Quick Summary

Blockchains are made up of several layers, each with their own specific functions. To prevent network congestion, these layers can be scaled through different scaling solutions.

• Layer 1 scaling solutions focus on changing the blockchain’s protocol.
• Layer 2 scaling solutions perform transactions off-chain and send the data back to be recorded on the main blockchain.
• Layer 1 solutions are generally more secure but harder to implement, while Layer 2 solutions are easier to build and use but less secure.

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Understanding Blockchain Layers

When people talk about blockchain layers, they’re describing how different parts of the network work together to make everything run smoothly. Each layer has a specific job, and in this guide, we’ll focus on Layer 1 (the main blockchain) and Layer 2 (the tools that help it scale).

Layer 1

Layer 1, or the base layer, is the main blockchain where all the important stuff happens. It’s the foundation for processing transactions, recording data, running decentralized apps (dApps), and executing smart contracts. Examples of Layer 1 blockchains include Bitcoin and Ethereum. These blockchains use their own native cryptocurrencies (like BTC or ETH) to pay for transaction fees and rewards.

Layer 2

Layer 2 is built on top of Layer 1 to make things faster and more efficient. Think of it as an add-on that handles a lot of the work off-chain (outside the main blockchain) and then sends the final results back to Layer 1. This reduces the load on the main blockchain, helping it avoid slowdowns and high fees. Layer 2 solutions are especially useful for older blockchains like Bitcoin and Ethereum, which weren’t originally designed to handle thousands of transactions per second.

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How Do We Scale Layer 1?

Scaling Layer 1 requires improving the blockchain itself so it can handle more transactions and run faster. Three popular methods of achieving this are:

1. Changing the Consensus Mechanism
   The consensus mechanism is how nodes agree on valid transactions. Some mechanisms are slower, creating bottlenecks. By switching to a faster one, the blockchain can process transactions more efficiently.
   For example, in 2022, Ethereum switched from Proof-of-Work (PoW) to Proof-of-Stake (PoS) during “The Merge.” This upgrade made Ethereum much faster and reduced its energy use by 99%.
2. Increasing Block Size
   Blocks are like containers that store transactions. Bigger blocks can hold more transactions, making the network faster. For instance, Bitcoin Cash (BCH) increased block size from Bitcoin’s 1MB to 32MB, allowing it to handle more transactions with lower fees.
3. Sharding
   Sharding splits the blockchain into smaller sections called "shards." Each shard processes transactions independently, allowing the network to handle multiple tasks at the same time. Ethereum is working on a sharding upgrade to improve its scalability, while blockchains like NEAR Protocol already use this method.

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How Do We Scale Layer 2?

Layer 2 focuses on taking the workload off the main blockchain, which makes transactions faster and cheaper. Here are some popular Layer 2 solutions:

1. Optimistic Rollups
   These process transactions off-chain in batches and send the data back to the main blockchain. The system assumes the data is correct unless proven otherwise. If there’s an error, it can be fixed, and penalties may apply to those responsible.
2. Zero-Knowledge (ZK) Rollups
   Similar to Optimistic Rollups, ZK Rollups also process transactions off-chain. However, they use advanced cryptography to ensure every transaction is valid, offering better security.
3. Sidechains
   A sidechain is a separate blockchain that works alongside the main one. It processes transactions independently but sends final data back to the main blockchain. Examples include Gnosis Chain for Ethereum and RootStock (RSK) for Bitcoin.
4. State Channels
   State channels let users make multiple transactions off-chain. When they’re done, only the final transaction gets recorded on the main blockchain. The Bitcoin Lightning Network is a great example, allowing fast and cheap payments.

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Comparing Layer 1 and Layer 2 Solutions

Both Layer 1 and Layer 2 solutions help blockchains handle more users and transactions, but they work differently. Layer 1 solutions improve the blockchain directly. They’re more secure because all transactions are processed on the main network, but upgrades like sharding or changing consensus mechanisms can take a long time to implement.

Meanwhile, Layer 2 solutions are quicker to roll out and reduce costs by processing transactions off-chain. However, since they operate outside the main blockchain, they might not be as secure.

Whether you’re using Bitcoin for payments or Ethereum for dApps, the scalability of blockchain networks affects everyone. Layer 1 upgrades and Layer 2 solutions work together to make blockchains faster, cheaper, and easier to use. This combination is key to making cryptocurrency and blockchain technology more practical for everyday use, helping more people participate in the decentralized future.

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