Blockchain Layers 1 and 2: What You Should Know

In blockchain technology, the term “scaling” means increasing the throughput of the system, measured by the number of transactions performed per second. As cryptocurrencies are increasingly used in everyday life, it became necessary to create blockchain layers to improve network security, record keeping, etc. The first layer in a decentralized ecosystem is the blockchain. Layer 2, on the other hand, is the integration of third-party components combined with layer 1 to increase the number of nodes and thus system throughput. Many solutions based on the second layer blockchain are currently being implemented. These solutions use smart contracts to automate transactions.

Layer XNUMX Blockchain Versus Layer XNUMX Blockchain

Blockchain technology has many advantages: it increases the level of security, allows you to conduct transactions without unnecessary hassle and keep records. However, as its use becomes more widespread, a number of problems arise. One such issue is scalability.

In the blockchain, each transaction in a decentralized system must go through several stages, which require significant computing power and time. In order to improve the ability of the blockchain to process data, blockchain developers implement second-level scaling into its structure. Let's find out more about how it works.

Why is blockchain scalability important?

The definition of the word “scalability” varies from expert to expert. However, at its core, blockchain scalability means the system’s ability to offer a rich experience to every user, regardless of the total number of users at any given time.

The term “throughput” refers to the number of transactions processed by the system per second. While companies/payment channels such as Visa process nearly 20 GST using the electronic payment network VisaNet, the main Bitcoin blockchain can only perform 3 to 7 TPS.

The difference in throughput may be shocking, but there is a simple explanation for this. Bitcoin uses a decentralized system while VisaNet operates on a centralized system. The former uses more processing power and time to ensure the privacy of its users. Each data transaction must go through several stages, including acceptance, Mining, distribution and verification by the nodal network.

As cryptocurrency is expected to become an integral force in the business world, blockchain developers are trying to expand the scope of blockchain. By creating blockchain layers and optimizing layer XNUMX scaling, they want to speed up processing times and increase TPS.

Bitcoin's struggle with scalability

Bitcoin started out as a simple blockchain for sending and receiving digital currency. However, since its inception, it has faced a scalability issue, which has given rise to the question: What will happen if more and more people start using Bitcoin?

This scenario can be thought of as a network problem. Each system has a certain amount of throughput and can only process a certain number of transactions per second (TPS). In addition, each transaction in a decentralized system must be verified, so sufficient data storage space is needed.

Fast forward to 2021. As the popularity of bitcoin grew, the expected happened: the protocol overflowed. As a result, the data processing speed has dropped.

Why does the current blockchain require second layer technology?

The answer is simple: an increase in demand and an increase in the cost of transactions. Let's explain this using Ethereum as an example.

Since Ethereum has a consensus mechanism, it allows for many decentralized applications. In blockchain technology, the consensus mechanism is a fault-tolerant system that allows agreements to be made on a single state of the network on distributed nodes. These protocols ensure that all nodes agree on transactions and are in sync. This makes the Ethereum blockchain extremely difficult to overwrite or attack.

Thanks to the stability and security of Ethereum, the ICO craze began, as a result of which individuals began to create coins on the blockchain. As a result, there was an influx of users and an increase in the number of transactions made in Ethereum. As the system became clogged, the transaction fees – or “gas” – that are paid by the parties processing transactions on the Ethereum network, increased.

When the blockchain network becomes clogged, pending transactions end up in the memory pool and take longer to process. To solve this problem, miners are starting to prioritize transactions with a higher gas price in order to confirm them. This further raises the minimum value required to complete a transaction.

The cycle of rising prices comes to the point where gas prices skyrocket, worsening the situation for everyone. Layer XNUMX scaling aims to address this issue and reduce transaction costs.

First level problem

The first layer network is a blockchain in a decentralized system. Two examples of such networks are Bitcoin and Ethereum.

Layer XNUMX scaling changes the protocol underlying the blockchain to ensure scalability. With such solutions, protocol rules are changed to increase the throughput and speed of transactions, thereby accommodating more data and users.

The first level scaling can be as follows:

• Block confirmation speed increase
• Increasing the capacity of the block containing the data.

Together, these scaling solutions increase network bandwidth. However, Tier 1 does not seem to be able to keep up with the growing number of blockchain users. Listed below are some of the disadvantages of the system.

Inefficient consensus protocol

The Layer 1 blockchain still uses the old and inconvenient proof-of-work consensus mechanism.

While this mechanism is more secure than others, its speed limits its use. Miners are required to use computing power to solve cryptographic algorithms. Thus, in general, more computing power and time is required.

Solution

The alternative consensus is proof-of-stake, which will be used in Ethereum 2.0. This consensus mechanism confirms new blocks of transaction data in accordance with the provision of network participants, which makes the process more efficient.

Excessive workload

As the number of users increased, so did the workload on the first layer blockchain. Because of this, the speed and performance of data processing decreased.

Solution

A large-scale solution to this problem is sharding. Simply put, shearing breaks down the work of verifying and authenticating transactions into small and manageable chunks. In this way, the workload can be distributed across the network in order to utilize the processing power of more nodes.

Since the network processes these fragments in parallel, serial processing of multiple transactions can occur simultaneously.

Layer 2 Scaling Solutions

Layer 2 blockchain operates at the “native” level to increase its efficiency. By effectively offloading transactions, Layer 2 takes over part of the transaction load of the layer 1 blockchain and transfers it to another system architecture.

The Layer 2 blockchain then handles the load and passes the data to Layer 1 for final processing of the results. Since most of the data processing load is transferred to this adjacent supporting architecture, network congestion is reduced: the Tier 1 blockchain not only becomes less overloaded, but also more scalable.

An example of a first-level blockchain is the network Lightning Network Bitcoin, scalable at the second level, which simultaneously accepts the load from Bitcoin and reports to it. As a result, the Lightning Network increases the speed of data processing on the Bitcoin blockchain. Additionally, the Lightning Network brings smart contracts to the Layer XNUMX Bitcoin blockchain.

Here are a few other second level scaling solutions:

Nested Blockchain (Plasma)

A nested second-level blockchain runs on top of another blockchain. In essence, the first level blockchain sets the parameters, and the second level nested blockchain executes the processes.

There can be multiple blockchain layers on one main blockchain. Think of it like a typical company structure. Instead of one person (for example, the manager) doing all the work, the manager assigns tasks to subordinates, who report to the manager as soon as they complete their tasks. Thus, the load on the manager is reduced and scalability is improved.

An example is the OMG Plasma project, which acts as a layer XNUMX blockchain for the layer XNUMX protocol Ethereum to enable cheaper and faster transactions.

State channels

State channels allow two-way communication between blockchain participants. At the same time, participants can reduce the waiting time, since a third party is not involved in the process - for example, a miner.

Here's how it works:

• Within the framework of smart contracts, participants agree in advance to block a part of the base layer.
• They can then directly interact with each other, eliminating the need to involve miners.
• After conducting the entire set of transactions, they add the final state of the channel to the blockchain.

Both Ethereum's Raiden Network and Bitcoin's Lightning Network are examples of state channels. The Lightning Network allows participants to conduct multiple microtransactions over a period of time. At the same time, Raiden allows participants to run smart contracts through personal channels.

Government channels such as the Lightning Network are also completely secure as only the participants are aware of the transactions. On the other hand, the first layer Ethereum blockchain records all transactions in a publicly verifiable ledger.

Saidchein

Along with government channels such as the Lightning Network and smart contracts, sidechains are also a solution for scaling layer XNUMX blockchain technology. A sidechain is a transaction chain that facilitates a large number of transactions. It has a consensus mechanism that is independent of the native layer. This mechanism can be optimized to improve scalability and processing speed. In this situation, the mainchain must confirm transaction records, maintain security, and resolve disputes.

Sidechains differ from public channels in that they publicly record all transactions in a ledger. Also, if a security breach occurs on a sidechain, it does not affect other sidechains or the underlying mainchain itself.

Rollups

Rollups are layer XNUMX blockchain scaling solutions that execute transactions outside the layer XNUMX blockchain and host transaction data on it. Since the data is in the base layer, this allows the first layer to secure the rollups.

Rollups have two different security models:

Optimistic rollups: In them, transactions are considered valid by default. Thus, they only perform fraud detection calculations when there is a problem.
Rollups with zero knowledge: These rollups perform off-chain calculations. After that, they pass the proof of validity to the base layer or mainchain.
Rollups help increase transaction throughput, open participation, and reduce gas fees for users.

Layer 1 and 2 Constraints

The multi-level blockchain has a number of advantages. For example, the main benefit of Tier 1 solutions is that developers don't have to add anything to the existing architecture as the underlying layer changes.

Meanwhile, Layer 2 solutions for scaling do not change the base layer protocol. In addition, these solutions allow many microtransactions to be carried out without requiring users to pay inflated transaction fees or spend time checking miners.

However, both of these blockchain layers have their own limitations that need to be taken into account.

Addition to existing protocols

The main problem with blockchain layers is adding them to existing protocols. The market capital of Bitcoin and Ethereum is in the billions. Users trade millions of dollars daily. Therefore, it does not make sense to complicate the process through unnecessary coding and experimentation, since this will be costly.

The Scalability Trilemma

Vitalik Buterin, founder of Ethereum, coined the term “scalability trilemma” to refer to the ability of a blockchain to juggle three organic properties:

• Security
• Scalability
• Decentralization

The trilemma says that any blockchain technology can have a maximum of two properties, but never all three at once. Thus, the current blockchain technology will always be forced to compromise on one of the fundamental properties. Bitcoin is a great example of this. While the blockchain has managed to optimize decentralization and security, it has had to compromise on scalability through no fault of its own.

What is the future after the first and second levels?

Scalability is one of the reasons why mass adoption of cryptocurrencies in the blockchain industry is not possible at the moment. As the demand for cryptocurrencies grows, so will the pressure to scale blockchain protocols. Since both layers of the blockchain have certain limitations, the solution in the future will be to create a protocol that can solve the scalability trilemma.

Сonclusion

Regarding the above bottleneck, there are two options: 1) mitigate the scaling issue, or 2) look for viable alternatives. Blockchain developers are choosing the first option as they move on to layer two scaling in action with Ethereum 2.0.

At the time of publication, blockchain systems are still under development. The burning question of the future is whether the blockchain layers and second layer scaling will be temporary or permanent. At the moment, no one knows for sure.