Whether you are new to blockchain and cryptocurrency or you are a seasoned veteran who has been through multiple bear markets, you have probably heard blockchains and blockchain-based protocols being referred to as Layer 1 or Layer 2. But why does blockchain have these layers? The simple answer is ‘scalability’.
The term scalability in blockchain refers to the ability of the chain to process an increasingly higher volume of transactions, quicker, which is typically measured in transactions per second (TPS). Scalability is one of the key elements of the ‘Blockchain Trilemma’ which contends that blockchains can only achieve two out of the three key issues facing them; decentralization, security, and scaling. Oftentimes, one of these elements must be sacrificed in order to improve the other areas. For example, to increase scalability, some blockchains have sacrificed decentralization. In a nutshell, Layer 2s help layer 1s scale without sacrificing security and decentralization.
A Layer 1 blockchain network is the foundational level that acts as the underlying infrastructure of other applications, protocols, and infrastructure that are built on top of it. Bitcoin and Ethereum are both layer 1 blockchains. The defining characteristic of a layer 1 blockchain is its consensus mechanism (link to the learn section) with tradeoffs on the levels of scalability, security, and decentralization achieved. Blockchains with proof-of-work (PoW) consensus mechanisms are perceived to be more secure while proof-of-stake (PoS) consensus mechanism protocols may sacrifice security or decentralization in order to become more scalable. These are just two examples of consensus mechanisms, there are a number of other types and many unique variants of PoS.
All layer 1 blockchains have a native token that allows you to interact with the blockchain. When you want to send cryptocurrencies on the network, mint a token, or call a smart contract you will expend some of the native token as gas.
Layer 2 blockchain solutions run parallel to their layer 1 counterparts and extend the functionality of layer 1s. Layer 2 solutions may increase the layer 1’s network performance, reduce transaction fees, or increase programmability. Typically, a layer 2 will constantly communicate with the layer 1 to ensure it has the same security and decentralization features allowing the layer 2 to focus on scaling and reducing gas fees.
Layer 2 networks typically implement scaling solutions that transmit transactions back to its layer 1 blockchain. They remove the transactional burden away from layer 1s and post finalized transaction proofs to them later. By removing the transactional burden, layer 2s increase the scalability of the entire network. Some layer 2 solutions include Bitcoin’s Lightning Network and Polygon which is built on Ethereum.