Blockchain Layer 1 and Layer 2: Things You Should Know

So you just learned what some of the most popular blockchains are from my previous entry, “The 5 Top Blockchains in Cryptocurrency” and now you want an easy-to-understand explanation of Layer 1 and Layer 2. Look no further.

It’s actually quite simple, though many articles online might make it over complicated. This entry will leave you with a basic, yet strong, understanding of what Layer 1 is, some of the protocol and what Layer 2 is as well as why and how these help to scale older infrastructure in the crypto/blockchain world.

Layer 1:

• Layer-1 network refers to a blockchain, while a Layer-2 protocol is a third-party integration that can be used in conjunction with a Layer-1 blockchain.
• Bitcoin, Litecoin, and Ethereum, for example, are Layer-1 blockchains.
• Layer-1 scaling solutions augment the base layer of the blockchain protocol itself in order to improve scalability.
• Layer-1 solutions change the rules of the protocol directly to increase transaction capacity and speed, while accommodating more users and data.
• Layer-1 scaling solutions can entail, for example, increasing the amount of data contained in each block, or accelerating the rate at which blocks are confirmed, so as to increase overall network throughput.

Consensus protocol improvements:

• POW (Proof of Work) — Solving math problems with computing power
• POS (Proof of Stake) — process and validate new blocks of transaction data based on participants staking collateral in the network. (ETHEREUM 2.0)

Sharding:

A popular Layer-1 scaling solution; Sharding entails breaking the state of the entire blockchain network into distinct datasets called “shards” — a more manageable task than requiring all nodes to maintain the entire network. These network shards are simultaneously processed in parallel by the network, allowing for sequential work on numerous transactions.

Layer 2:

• a network or technology that operates on top of an underlying blockchain protocol to improve its scalability and efficiency; shifting a portion of a blockchain protocol’s transactional burden to an adjacent system architecture, which then handles the brunt of the network’s processing and only subsequently reports back to the main blockchain to finalize its results.
• Bitcoin is a Layer-1 network, and the Lightning Network is a Layer-2 solution built to improve transaction speeds

Nested blockchains:

• A nested blockchain is essentially a blockchain within — or, rather, atop — another blockchain. The nested blockchain architecture typically involves a main blockchain that sets parameters for a broader network, while executions are undertaken on an interconnected web of secondary chains.
• The underlying base blockchain does not take part in the network functions of secondary chains unless dispute resolution is necessary.
• The OMG Plasma project is an example of Layer-2 nested blockchain infrastructure that is utilized atop the Layer-1 Ethereum protocol to facilitate faster and cheaper transactions.

State channels:

• A state channel facilitates two-way communication between a blockchain and off-chain transactional channels and improves overall transaction capacity and speed. A state channel does not require validation by nodes of the Layer-1 network. Instead, it is a network-adjacent resource that is sealed off by using a multi-signature or smart contract mechanism.
• The Liquid Network, Celer, Bitcoin Lightning, and Ethereum’s Raiden Network are examples of state channels. In the Blockchain Trilemma tradeoff, state channels sacrifice some degree of decentralization to achieve greater scalability.

Sidechains:

• A sidechain is a side blockchain that is linked to another blockchain, referred to as the main chain, via a two-way peg.
• A sidechain is a blockchain-adjacent transactional chain that’s typically used for large batch transactions. Sidechains use an independent consensus mechanism
• Sidechains are differentiated from state channels in a number of integral ways. Firstly, sidechain transactions aren’t private between participants — they are publicly recorded to the ledger. Further, sidechain security breaches do not impact the main chain or other sidechains.