Things to know about the Layer 1 and Layer 2 blockchain

In blockchain technology, the term “scaling” refers to an increase in the throughput rate, measured in terms of the number of transactions per second (TPS). As cryptocurrencies become more widely used in daily life, creating layers for network security, better records, etc.

Layer 1 in the decentralized ecosystem is blockchain. On the other hand, Layer 2 is a third-party integration with Layer 1 to increase the number of nodes and thus system throughput. Many Layer 2 blockchain solutions are currently being implemented. These solutions use smart contracts to automate transactions.

Layer 1 and Layer 2

Blockchain technology offers many advantages such as increased security, enables easier transactions and helps to keep records. However, as it became more widespread, a number of problems gradually arose. One of these problems is scalability.

With blockchain, every transaction in a decentralized system has to go through several steps. This process takes a lot of time and computing power. To improve the processing capacity of the blockchain, the developers are introducing a Layer 2 scaling solution into the structure.

Why is the scalability of the blockchain important?

Experts have many ways to define “scalability” depending on each person’s point of view. In essence, however, blockchain scalability is the ability of a system to provide a complete experience for every user, regardless of the total number of users at any given point in time.

The term “throughput” refers to the number of transactions the system processes per second (TPS). While payment companies / channels like Visa process nearly 20,000 TPS using the VisaNet electronic payment network, the main bitcoin chain can only process 3 to 7 TPS.

The large discrepancy between the above levels may surprise many, but there is a reason for everything. Bitcoin uses a decentralized system while VisaNet runs on a centralized system. Bitcoin uses more power and processing time to protect user privacy. Every data transaction has to go through many steps, including acceptance, mining, distribution and validation by the network of nodes.

With cryptocurrencies expected to become an indispensable force in the business world, blockchain developers are looking to expand the reach of processing. By creating multiple layers of blockchain and optimizing Layer 2 scaling, they wanted to speed up processing times and increase the TPS number.

Bitcoin struggles with a lack of scalability

Originally, Bitcoin was a simple blockchain for users to send and receive digital money. However, it has struggled with scalability since its inception, so everyone wondered: what if more and more people started using Bitcoin?

This question indicates an urgent network problem. Every system has a certain bandwidth and can only process up to a certain number of transactions per second. In addition, every transaction has to be audited in a decentralized system and therefore requires a lot of storage space.

By 2021, when Bitcoin becomes ubiquitous, that question will be answered by transactions flooding the log, resulting in slower processing speeds.

Why does the current blockchain need Layer 2 technology?

The answer is simple: increased demand and higher transaction costs.

For example, since Ethereum has a consensus mechanism, it enables a variety of decentralized applications. In blockchain technology, the consensus mechanism is a fault tolerant system that leads to agreements about a single network state between many distributed nodes. These protocols ensure that all nodes agree on transactions and are synchronized. This makes it extremely difficult to overwrite or hack the Ethereum chain.

Thanks to the stability and security of Ethereum, the ICO craze developed into a phenomenon that led to new coin projects “sprouting like mushrooms” on this blockchain. This increases the number of users and the number of transactions made on Ethereum. When the system is overloaded, the transaction fees – or “gas” fees, paid to the parties processing transactions on the Ethereum network increase.

When the blockchain network is congested, pending transactions on the storage pool stop and take longer. To solve the problem, miners began prioritizing transactions with higher gas prices for confirmation. This further increases the minimal cost required to complete a transaction.

The price cycle, which is driving gas prices up dramatically, is making things worse for everyone. Layer 2 scaling aims to solve this problem and reduce transaction costs.

Layer 1 problem

A Layer 1 network is a blockchain in a decentralized system, typically Bitcoin and Ethereum.

A Layer 1 scaling solution changes the underlying blockchain protocol to allow for scalability. The rules of the protocol are adapted accordingly in order to increase the transaction capacity and speed. As a result, the blockchain processes more data and attracts more users.

The scaling through a layer 1 blockchain can be understood as follows:

– Increased block confirmation speed.

– Increase the data storage capacity of a block.

Taken together, these scaling solutions increase the throughput of the network. However, in view of the growing number of blockchain users, Layer 1 seems to be lagging behind the intended goal. Here are some of the system’s shortcomings:

Ineffective consensus protocol

Blockchain Layer 1 still uses the old and inconvenient PoW consensus mechanism.

Although this mechanism is more secure than others, its speed slows the system down. Mechanism whereby miners need computing power to solve cryptographic algorithms. Therefore, it generally takes more processing power and time.

Solution: PoS consensus can be used instead. This is also the consensus that Ethereum 2.0 will use. This consensus mechanism validates new blocks of transaction data according to the staking of the participants in the network, which makes the process more efficient.

Overworked workload

As the number of users increases, so does the workload on the Layer 1 blockchain. Therefore, the processing speed and capacity gradually decrease.

Solution: The scalable solution to this problem is sharding. Put simply, sharding breaks the work of validating and validating transactions into small, manageable bits. As a result, the workload is distributed across the network so that more nodes can use the computing power.

Since the network processes shards in parallel, multiple transactions can be processed sequentially at the same time.

Solution for scaling layer 2

Blockchain layer 2 works on top of the original layer to improve efficiency. By outsourcing transactions, Layer 2 takes on part of the load of the Layer 1 blockchain and inserts transactions into a different system architecture.

Then blockchain layer 2 processes the transaction and reports to layer 1 to complete the results. Since the majority of the data processing load falls on this coherent back-end architecture, network congestion is minimized: The Layer 1 blockchain is not only less congested, it is also more scalable.

An example of a layer 1 blockchain is Bitcoin, a layer 2 scaling solution is the Lightning Network. Lightning Network processes and reports to transactions on Bitcoin. As a result, Lighting Network increases the processing speed on the Bitcoin blockchain. In addition, the Lightning Network brings smart contracts to the Bitcoin Layer 1 blockchain.

Here are some other Layer 2 scaling solutions:

Interlocking Blockchain (Plasma)

The interlocking blockchain is a layer 2 blockchain that works on top of a layer 1 blockchain; basically, the layer 1 blockchain sets the parameters, while the layer 2 nests the process execution.

There can be multiple levels of blockchain in the main chain, like a typical corporate structure. Instead of leaving all the work to one person (e.g. a manager), a manager assigns tasks to a subordinate who reports back to the manager when they have completed the respective task. This relieves the manager and at the same time improves scalability.

The OMG Plasma Project, for example, acts as a layer 2 blockchain for the Ethereum layer 1 protocol to ensure cheaper and faster transactions.

Status channels

Status channels enable bidirectional communication between blockchai participants. This enables you to shorten waiting times as no third parties (e.g. miners) are involved in the process.

State channels work as follows:

– According to the smart contract, the participants agree in advance to block part of the base layer.

– You can then interact with each other directly, eliminating the need for miners.

– After the entire transaction has been carried out, they send back the final channel status.

Both the Raiden Network on Ethereum and the Lightning Network on Bitcoin are good examples of government channels. Lightning Network allows participants to conduct a series of microtransactions within a specified time period. Meanwhile, Raiden enables attendees to execute smart contracts over a private channel.

State channels such as the Lightning Network are also completely secure, as only the participants know about the transaction. On the other hand, the Ethereum Layer 1 blockchain records all transactions in a publicly verifiable ledger.

Side chain

Similar to government channels such as Lightning Network and Smart Contracts, sidechains also represent a scaling solution for layer 2 blockchain technology. A sidechain is a tradable chain that enables a large number of transactions. It has a consensus mechanism that is independent of the original layer. The mechanism is optimized to improve scalability and processing speed. In this situation, the main chain needs to confirm transaction records, maintain security, and handle disputes.

Sidechains differ from government channels in that they publicly record all transactions in the ledger. In addition, if a sidechain suffers a security breach, it has no effect on other sidechains or the main chain of the base layer.