Tl:dr
- Layer 1 refers to the main blockchain itself, such as Ethereum or BNB.
- Layer 2 solutions operate on top of the main blockchain, processing transactions off-chain and then batching them onto the main chain to improve scalability.
- L2s help reduce transaction costs, increase transaction throughput, and improve overall network scalability.
- Optimistic Rollups and zk-Rollups are the two main types of rollups that are utilized by different L2s
What Are Layers in Blockchain?
Layers in blockchain technology generally refer to “Layer 1s and Layer 2s”. Layer 1 refers to the main blockchain itself, such as Ethereum or BNB. Layer 2 solutions operate on top of the main blockchain, processing transactions off-chain and then batching them onto the main chain to improve scalability without compromising security.
The key difference between Layer 1s and Layer 2 for most users, is that Layer 1s have their own gas token to settle transactions and a consensus mechanism. Layer 2s, on the other hand typically use the Layer 1s gas token to settle transactions and uses roll-ups to batch transactions on and settle them on the Layer 1.
For example, Base is a Layer 2 blockchain that uses ETH as a gas token and settles transactions on Ethereum as roll-ups.
Each layer plays a crucial role in the functionality and scalability of blockchain networks.
What is Scalability in Blockchain, and Why is it Important?
Scalability in blockchain refers to its ability to efficiently handle a growing number of transactions and users. This is crucial because as blockchain popularity rises, more transactions and users can strain the system, leading to slower transaction times, higher fees, and network congestion.
Imagine a busy highway where increasing cars without adding lanes causes traffic jams and toll fees. Similarly, without scalability, blockchains face challenges like slower transactions, higher costs, and network overload.
Scalability is very important for two key reasons: wider adoption and improved user experiences. Scalable blockchains can meet the demands of mainstream use, encouraging more users to adopt blockchain technology. Faster transactions and lower gas fees also create a smoother experience for users, enhancing satisfaction and usability.
One prime example of blockchain congestion was Ethereum’s Crypto Kitties craze of 2017. As one of the first NFT/gaming projects on the Ethereum network, Crypto Kitties’ massive success caused problems within the Ethereum network. There was so much activity on the network that basic transactions could take a day or two.
How Do Layer 1 Blockchains Work?
Layer 1 blockchains serve as the foundational layer of a blockchain network, functioning as the singular source of truth for the entire system.
Transaction Processing
When a user initiates a transaction, such as sending cryptocurrency or interacting with a smart contract, it is broadcast to the network of computers (nodes) running the blockchain software. Miners (in Proof-of-Work) or validators (in Proof-of-Stake) then verify the transaction by solving a cryptographic puzzle or meeting consensus requirements. Once verified, the transaction is added to a new block along with other validated transactions. This block is then cryptographically linked to the previous block on the chain, creating an immutable record of transactions.
Key Components
L1 blockchains include essential components like the consensus mechanism, which ensures agreement on the blockchain's state and transaction validity. Consensus mechanisms such as Proof-of-Work or Proof-of-Stake play crucial roles. Blocks hold transaction data, their size and frequency are determined by the blockchain protocol. Each L1 blockchain also has its native cryptocurrency, used for transaction fees and rewarding miners/validators.
Security
L1 chains employ cryptographic hashing and a decentralized network structure for security and data immutability. These elements safeguard transactions and ensure the integrity of the blockchain's history, making it resistant to tampering or unauthorized changes. Overall, Layer 1 blockchains form the core infrastructure of blockchain networks, providing a secure and reliable foundation for dApps and transactions.
What are L2 blockchains?
L2 blockchains are additional protocols built on top of L1 blockchains to address scalability and performance challenges. They enhance the efficiency of blockchain networks by processing transactions off-chain or in a separate layer before settling them on the main blockchain. Essentially, many transactions on the L2 chain are bundled or “rolled up” into one transaction on the L1 chain.
L2s help reduce transaction costs, increase transaction throughput, and improve network scalability. These features make L2s especially suited for dApps with high transaction or data requirements, such as Web3 gaming projects. As of July 2024, L2’s have grown to $40B Total Value locked or TVL.
How do Layer 2 Chains and Rollups Work?
Layer 2 solutions, specifically rollups, play a crucial role in enhancing scalability and reducing transaction costs on Layer 1 blockchains. The two main types of rollups, Optimistic Rollups and Zero-Knowledge Rollups or zk-Rollups, achieve these goals differently.
Optimistic Rollups operate under the assumption that transactions are valid unless proven otherwise during a challenge period. This period allows anyone to dispute a transaction's validity, requiring a fraud-proof on Layer 1 for resolution. While they offer flexibility and speed, the challenge period introduces a delay and relies on economic incentives for security.
On the other hand, zk-Rollups use cryptographic proofs to validate transactions without revealing sensitive information. This approach ensures fast finality without a challenge period, providing high security but with potential limitations in flexibility and computational costs.
Both rollup types contribute significantly to blockchain scalability, each with its trade-offs between security, flexibility, and transaction speed.
Popular L2s that utilize optimistic rollups include Base, Arbitrum, and of course, Optimism. Notable zk-Rollup L2s, include StarkNet, Loopring, and ImmutableX.
Layer 1 vs. Layer 2 Blockchains
In a nutshell, different L1 blockchains tend to compete with each other, while L2 blockchains are used to enhance L1 blockchains.
Some L2s have their own token, such as Optimism which launched OP token in May 2022. It is important to note that L2’s tokens like OP tokens are not used as gas to confirm transactions, but rather ETH, the native currency of Ethereum, the L1. The token of L2 protocols like OP token is primarily used for project governance.
According to Dune Analytics, the percentage of transactions on various Ethereum-based L2s is now far higher than on L1s. In addition to this, the number of distinct weekly addresses on L2s also outpaces Ethereum. The popularity of L2s is probably due to the low transaction costs and high speeds.
With L2’s high number of transactions and TVL, they vastly expand Ethereum’s capabilities. L2s are also released on other chains, although Ethereum is the most popular. For example, BNB released opBNB, which expands BNB’s capabilities.
What are Sidechains?
Sidechains are separate blockchains connected to a main blockchain, often referred to as the parent chain. They function as secondary networks that can handle transactions more efficiently, improving scalability and reducing congestion on the main chain.
A key feature of sidechains is the two-way peg mechanism, which allows digital assets to be transferred between the main chain and the sidechain securely.
Polygon is a prominent example of a sidechain built on the Ethereum network. By operating as a sidechain, Polygon can process transactions faster and at a lower cost compared to Ethereum's mainnet, while still benefiting from Ethereum's security and decentralized ecosystem.
How do Sidechains Work?
Sidechains are independent blockchains, like Ethereum and Polygon, connected to a mainchain via a two-way peg.
They operate with their own consensus mechanism and native token, distinct from the parent chain. This allows for enhanced scalability and transaction throughput.
The two-way peg is a critical component. To transfer assets to a sidechain, users lock their tokens on the mainchain, generating a corresponding amount of pegged tokens on the sidechain. Conversely, to return assets to the mainchain, users burn pegged tokens, unlocking the equivalent amount on the mainchain. This process ensures asset equivalence and security.
Sidechains benefit from the security guarantees of the mainchain while offering increased transaction capacity. However, they introduce additional complexity and potential security risks. Careful consideration of the sidechain's consensus mechanism, peg implementation, and overall architecture is essential for its successful operation.
How ChainPort and other Bridges Connect L1s & L2s
ChainPort and other blockchain bridges are essential in the transfer of assets and information between L1s, L2s, and sidechains. With bridges like ChainPort, dApps can migrate tokens across these different chains, and users can bridge stablecoins and popular wrapped assets.
Bridges are an essential part of connecting these various chains. There are various bridging methods for different types of assets and purposes. The most popular bridging methods include “Lock and Mint” and “Native Token Bridging.” Lock and mint bridging involves locking a token on the source chain and minting a corresponding token on the target chain, enabling smooth token transfer between blockchains. Native Token Bridging enables the transfer of a token already deployed on multiple chains via smart contracts.
What Other Blockchain Layers Exist?
Other blockchain layers typically refer to five layers of blockchain architecture. These layers are different components of L1 blockchains, and there are five distinct parts.
The Five Layers of Blockchain Architecture
The five layers of blockchain architecture include the hardware infrastructure layer, the data layer, the network layer, the consensus layer, and the application layer.
The hardware infrastructure layer includes physical components like computers and networks. The data layer stores blockchain data, which is a growing list of records called blocks. The network layer manages communication between nodes on the blockchain network. The consensus layer defines rules for node agreement on blockchain state and block addition. The application layer allows users to interact with the blockchain and build applications like smart contracts and decentralized applications.
FAQ
Is Cardano a Layer 1 Blockchain?
Yes, Cardano is an L1 blockchain developed by Charles Hoskinson, Cardano Foundation, IOHK, EMURGO. Cardano is one of the most popular Proof-of-Stake blockchains.
Is Ethereum a Layer 1 or Layer 2?
Ethereum is the second most popular L1 blockchain after Bitcoin.
What is a Layer Zero Blockchain?
The physical infrastructure that supports blockchain technology is called layer 0 or layer zero. A blockchain network requires hardware, software, and network infrastructure to operate. Also included are the data centers, cloud providers, and other physical infrastructures that support blockchain technology.
What is the Consensus layer in Blockchain?
The consensus layer is sometimes called layer 1 in a blockchain architecture. This layer provides the basic functionality of the blockchain. Layer 1 maintains a decentralized ledger of transactions and provides consensus mechanisms to validate new blocks of transactions.
What Solutions do Layer 2 Blockchains provide?
Through L2 solutions, some of the transaction processing is moved off the main blockchain, increasing transaction speed and reducing transaction costs.
