Any cryptocurrency blockchain network’s throughput—or processing speed—can be improved with Layer 1 and Layer 2 blockchain scaling solutions. To assist process more transactions, they may also incorporate protocol upgrades or new network solutions.
Layer 1 modifications include altering the consensus algorithm or block size, as well as sharding—the division of a database into numerous sections. Rollups (bundling transactions), side chains, and state channels are all components of layer 2 that handle transactions off-chain.
Why Scaling Solutions at Layers 1 and 2 Are Important?
A blockchain is a decentralized network of nodes that independently processes cryptocurrency transactions using set rules or a consensus mechanism to ensure the transactions’ correctness. The subsequent sequential recording of the transactions creates an immutable chain of data blocks.
Unfortunately, a blockchain needs more processing power to manage its increasing number of transactions the more well-known it grows (Bitcoin is an example of this). The amount of transactions that can be executed may also be restricted by cryptocurrency blockchain protocols, causing a bottleneck in the network.
As a result, transactions on well-known blockchain networks now frequently take ten minutes or longer to process. Scaling activities have been created to assist give a more effective way of holding a much higher amount of transactions in order to address this problem.
Each network may be scaled in a variety of ways, and hundreds of scaling solutions have been created for a number of well-known blockchains. By updating the base-layer network’s code, these solutions assist in offloading the transaction processing power to other networks or enhance the base-layer network itself.
Differences between layer 1 and layer 2 blockchains
The foundation of a decentralized cryptocurrency network is a Layer 1 blockchain. Blockchains at Layer 1 include those used by Bitcoin, Ethereum, and Cardano. These blockchains operate a cryptocurrency network’s processing and security using a standard consensus algorithm, such as proof of work (PoW) or proof of stake (PoS).
Network protocols that are placed on top of a Layer 1 solution are referred to as Layer 2 blockchains. The Layer 1 blockchain serves as the network and security foundation for Layer 2 protocols, which are more flexible in how they scale transaction processing and network throughput. Examples include Bitcoin’s Lightning Network and Polygon, which is a layer on top of Ethereum. In August 2023, Coinbase debuted Base, their Ethereum Layer 2 network.
Types of Layer 1 Blockchain Scaling Solutions
Scaling Layer 1 blockchains may be done in a number of ways, including:
Increased Block Size
Since more transactions can now be confirmed at once thanks to some Layer 1 cryptocurrency blockchains’ modified code, the network’s total capacity has increased. The Bitcoin Cash (BCH) network is an illustration of this; it increased its block size from 1 megabyte (MB) to 8 MB, and then from 8 MB to 32 MB, enabling it to execute more than 100 transactions per second as opposed to Bitcoin’s seven transactions per second.
Updated Consensus Mechanism
A blockchain’s consensus mechanism is the process through which it verifies transactions to guarantee their correctness and network security. For instance, the proof-of-work (PoW) consensus method used by Bitcoin necessitates a lot of computing power to solve a challenging equation before the next block can be added to the blockchain.
A proof-of-stake (PoS) consensus mechanism, which necessitates node operators to lock up a sizable Ether (ETH) deposit in order to be permitted to execute transactions, has subsequently replaced Ethereum’s earlier PoW consensus method.
Sharding
Similar to database partitioning, sharding enables a blockchain database to be divided into smaller chunks so that several transactions may be handled at once. A Layer 1 blockchain network’s overall capacity is boosted by doing this.
Types of Layer 2 Blockchain Scaling Solutions
Additionally, there are other kinds of Layer 2 blockchain scaling solutions, such as:
Rollups
Bundles of transactions can be “rolled up” into a single transaction rather of processing them one at a time, greatly increasing the number of transactions that can be completed simultaneously. The transactions are contracted out for off-chain recording, bundling, and then bringing onto the main chain to process as a single unit.
Side Chains
Side chains, which enable parallel transaction processing, are distinct blockchain networks with their own set of validators. This significantly boosts a blockchain’s ability to handle transactions, but you must have faith in both the integrity of the side chain network and the bridge network that links it to the main blockchain.
State Channels
State channels are similar to side chains in that transactions are recorded off chain, but these transactions are recorded in bulk off chain, after which the state of the channel is set to complete. By broadcasting a finished “state” to the main network, the transactions are then collectively recorded on the primary blockchain network.
The Lightning Network for Bitcoin is structured in this manner.
Risks of Blockchain Scaling Solutions at Layers 1 and 2
Although scaling a blockchain is a terrific approach to enhance transaction processing and boost adoption generally, there are a few concerns associated with doing so:
Blockchain forks
Blockchains are collections of data blocks that keep a chronological record of all transactions. The blockchain may need to be forked in order to be updated for scalability, which might lead to conflict among those who support the blockchain. The scaling upgrade is made possible via forking the code, however this causes two networks (like Bitcoin and Bitcoin Cash) to operate simultaneously. This may mislead people and lower the value of all cryptocurrencies.
Harder to verify
Some scaling strategies send transactions to an off-chain network, preventing public verification. A blockchain may be exposed to malicious actors that want to modify the transaction data as a result of this lack of transparency.
What Exactly is Scalability in Crypto?
The blockchain is a decentralized network on which cryptocurrencies run. This kind of network has several drawbacks, such as the difficulty to expand its capacity without modifying its code or finding new solutions. The capacity to upgrade the network itself or Layer 2 solutions that enable substantially faster transaction processing are examples of a cryptocurrency’s scalability.
What Sets Layer 1 Scaling Apart From Layer 2 Scaling?
Modifications to the blockchain network’s basic protocol that increase scalability are known as layer 1 scaling solutions. Instead, layer 2 scaling solutions improve scalability by using off-chain services or networks.
What Happens After Scaling at Layers 1 and 2?
Major crypto blockchain networks’ efforts to increase their scalability will take time. “The most likely option is for Layer 1s to focus on security, and allow Layer 2 networks to tailor their services to specific use cases,” says Binance Academy, a platform for crypto literacy managed by the exchange of the same name.
Because they have sizable user and developer communities, there is a good probability that major chains like Ethereum will continue to rule for the time being. However, having a large, decentralized collection of validators as well as a reliable reputation makes it easier to develop focused Layer 2 solutions.
The widespread acceptance and expanded capacity of a cryptocurrency network depend on the scaling of a blockchain network. While enhancing the capacity to process far more transactions, layer 1 and layer 2 scaling solutions also contribute to maintaining the integrity of the underlying blockchain. However, there are inherent dangers that might jeopardize the integrity of the whole project or even the security of a specific blockchain.
