Layer 1 vs. Layer 2: The Difference Between Blockchain Scaling Solutions

Layer 1 and Layer 2: An Overview

Layer 1 and Layer 2 blockchain scaling solutions are improvements to the throughput—or processing speed—of any cryptocurrency blockchain network. They can include protocol updates or additional network solutions to help process more transactions.

Layer 1 includes updates such as changing block sizes, consensus mechanisms, or splitting the database into multiple parts (known as sharding). Layer 2 includes rollups (bundling transactions), parallel blockchains (known as side chains), and off-chain handling of transactions (known as state channels).

Why Layer 1 and Layer 2 Scaling Solutions Are Important

A blockchain is a decentralized network of nodes that processes crypto transactions independently, with consensus protocols that verify the accuracy of the transactions. The transactions are then recorded sequentially, forming a chain of data blocks that can’t be changed.

Unfortunately, the more popular a blockchain becomes (Bitcoin is a case in point), the more processing power it needs to handle its growing number of transactions. Cryptocurrency blockchain protocols also may limit the number of transactions that can be processed, creating a bottleneck in the network.

This has caused popular blockchain networks to become very slow, sometimes taking up to 10 minutes (or more) to process a transaction. To solve this issue, scaling activities have been developed to help provide a more efficient means of holding a much larger volume of transactions.

There are several ways to scale each network, and dozens of scaling solutions have been developed for various popular blockchains. These solutions help offload the transaction processing power onto other networks or improve the base-layer network itself through a code update.

Layer 1 Blockchains vs. Layer 2 Blockchains

A Layer 1 blockchain is the base architecture for a decentralized cryptocurrency network. Examples of Layer 1 blockchains include Bitcoin, Ethereum, and Cardano. These blockchains handle transaction processing and network security through a shared consensus mechanism, such as proof of work (PoW) or proof of stake (PoS).

A Layer 2 blockchain refers to another blockchain or set of protocols layered "on top" of a Layer 1 solution. Layer 2 protocols use the Layer 1 blockchain for network and security infrastructure but are more flexible in their ability to scale transaction processing and overall throughput on the network. Examples are Polygon (which layers on top of Ethereum) and Bitcoin's Lightning Network. Coinbase launched Base, its Ethereum Layer 2 network, in August 2023.

Types of Layer 1 Blockchain Scaling Solutions

There are several ways to scale Layer 1 blockchains, including:

Increased Block Size

Some Layer 1 cryptocurrency blockchains have updated their code to increase the block size, allowing more transactions to be verified at a time, thus expanding the overall capacity of the network. An example of this is the Bitcoin Cash (BCH) network, which upgraded its block size to 8 megabytes (MBs) from 1 MB, then further to 32 MBs, theoretically allowing it to process more than 100 transactions per second vs. Bitcoin’s seven transactions per second.

Updated Consensus Mechanism

The consensus mechanism of a blockchain validates transactions to ensure the accuracy and security of the network. Bitcoin, for example, uses proof-of-work (PoW) consensus, requiring tremendous processing power to solve a cryptographic puzzle to be allowed to record the next block in the blockchain. Once the puzzle is solved, the blockchain confirms transactions in the blocks by verifying block hashes.

Ethereum also initially used PoW but has since upgraded to proof-of-stake (PoS) consensus, which requires node operators to lock up a large Ether (ETH) deposit to process transactions.

Sharding

Sharding is similar to database partitioning, which allows a blockchain database to be broken up into smaller parts so that transactions can be processed simultaneously. This increases the overall capacity of a Layer 1 blockchain network.

Types of Layer 2 Blockchain Scaling Solutions

There are also several types of Layer 2 blockchain scaling solutions, including:

Rollups

Instead of processing transactions individually, bundles of transactions can be “rolled up” into a single transaction, vastly increasing the number of transactions that can be processed at once. The transactions are outsourced to be recorded off-chain, bundled, and then brought onto the main chain to process as a single entity.

Side Chains

Side chains are independent blockchain networks with their own set of validators that allow transactions to be processed in parallel. This vastly increases the transaction-processing power of a blockchain, but you must trust the integrity of the side chain network and the bridge network that connects it to the main blockchain.

State Channels

State channels are similar to a side chain, as transactions are recorded off-chain, but these transactions are recorded in bulk off-chain, and then the state of the channel is set at complete. The transactions are then recorded in bulk on the main blockchain network by broadcasting a completed “state” to the main network. This is how Bitcoin’s Lightning Network is set up.

Risks of Layer 1 and Layer 2 Blockchain Scaling Solutions

While scaling a blockchain is a great way to improve transaction handling and increase overall adoption, there are a few risks inherent to using a scaling solution:

• Blockchain forks: Blockchains are a chain of data blocks (files) that hold a record of all transactions in sequential order. Updating the blockchain to scale may require a fork of that blockchain, which can cause division among the blockchain supporters. Forking the code allows the scaling update to take place, but results in two networks running simultaneously (such as Bitcoin and Bitcoin Cash). This can confuse users and devalue the overall cryptocurrency.
• Harder to verify: Some scaling solutions move transactions to an off-chain network, which means verification doesn’t happen publicly. This lack of transparency may put a blockchain at risk of exposure to bad actors who aim to manipulate the transaction data.

The Bottom Line

Scaling a blockchain network is important to a cryptocurrency network's overall adoption and increased capacity. Both Layer 1 and Layer 2 scaling solutions help preserve the integrity of the underlying blockchain while improving the ability to handle far more transactions.