Key Points
- Layer 1 blockchains provide the base protocol and security foundation for all transactions
- Layer 2 solutions process transactions off-chain to increase speed and reduce costs
- Rollups and sidechains are the two main types of Layer 2 scaling solutions
One of the things that makes Blockchain technology special is how it organises itself into architectural layers.
The differences between Layer 1s and Layer 2s are how the scalability problem is approached in both.
This being said, the difference between L1s and L2s is an important part of how they improve over time.
What Is a Layer 1 and Why Does It Matter?
Think of Layer 1 as the base protocol where all operations happen. L1s are like “mother blockchains”, and some popular examples include Bitcoin, Ethereum, Solana and Cardano. These serve as the foundation for everything built on top of them.
Layer 1s versus Layer 2 blockchains | source: Investopedia
Main Functions of Layer 1
Layer 1 blockchains handle security and finality on their own. They maintain immutability and make sure that all transactions are settled. The L1 network acts as the ultimate source of truth for the entire system.
These networks also define their consensus mechanisms. Bitcoin uses Proof of Work, while modern Ethereum runs on Proof of Stake. The consensus rules determine how new blocks get created and validated.
Every Layer 1 has a native token.
Bitcoin uses BTC and Ethereum uses ETH and users pay transaction fees (called gas) with these tokens. The same tokens are also used to reward network participants for maintaining security.
The Scalability Problem
The design that makes Layer 1 blockchains secure, also limits them in terms of scalability. This challenge is known as the “Blockchain Trilemma.”
The Blockchain trillemma | source: CertiK
Think of the blockchain trillemma as this: Decentralized systems (like blockchains) can only achieve two of three properties effectively, and these include decentralisation, security or scalability.
This beinf said, early Layer 1 networks prioritised security and decentralisation. This choice imposed some heavy design limits on them and made them less scalable.
For example, Bitcoin processes about 7 transactions per second. Ethereum improved after switching to Proof-of-Stake but still suffers from congestion during high activity.
The limited capacity of these networks also creates problems during busy periods. Network congestion can drive up transaction fees, and users have to compete to get their transactions included in the next block.
Gas prices can also skyrocket and make simple transactions very expensive.
How Layer 2 Solutions Work
Layer 2 solutions are secondary protocols built on top of existing Layer 1 blockchains. These solutions are created to inherit the features of the base layer, while improving speed and reducing costs at the same time.
Overall, the Layer 1 provides the foundation while the Layer 2 handles most of the transaction volume.
Still, the final security and settlement still depend on the parent L1 network.
Off-Chain Processing Explained
Layer 2 solutions execute transactions away from the main chain. They process large volumes of transactions separately and only send back summaries (or proofs) to the Layer 1 for verification.
This approach reduces how much load in computation thatthe base layer has to deal with. Transaction fees also drop and users experience speed on the Layer 2 network.
Layer 2 solutions don’t create their own security from scratch.
They derive it directly from the Layer 1 beneath them, and this inherited security is a major advantage over creating an entirely new L1 from scratch.
Rollups And The Smart Bundling Approach
Rollups bundle hundreds of off-chain transactions into a single batch. This batch gets submitted to the Layer 1 as one transaction. The base layer then verifies and finalises the entire batch at once.
This multiplication effect thus increases the L1’s capacity.
Optimistic Rollups
Optimistic rollups assume that all transactions are valid by default. Arbitrum and Optimism use this method, and include a challenge period where anyone can submit a fraud proof if they detect invalid transactions.
If someone proves that fraud occurred, the rollup state reverts and whoever committed the blunder faces penalties. This system works on a honour code principle and transactions are considered good unless proven bad.
The challenge period also adds a delay before finality and users must wait several days to withdraw funds back to Layer 1. This trade-off allows for simpler technology and lower costs.
Zero-Knowledge Rollups
Zero-knowledge rollups (ZK-rollups) use advanced cryptography to prove that transactions are valid off-chain. zkSync and StarkNet are examples of this technology, because they generate mathematical proofs to show that their computations are correct.
When the base layer gets this proof, it doesn’t need to re-execute the transactions once it has been confirmed as valid.
The main takeaway is that ZK-rollups offer faster finality than Optimistic rollups because they skip the challenge period.
Sidechains And The Parallel Approach
Sidechains offer a different scaling strategy. Unlike rollups, sidechains are independent blockchains that run in parallel to the main Layer 1. They do this by connecting to the base layer through a two-way peg.
Independent Security Model
Sidechains maintain their own consensus mechanisms and validator sets. Their security operates independently from Layer 1 and If attackers compromise a sidechain, the base layer remains unaffected.
However, assets on the sidechain still face risks.
This independence allows them to have greater design flexibility and Sidechains can even use different consensus models or block parameters. They can achieve very high speeds and extremely low costs and Polygon PoS is a well-known example.
The trade-off of sidechains is clear at this point. They sacrifice the inherited security that rollups provide and must build their own security guarantees.
