A blockchain contains three main tiers: keeping safety as the top priority, making sure everything works all the time, and letting everyone participate in how a blockchain works.

However, when many people use a blockchain at the same time, it slows down. That’s where layer-2 comes in, which can be considered an upgrade to layer-1 blockchains. Layer-2 makes blockchains scalable, faster, and less crowded while keeping everything governed and safe. 

In this article, we will discuss what is layer-2 blockchain, the different layers of blockchain, and specifically what are the key differences between layer-1 vs layer-2 blockchains.

What is layer-2 blockchain?

As the name suggests, layer-2 in crypto has come after layer-1 and is built on top of layer-1 to improve its performance and scalability.

The core problem for layer-1 protocols is their high fees and slow transaction speeds, especially during a volatile market and peak usage. Layer-2 blockchains have come up with sidechains, state channels, and rollups, among other solutions that enhance the underlying layer-1 blockchain in terms of faster transaction times and lower fees. 

Understanding the layers of the blockchain 

Layer-1 (L1) also known as the base layer of a blockchain network oversees fundamental functions that include consensus mechanisms such as the Ethereum (ETH) proof-of-stake or Bitcoin’s proof-of-work and transaction settlements, among other key functions. Despite, decentralization and security being a top aspect of L1s, bottlenecks like poor transaction speeds and expensive fees sometimes plague them.

Layer-2 (L2) blockchains are built right on top of layer-1 blockchains to address the underlying problems. Layer-2 blockchains use techniques like rollups, sidechains, and state channels, which in turn, reduce the transactional load and enable quicker and less expensive transactions without sacrificing security.

L2 blockchains have come a long way and solved many problems in L1 and the overall blockchain ecosystem, however, additional optimization is required to enhance interoperability, user experience, and particular application features. This is where layer-3 (L3) blockchains come into the picture.

L3 blockchains are specialized in creating specific protocols for applications in web3 sectors including but not limited to NFTs, DeFi, and gaming. In simpler words, L3 blockchains facilitate cross-chain functionality across different blockchains so that any end-user can access multiple blockchains at a single time, which improves accessibility and interoperability. 

These three blockchain layers described above, combine to create a complete stack that guarantees blockchain technology’s future scalability, security, and accessibility.

Layer-1 vs layer-2 blockchain

Layer-1 and layer-2 blockchains differ primarily in their functions inside the blockchain ecosystem. Consensus mechanisms and autonomy are at the core of layer-1 blockchains. Bitcoin and Ethereum are two of the popular layer-1 blockchains that are autonomous in how they operate as they record and verify transactions on-chain. However, as mentioned before, when there is significant volatility in the market, layer-1 blockchains experience critical scalability issues which have a direct impact on spiking fees and delaying transactions.

Layer-2 blockchains are developed on top of layer-1 protocols with a specific mission in check, which is to improve the scalability and performance of L1 blockchains over time. There are many techniques that L2 blockchains use to make L1s efficient, but the most common ones are the combining of several transactions into one, and processing transactions off-chain that directly lowers the protocol’s workload without much negative impacts.

Rollups, state channels, and sidechains are some of the many solutions L2 blockchains offer that combine to allow for quicker and less expensive transactions and reduce congestion on the underlying L1 protocols.

In the long run, both layer-1 and layer-2, team up to produce an effective system: layer-1 offers the security and decentralized consensus that form the basis, while layer-2 enhances scalability and user experience, making blockchain technology more viable for common use cases like gaming and decentralized finance (DeFi).

List of layer-2 blockchains

There are over 100 layer-2 blockchains with more blockchains developing now and then. Here we will mention the top three layer-2 blockchains so far:

Polygon (POL)

Polygon is a layer-2 blockchain, also referred to as ‘sidechain’, which is a scaling solution operating on the Ethereum blockchain. Cryptocurrency projects use Polygon to enhance the scalability, flexibility, and autonomy of their platform. POL (previously known as MATIC) is the native token of Polygon and is used for governance and network transaction fees on the Polygon blockchain.

Optimism (OP) 

Optimism is a layer-2 blockchain that uses optimistic rollups to scale the Ethereum ecosystem. This layer-2 platform runs on a community-driven governance model to benefit the ecosystem in the long run.

The Optimistic Rollup protocol is at the center of Optimism, as it helps take the load off Ethereum by executing transaction data outside Ethereum and then periodically posting it onto the Ethereum blockchain. This whole process helps in reducing transaction costs and enhances the performance of the Ethereum blockchain and more projects can build on Ethereum by using the Optimisim L2 blockchain.

Arbitrum (ARB)

Arbirtum is a layer-2 blockchain that also uses optimistic rollup for storing off-chain data which reduces the traffic on the Ethereum blockchain. It offers web3 apps and smart contracts that offer lower and faster transactions as compared to using Ethereum alone as a blockchain.

Benefits and challenges

By now you have understood why layer-2 blockchains are a critical part of the entire web3 ecosystem. However, it doesn’t mean they do not face any challenges. In this section, we will briefly discuss the benefits and challenges offered by layer-2 blockchains. 

Benefits:

Scalability 

Processing transactions off-chain is the key feature of L2 blockchains which has a direct impact on increasing scalability, as the congestion on the underlying L1 blockchain is significantly reduced. 

Lower Transaction Costs 

New users and projects are attracted to shift from web2 to web3 because layer-2 blockchains reduce transaction costs dramatically thanks to it off-chain transaction processing feature described above. 

Faster Transactions 

When transactions are processed off-chain, not only is the fee reduced, but also the time it takes to get from point A to point B. L2 blockchain bundles multiple transactions together which makes their speed faster and in turn ensures improved user experience while maintaining security as well. 

Challenges:

Security Dependencies 

L2 blockchains do not share the autonomy and high level of security as compared to the layer-1 blockchains. There are still vulnerabilities and failures associated with L2 blockchains that are being resolved by blockchain developers. 

Complexity and Adoption 

Not everyone can integrate their layer-2 project into the layer-1 protocols as it may require specific infrastructure knowledge of both L1 and L2 blockchains. This means that many users and new projects may face a steep learning curve to adopt this layer-2 technology. 

Interoperability Issues 

Performance and fast transactions are a big benefit of layer-2 blockchains, however, the interoperability issues is still there. This issue is resolved by the introduction of L3 blockchains which enhance cross-chain functionality across different blockchains as explained in section 2 of this article.

The future of layer-2 blockchains

Layer-2 blockchains in crypto will continue to solve the scalability issues that are currently being faced by layer-1 blockchains, such as Bitcoin and Ethereum. With an increasing number of adoption for decentralized technology, cost-efficient blockchain technology is going to be the top requirement and this is where layer-2 blockchains can manage this incoming traffic without compromising on decentralization or security.

It is also expected that interoperability between layer-1 and layer-2 blockchain will continue to be improved. This will help in creating a unified ecosystem that will provide more accessibility to assets and data across all blockchains. In simpler words, user experiences such as blockchain wallet integrations, transaction throughput, and other key metrics that determine blockchain performance will be enhanced, which in turn will encourage mass adoption.

Other important expectations from layer-2 blockchains are that the innovation sector, which includes rollups, zk-proofs, etc., will continue to advance as new cryptocurrency startups continue to build on this blockchain technology. It is also possible that the layer-2 blockchain solution may overshadow other blockchain layers and become the future of a decentralized economy.

Cryptocurrencies are built on blockchain networks. Much like a house is built starting with a solid foundation, a crypto network begins with its layer-1 blockchain. This is the bedrock of the entire system, handling processes like security, transaction processing, and much more.

This article will explain exactly what we mean by layer-1 in terms of cryptocurrency and blockchain technology, from the definition of L1 blockchain to real-world use cases and examples.

What is blockchain?

A blockchain network is a network of computers called nodes which work together to process information. This information is processed one block at a time, and each block is added to a permanent ledger that cannot be edited unless a majority of nodes agree to make a change.

As such, blockchain networks with many nodes can become very secure and difficult to censor or attack. This security and the immutable, unchangeable nature of the network information forms the basis for cryptocurrency networks like Bitcoin.

What is layer-1 blockchain? 

A layer-1 blockchain in crypto is a network where transactions are executed and confirmed directly on the blockchain. 

While layer-2 blockchains exist to augment and take pressure off of layer-1 blockchains, a layer-1 blockchain network is the main network required for a cryptocurrency to function.

Fr example, Bitcoin and Ethereum are layer-1 blockchains and do not need any other blockchain network in order to carry out their operations, such as confirming transactions and minting or creating new units of currency.

Decentralization in L1 blockchains

In cryptocurrency, layer-1 blockchains are often designed to be decentralized, meaning no one authority is controlling the nodes that process the transactions and run the network. 

Entities called miners process transactions in exchange for crypto rewards, and while smaller L1 chains are often centralized, networks like Bitcoin and Ethereum are controlled by competing mining pools that ensure that no central figure is making all the decisions.

This relative decentralization is a major factor in the popularity of layer-1 blockchains, and of cryptocurrency in general.

Their independence allows them to create and improvise their native security protocols and governance hierarchies, which in turn make them more reliable than other types of blockchain layers like Layer-2, Layer-3, and so on. But what key features make layer-1 blockchains so reliable and robust? Let’s find out below.

Key characteristics of layer-1 blockchain 

Layer-1 blockchains offer several features all of which serve a singular purpose in the end, which is to enhance the functionality and autonomy of the entire blockchain ecosystem. Here are some of the most important features: 

1. Freedom

Independence is what makes layer-1 an easy sell for an upcoming cryptocurrency project to build its platform on layer-1 only. By simply creating their governance and security protocols, layer-1 blockchains ensure that their core functions don’t rely on other blockchain layers, which directly ensures a high level of security and decentralization.

2. Native cryptocurrency

Whether it’s staking, governance, or transaction fees, users of layer-1 protocols are not required to buy any other token to do these tasks, rather only the native cryptocurrency is used. This entire process ensures transparency and trust, which adds to the growth of the layer-1 blockchain network.

3. Consensus mechanisms 

With a custom-made consensus algorithm, every layer-1 blockchain ensures network integrity and validates transactions with the highest amount of security protocols. Two major examples of such mechanisms include Bitcoin which uses Proof-of-Work (PoW) and Ethereum which employs Proof of Stake (PoS). With its army of nodes following the consensus algorithm, the entire transaction process becomes transparent and secure.

4. Community-driven governance

Stakeholders play a key part in driving the ecosystem growth in layer-1 blockchains. This means taking part in voting processes that determine key decisions that impact the future of the project directly. Overall this process harmonizes a sense of ownership and promotes decentralization which plays a key role in encouraging new cryptocurrency projects to build in this space.

Other features include scalability, smart contract functionality, and potential for ongoing development. 

List of layer-1 blockchains

There are at least 130 layer-1 blockchains that offer security, and autonomy, along with other key features mentioned above. Here, we will discuss the top three layer-1 blockchains.

1. Bitcoin (BTC)

Launched in 2009 by an anonymous founder known as Satoshi Nakamoto, Bitcoin (BTC) is the father of cryptocurrencies and operates on the Proof-Of-Work (PoW) mechanism. As a layer-1 protocol, Bitcoin provides autonomy by offering robust security features, enabling peer-to-peer transactions without the need for a 3rd party, all of which make it the most trustable blockchain network and currency in the web3 world. 

2. Ethereum (ETH)

Ethereum was the first blockchain that introduced the world of smart contracts in the blockchain space. It opened new gateways of development in the blockchain world, as it became easier for web3 developers to build decentralized applications (dApps) on the Ethereum blockchain. Ethereum also launched the Proof-of-Stake (PoS) model which further enhanced scalability while at the same time reducing energy consumption by a wide margin. 

3. Binance Smart Chain (BSC)

Binance Smart Chain serves two key features, one is to maintain low transaction costs and the other is to be at high performance at all times. This layer-1 blockchain has positioned itself in the world of DeFi as well due to its user-friendly operating system and fast transaction speeds, which makes it ideal for the average user as well as new development projects that want to build on this layer-1 blockchain. 

The future of layer-1 blockchains

There’s no doubt that layer-1 blockchains play a critical role in the world of decentralized technologies. From running decentralized apps, and executing transactions on stand-alone blockchain infrastructure, to smart contracts, layer-1 blockchains act as a foundational platform in the blockchain world. However, we can’t deny the fact that these networks still face challenges, especially when transaction volumes and/or user adoption increases with time. 

To overcome these challenges many of these layer-1 blockchains have started experimenting and doing research on improving their architectural designs and consensus algorithms.

For example, some blockchains have added mechanisms of Proof-of-Stake (POS) and sharding, to lower transaction fees, and reduce latency, however, despite these critical innovations layer-1 blockchains such as Bitcoin and Ethereum are still moving towards layer-2 blockchains which offer a wider range of solutions to the challenges poised in the blockchain world.

In the future, we can expect more evolution from layer-1 protocols as they adapt to new ecosystems, become more interoperable, and become a combination of intrinsic improvements, thanks to layer-2 and layer-3 blockchain technologies. 

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