A Journey to the Depths of Blockchain

editorJanuary 23, 2025

0 6 8 minutes read

Get to Know Layer 1 and Layer 2 Better

Engaging in the exciting world of blockchain and cryptocurrencies introduces us to new terms and phrases, some of which we might not fully understand. Blockchain can be likened to a complex ecosystem composed of various technologies such as “Distributed Ledger Technology” (DLT), encryption, and networks. Within this powerful ecosystem, innovative tools like digital assets are created, and to better understand how they function, we need to familiarize ourselves with the different concepts and terms related to this ecosystem. Blockchain “Layer 1” (L1) and “Layer 2” (L2) are fundamental concepts in the blockchain world, and in this report, we aim to provide a comprehensive review of them.

Blockchain

Simply put, blockchains can be seen as chains of blocks containing digital information, serving as the underlying technology for cryptocurrencies and many applications. This structure enables the secure, transparent, and decentralized storage of data. If we consider the internet as a highway, blockchains are like highly secure, bulletproof vehicles transporting important data on this highway.

In order for blockchains to fulfill their primary function in the best possible way, they must be equipped with three parameters: security, speed (scalability), and decentralization. In other words, a blockchain is considered ideal when it can support these three key aspects, known as the “Blockchain Trilemma,” at the highest possible level.

Simultaneously supporting these three parameters is challenging. Consider that when two of them are strengthened, the third will automatically weaken. However, there are various solutions that developers use to maintain the three aspects of the blockchain trilemma and create an ideal blockchain network.

For example, layering blockchains and combining different Layer 1 and Layer 2 blockchain networks is one such solution. In this method, blockchain-based systems are composed of several networks and blockchain layers, to combine them to ensure the security of the entire system. Additionally, the reason for creating these different layers is to achieve high scalability. Below, we will introduce the most commonly used Layer 1 and Layer 2 blockchains.

Layer 1 Network: The Foundation of Blockchain

Layer 1, also known as the “Base Layer,” is the primary foundation and initial infrastructure of a blockchain network. It consists of a set of nodes or servers that store the blockchain data. Each participant or node in this base layer is responsible for verifying and validating the data. This process is similar to a democratic process in which each voice (in this case, each node) is important in decision-making.

Just like a legislative body that makes decisions after collecting votes, and everyone is obliged to act according to the final laws, all the fundamental rules of the network, the stages of implementing consensus mechanisms, encryption algorithms, and native tokens are defined in this layer. The main responsibility of Layer 1 is to achieve consensus, validate, and settle transactions.

Consensus Mechanism in Blockchain

Each Layer 1 blockchain network has a unique cryptocurrency, known as the native token. This token acts as the local currency of the network and is used to pay for network services, such as transferring assets, creating new tokens, or executing smart contracts. Each of these networks has its own specific method for validating and recording transactions and, more generally, for determining the network’s rules, which is known as the “Consensus Mechanism.” Below is a table listing some examples of Layer 1 networks and their consensus mechanisms.

Layer 1 Blockchain Network	Consensus Mechanism	Cryptocurrency
Bitcoin	Proof of Work (PoW)	BTC
Ethereum	Proof of Stake (PoS)	ETH
Algorand	Proof of Stake (PoS)	ALG
Cardano	Proof of Stake (PoS)	ADA
Header	Proof of Stake (PoS)	HBAR

Different consensus mechanisms offer varying levels of speed, security, and decentralization. This means that each of these networks focuses more on one of these blockchain trilemma features and may be somewhat weaker in other aspects. For example, some networks prioritize security and decentralization highly, but transactions in them may be slower.

Proof of Work (PoW):

In this mechanism, miners solve complex mathematical problems to add new blocks to the blockchain and are rewarded for doing so. This method requires a lot of computational power. It also preserves the security and decentralization aspects of the blockchain trilemma well, but it is weaker in terms of scalability.

Proof of Stake (PoS):

In this mechanism, validators lock up some amount of the network’s native cryptocurrency to gain the right to validate new blocks. The more stakes they have, the higher their chances of validating a block and earning a reward. This method requires less computational energy. It is also more scalable than Proof of Work, but its scalability is often not ideal and requires upgrades.

Blockchain is a highly complex and new technology that could have significant consequences for how transactions are conducted across the financial system.
— Janet Yellen, U.S. Secretary of the Treasury

In general, the features of Layer 1 blockchain networks can be summarized as follows:

High Security:

Due to their decentralized nature and the use of strong consensus mechanisms, they offer very high security.

Complete Transparency:

All transactions are publicly recorded and visible on the blockchain.

Limited Scalability:

One of the main challenges of Layer 1 is scalability. As the number of transactions increases, the network speed decreases, and in some cases, transaction fees rise.

There are many solutions for improving the speed of Layer 1 blockchains, but discussing them is beyond the scope of this article. However, you can consider the following three general approaches:

Increasing Block Size: In this case, we can fit more transactions into each block. However, this may reduce security.
Sharding the Blockchain into Smaller Parts: The blockchain can be split into several segments, with each part handling its own work. This increases speed but also adds complexity.
Changing the Transaction Validation Method: Some methods, like Proof of Stake, are faster than Proof of Work. However, transitioning from one consensus mechanism to another can present its own challenges.

Despite these three challenging methods, and as previously mentioned, using Layer 2 blockchain networks can be one of the best options for improving the scalability of Layer 1 blockchains.

Layer 2 Blockchain: The Layer of Innovation

In the blockchain space, Layer 2 networks act as assistants who help the “leader” focus on important tasks by organizing simpler tasks. In this sense, Layer 2 networks provide solutions to some of the limitations of Layer 1 networks, which are like the leader in the example.

More technically, a Layer 2 network processes most transactions off the main network and then registers them as a single transaction on the main blockchain. By reducing the load on Layer 1, it enhances the blockchain’s throughput. Imagine an employee summarizing the transactions of a day in a report or a vendor consolidating all the sales at the end of the day.

Layer 2 blockchain networks, compared to Layer 1 blockchains, have the following features:

High Scalability:

By transferring some of the computations off the main blockchain, Layer 2 significantly increases scalability.

Higher Speed:

Transactions are processed much faster on Layer 2 than on Layer 1.

Lower Fees:

With the reduced load on the network, transaction fees also decrease.

Just as Layer 1 blockchains use various methods for consensus, each Layer 2 network also employs different methods for transferring transactions to its base layer. Some of the main methods used in Layer 2 blockchains are:

1. Payment Channels:

In this method, two participants use specific technology to create a private payment channel between themselves. Transactions between them are processed offline in this channel, and only the final result is sent to the base blockchain. For example, the “Lightning Network” Layer 2 network on the Bitcoin blockchain uses this method.

Advantages: High speed, low cost

Disadvantages: Requires constant maintenance of the channel, limited channel capacity

2. Rollups:

In this method, a batch of transactions is processed collectively and compressed. Only a mathematical proof of the validity of these transactions is sent to the main chain. In this case, speed increases and costs decrease. For example, the “Polygon” and “StarkNet” projects are Layer 2 blockchains for the Ethereum network that use Rollup technology.

Advantages: High scalability, strong security

Disadvantages: Complex technology, reduced decentralization

There are two different types of Rollup methods to improve blockchain efficiency:

Optimistic Rollups:

In this method, it is assumed that all transactions are valid, and in case of fraud, challenges are raised.

Zero-Knowledge Rollups:

This method proves the validity of transactions without revealing additional information, thereby enhancing security.

Blockchain is a transparent and tamper-proof system that removes trust from individuals and organizations and places it in mathematical laws.
— Adam Draper, Founder of Boost VC

3. Sidechains:

The sidechain-based method involves a smaller, independent blockchain connected to the main network. Transactions are processed on this sidechain and then transferred to the main blockchain.

Advantages: High speed and flexibility, customization options

Disadvantages: Requires strong security mechanisms to connect to the main network

4. Plasma States:

In this method, a sidechain is created that uses smart contracts to manage transactions.

Advantages: High scalability, security

Disadvantages: High technical complexity

Factors Influencing the Selection of an Appropriate Layer 2 Method

Choosing the best Layer 2 mechanism for a base blockchain depends on several factors:

Type of Blockchain: Each blockchain has its own unique features and limitations.
Type of Application: Some applications require high speed, some require high security, and some need greater programmability.
Required Security Level: Each Layer 2 mechanism offers a different level of security.
Technical Complexity: Some mechanisms are more technically complex and require a stronger development team.

For example, in the Ethereum ecosystem, “gas fees” (transaction fees – this fee is paid as a reward to validators for confirming transactions on the blockchain) can vary greatly, and transaction times can be slow. Therefore, developers are more inclined to provide their users the ability to interact with a Layer 2 network, such as Polygon, in order to manage reducing costs and transaction delays.

Differences Between Layer 1 and Layer 2

While both layers aim to improve blockchain performance, they each take a different approach. Layer 1 works through consensus and transaction validation, where each node verifies the data and emphasizes security and decentralization. This can lead to reduced speed and scalability. In contrast, Layer 2 networks enable faster transaction speeds and reduced costs, but they often rely on Layer 1 for their security.

Blockchain can remove the control of the internet from a few large companies and give more power to the people.
— Olaf Carlson-Wee, CEO of Polychain Capital

Final Words

Combination of Layer 1 and Layer 2 in Modern Applications

Today, various platforms intelligently use both layers to ensure high security for transactions without any loss of performance. From instant peer-to-peer payments to supply chains, this synergy is shaping a new era of blockchain applications. Both Layer 1 and Layer 2 blockchains play important roles in the world of digital currencies. Layer 1 acts as the foundation, and Layer 2 is used to improve scalability and performance. Choosing between the two layers depends on the specific needs of each project, as each of these methods has its own advantages and disadvantages.

Some projects use a combination of Layer 1 and Layer 2 to achieve the best result. Although Layer 1 and Layer 2 networks may appear different at first glance, they are part of a shared evolutionary process. In fact, Layer 1 and Layer 2 are like two hands working together. Layer 1 provides a solid foundation, and Layer 2 is designed to increase speed and convenience. Together, they promise a future where blockchains are not only functional but also efficient, scalable, and globally accessible.