Layers are what we call the different components of blockchain architecture. Each serves a specific function in how the network operates. In this guide, we’ll focus on Layers 1 and 2 and how to scale them.
Layer 1, or the base layer, is the main blockchain itself where new data is confirmed and recorded. Examples of Layer 1 blockchains include Bitcoin and Ethereum. These blockchains are independent networks that use their own native cryptocurrencies to handle transaction fees, rewards, run decentralized applications (dApps), and execute smart contracts.
Layer 2 refers to solutions built on top of Layer 1 blockchains to improve their scalability. Although many newer Layer 1 blockchains can process thousands of transactions per second, older blockchains like Bitcoin and Ethereum weren't designed with this much capacity. To scale these older networks, developers created Layer 2 solutions, which perform transactions off-chain, or outside the main blockchain, and later send the transaction data back to the main blockchain for confirmation and recording. This reduces the load on the Layer 1 blockchain and helps prevent network congestion.
Layer 1 solutions improve the blockchain's performance by making changes directly to the main network itself. These include:
The consensus mechanism is the method used by the devices on a blockchain network to agree that new transactions are valid. Some consensus mechanisms are slower and can create bottlenecks. By switching to a faster consensus mechanism, the network can process transactions more quickly. However, this change is complex and can be time-consuming because it requires changing the underlying protocol.
For example, in September 2022, Ethereum transitioned from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism, in an event we call “The Merge.” Now, Ethereum is able to process transactions much faster and with less energy consumption than ever.
By increasing the size of each block in the blockchain, more transactions can be processed at once. This helps to save space and reduce processing time. An example is Bitcoin Cash (BCH), a hard fork of Bitcoin, which increased the block size from Bitcoin's standard 1MB to 32MB. This allows the Bitcoin Cash network to process far more transactions per second than Bitcoin, with the added benefit of lower transaction fees.
Sharding splits the blockchain network into smaller, interconnected segments called "shards." Each shard operates in parallel, allowing the network to process multiple transactions simultaneously. For instance, Ethereum’s "Dencun" upgrade introduced proto-danksharding, which allows the blockchain to handle large amounts of data separately without constantly syncing with the entire network. Similarly, NEAR Protocol uses a sharding solution called "Nightshade," which keeps data in a single chain while distributing the workload across several shards.
Layer 2 solutions enhance blockchain performance by processing transactions off-chain, then recording the results on the mainnet in batches. These solutions are generally more efficient than Layer 1 scaling but can be less secure since transactions occur outside the main blockchain and are not protected by the blockchain’s security features.
Layer 2 scaling solutions include:
These solutions process transactions off-chain, group them into batches, and then submit the data back to the mainnet. The mainnet automatically assumes the data is correct unless proven otherwise. If an error is detected, the incorrect transaction is re-executed, and those responsible for approving the error may be penalized.
Similar to optimistic rollups, ZK-rollups also speed up the blockchain by processing transactions off-chain and submitting the data back to the mainnet in batches. However, they use advanced cryptographic proofs (zero-knowledge proofs) to verify the validity of each transaction. In effect, they’re like optimistic rollups but safer to use.
A sidechain is a separate blockchain that runs alongside the mainnet. It processes transactions independently using its own consensus mechanism and then transmits the data back to the mainnet. If you’re after quick transactions with low fees, you can opt to use a sidechain like Polygon and Skale for Ethereum or one of Polkadot’s many parachains.
State channels allow users to transact with each other off-chain without recording each and every transaction on the mainnet immediately. Instead, a separate channel is opened for them to transact back and forth. Once the transaction sequence is complete, the final state of their funds and assets gets recorded on the mainnet. The Bitcoin Lightning Network is an example of a state channel that lets users send and receive payments instantly and at low cost.
Layer 1 solutions generally offer higher security since all transactions are processed on the main blockchain, but these solutions can be complex and time-consuming to implement. On the other hand, Layer 2 solutions are often easier to implement, but they tend to be less secure because transactions occur off-chain.
Both Layer 1 and Layer 2 solutions play crucial roles in the blockchain ecosystem. By enhancing scalability, reducing costs, and increasing transaction efficiency, they make crypto and blockchain technology more accessible and practical for everyone.
