer 1 blockchain. Their main purpose is to smoothly and flexibly take on some of the data processing responsibility away from the main blockchain.
A well-publicized example of a layer 1 scaling solution would be Ethereum’s upcoming move from a proof-of-work to a proof-of-stake consensus mechanism. Developers are fundamentally changing the underlying architecture of the Ethereum blockchain in order to implement a new system that will hopefully decrease transaction time and improve security. (1)
The Lightening Network for Bitcoin is a prominent example of a layer 2 scaling solution. Programmers use smart contracts and multi-signature scripts to allow users to transact directly with each other without having to record all their transactions on Bitcoin’s main blockchain. This makes Bitcoin transactions on the Lightening Network extremely fast and efficient. We will get into a bit more about how this works below. The important takeaway, though, is that this scaling solution has no impact on the underlying architecture of the Bitcoin network. The Lightening Network is an adjacent network that runs synergistically with the Bitcoin mainnet. (2)
Popular types of layer 2 blockchains
So, how do these layer 2s actually work? Well, we will do a brief overview of three popular layer 2 solutions.
1. Nested blockchains
We could get really technical here, but just think of nested blockchains like the middle management in a corporation. They are a series of interconnected secondary chains built on top of a layer 1 to facilitate faster transaction times. The layer 1 (aka the CEO) establishes ground rules for how the layer 2 operates and then the middle management deals with the procedure and day to day running of the business. By delegating their workload to capable associates, the CEO is drastically reducing a backlog of work that has to be done directly by them. An example of a nested blockchain is the OMG Plasma Network for Ethereum. (3)
2. State channels
State channels are ways for users to communicate directly off-chain in order to minimize congestion on a layer 1 protocol. Two parties can open a channel between themselves and do as many transactions as they want without having to have them validated or verified by layer 1 nodes. (2)
When the two parties are finished transacting, they can close the channel and consolidate all their small transactions into one. They then can pass this one consolidated transaction to the layer 1 blockchain. This drastically reduces the computational workload of the layer 1 protocol and enables a much-improved network throughput. (2)
A well known example of a state channel is the aforementioned Lightening Network for Bitcoin.
Sidechains are a bit of a hybrid between layer 1 and layer 2 scaling solutions. They are secondary blockchains that are linked to a layer 1 blockchain by a two-way peg. Sidechains have their own consensus mechanisms that can be designed to maximize speed and efficiency. (4)
Like state channels, sidechains’ main role is to take on some of the transaction and validation processes of a layer 1 blockchain in order to make scalability more feasible.
However, that doesn’t mean they necessarily operate in the same way. A noticeable difference is that sidechains are not private interactions between individuals as in the case of state channels. All sidechain transactions are publicly recorded on chain. Further, because sidechains are separate from the mainchain and use their own consensus mechanisms, security breaches on sidechains do not affect the mainchain. A prominent example of a sidechain is the Polygon network for Ethereum. (4)
Scalability is a crucial concept to understand when it comes to cryptocurrency and blockchain technology. Trying to achieve the holy trinity of a high level of security, decentralization, and speed is at the core of most crypto currency projects. Moving forward, layer 1 and layer 2 scaling solutions will continue to play incredibly important roles in this quest.
(1) “Blockchain layer 1 vs layer 2-key differences,” 101 Blockchains: https://101blockchains.com/blockchain-layer-1-vs-layer-2/
(2) “What is the Lightening Network in Bitcoin, and how does it work?” Coin Telegraph: https://cointelegraph.com/bitcoin-for-beginners/what-is-the-lightning-network-in-bitcoin-and-how-does-it-work
(3) “Layer-1 and Layer-2 Blockchain Scaling Solutions,” Gemini: https://www.gemini.com/cryptopedia/blockchain-layer-2-network-layer-1-network
(4) “An introduction to side chains,” Coin Desk: https://www.coindesk.com/learn/an-introduction-to-sidechains/
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