If you’re wondering about the difference between layer 1 vs layer 2 vs layer 3 blockchain, you’ve come to the right place. There are many different types of blockchain technology, each with its advantages and disadvantages.
This blog post will look at three of the most common types of blockchain. Covemarkets will compare and contrast the three and help you decide which one is right for you.
What Is Blockchain Scalability?
While blockchain technology is establishing itself as a new economic pillar, its decentralized network architecture confronts a problem known as the “Blockchain Trilemma“: how to strike a balance between decentralization, security, and scalability inside a blockchain infrastructure.
Blockchain security protects a blockchain protocol against malicious actors and network assaults.
Blockchain decentralization refers to the meaningful distribution of computing power and consensus protocol throughout a network. Both are seen as necessary for a blockchain network to operate.
Scalability, or a blockchain network’s capacity to accommodate high transactional flow and future expansion, is also crucial. Scalability is important because it is the only way blockchain networks can effectively compete with centralized, older systems with quick settlement times.
The fact that Bitcoin handles between 4 and 7 transactions per second is a typical example of the difference in scalability (TPS). However, thousands of TPS are processed by Visa.
Blockchain technology must achieve these high levels of scalability, if not beyond them, to compete with these already-existing systems. There is currently a whole segment of the blockchain business dedicated to enhancing scalability.
Fortunately, a brand-new generation of blockchains and scaling solutions designed mainly to address this transaction-capacity issue are significantly expanding the scalability potential of blockchain.
These projects use Layer-1 and Layer-2 scaling techniques to address scalability differently.
Scalability: Why Is It Important?
Numerous advantages of blockchain technology include higher security, better recordkeeping, and simple transactions.
Scalability continues to be a significant issue, leading to debates about whether layer 1 or layer 2 is better in conversations about future blockchain networks.
Every blockchain network employs a decentralized mechanism to carry out transactions piecemeal.
Blockchain transactions usually require significant time and computing power to complete all the necessary processes.
Imagine a blockchain network where transactions are piled on top of the other. In these circumstances, the application cannot satisfy every transaction request made by every user, which leads to an uneven user experience.
It follows that scalability is a crucial requirement for the development of blockchain networks in the future.
What Is Blockchain Layer 1 Vs Layer 2 Vs Layer 3 ?
What Is Layer 1 Crypto?
The foundational level of a blockchain architecture is referred to as Layer 1. It serves as the foundation of a blockchain network. Blockchains at Layer 1 include Bitcoin, Ethereum (ERC20), and BNB Chain (BEP2 and BEP20).
Scaling Solutions for Layer 1
A Layer-2 protocol is a third-party integration that may be utilized with a Layer-1 blockchain in the decentralized ecosystem. A Layer-1 network is referred to as a blockchain.
Blockchains at Layer 1 include those for Bitcoin, Litecoin, and Ethereum. Scalability is increased by adding layer-1 scaling solutions to the blockchain protocol’s base layer.
Numerous approaches that directly increase the scalability of blockchain networks are presently being researched and put into use.
This is how it goes: To boost transaction capacity and speed while accepting additional users and data, layer-1 solutions directly alter the protocol’s rules.
To boost total network performance, layer-1 scaling solutions may involve, for instance, increasing the amount of data contained in each block or speeding up the pace at which blocks are validated.
A blockchain may undergo other fundamental modifications to accomplish the Layer-1 network scale.
Improvements to the consensus protocol: Some consensus processes are more effective than others. The consensus process now used on well-known blockchain networks like Bitcoin is known as Proof of Work (PoW).
PoW is safe, although it can be sluggish. Because of this, many more recent blockchain networks use the Proof-of-Stake (PoS) consensus algorithm.
PoS systems process and validate new blocks of transaction data based on users staking collateral in the network instead of needing miners to solve cryptographic algorithms employing significant processing power.
With Ethereum 2.0, the network will switch to a PoS consensus mechanism, which is anticipated to significantly and fundamentally enhance its capacity while boosting decentralization and maintaining network security.
Sharding: Despite its relatively experimental status within the blockchain industry, sharding is a method borrowed from distributed databases that have grown to be one of the most popular Layer-1 scalability options. A more reasonable effort than needing all nodes to maintain the whole network is sharding, which involves splitting the state of the entire blockchain network into several databases known as “shards.”
The network processes these network shards concurrently, enabling sequential work on several transactions.
Furthermore, rather than keeping a copy of the blockchain in its entirety, each network node is assigned to a particular shard. Using cross-shard communication protocols, individual shards exchange addresses, balances, and general states to communicate proofs with the main blockchain.
What Is A Layer 2 Crypto?
To enhance the functionality of the original blockchain, layer 2 refers to numerous protocols constructed on top of layer 1. Off-chain processing components are frequently used in layer 2 protocols to address the layer 1 network’s performance and cost shortcomings.
The Omni Layer, Liquid Network, and Lightning Network are three prominent layers 2 examples of Bitcoin.
A layer 2 Bitcoin protocol called Lightning Network (LN) provides customers with a quick micropayment platform.
Crypto payments made through layer 1, or the Bitcoin chain, are often sluggish and expensive, but payments made through layer 2, or LN, are carried out much more swiftly and have much lower transaction costs.
On LN, most transactions are confirmed within a minute, and the average transaction is completed in under two seconds. Contrarily, BTC layer 1 transactions often take several minutes to finalize, and some transactions may do so for days.
For the past three years, the average duration for Bitcoin transaction confirmations has been approximately ten minutes (Source: Blockchain.com)
On LN, the costs are also significantly less. On the platform, transaction fees are often measured in fractions of a US penny.
LN allows micropayments down to tiny sums; the smallest transaction authorized is merely 0.00000001 BTC ($0.00068).
This might be helpful for companies that frequently provide their clientele with little micropayment rewards or reimbursements. The lowest amount you may send with BTC layer 1 is 0.00000546 BTC ($0.37), roughly 550 times greater.
LN successfully addresses the BTC layer 1 scalability issue, particularly in the context of high-volume micropayments.
Many digital enterprises need the option for large-volume payments, which the underlying BTC network would not be able to carry out effectively. LN, on the other side, is adept at handling this sort of high-volume payment.
Another layer 2 proposal for bitcoin is Liquid Network. It is a sidechain made for cryptocurrency exchanges and traders that will speed up the processing and settlement of Bitcoin transactions. It enables USDT transactions in addition to BTC transactions.
For network operations, the platform makes use of the L-BTC currency. A federation of 57 cryptocurrency platforms, many of which are cryptocurrency exchanges, oversees Liquid Network.
a few of the Liquid Network’s board of directors (Source: Liquid.net)
The Liquid Network often confirms transactions in under a minute, which is considerably quicker than BTC layer 1 but not relatively as quick as the Lightning Network. Additionally, the transaction costs are often only a fraction of a US penny.
The primary users of Liquid Network include traders, crypto exchanges, trading desks, and issuers of digital assets. Stablecoin, security, and other crypto asset issuers can use the platform to launch their products.
The speed and cost of the underlying BTC layer 1 network are not a priority of all layer 2 projects. Additional initiatives aim to address BTC’s other constraints.
One layer 2 startup that enables users to generate and exchange personalized crypto currencies and assets is Omni Layer.
Omni Layer, one of the earliest layer 2 startups, was the first well-known crypto platform to host a sizable ICO in 2013. Omni Layer, formerly Mastercoin, successfully raised $500,000 during the ICO.
Omni now hosts over 800 unique currencies and tokens. These asset issuers can trade with one another via Omni Layer exchanges. Additionally, they are allowed to exchange their currencies for BTC and USDT.
Layer 2 Scaling Solutions
A layer-2 network or technology enhances the scalability and efficiency of a main blockchain protocol by running on top of it.
This class of scaling solutions comprises offloading a portion of the transactional weight of a blockchain protocol to a neighboring system architecture, which then manages the bulk of the network’s processing and only afterward reports back to the primary blockchain to complete its findings.
The base layer blockchain becomes less crowded— and therefore more scalable—by abstracting most data processing to auxiliary architecture.
For instance, the Lightning Network is a Layer-2 solution designed to increase transaction speeds on the Bitcoin network. Bitcoin is a Layer-1 network. Additional illustrations of Layer-2 solutions include:
Blockchains that are layered on top of or inside of one another are referred to as nested blockchains. The nested blockchain architecture generally consists of a core blockchain that establishes the rules for a more extensive network, with executions on a web of connected subsidiary chains.
A mainchain can be the foundation for several blockchain tiers using a parent-child relationship. The parent chain assigns tasks to kid chains, who complete and pass them back to the main chain.
Unless it becomes required for dispute resolution, the underlying base blockchain does not participate in the network operations of subsidiary chains.
The division of labor in this paradigm lessens the processing load on the mainchain, improving scalability tremendously.
The Layer-2 stacked blockchain structure used on top of the Layer-1 Ethereum protocol to enable quicker and less expensive transactions is shown by the OMG Plasma project.
State channels: A state channel increases total transaction capacity and speed by enabling two-way communication between a blockchain and off-chain transactional channels. Nodes in the Layer-1 network are not required to validate a state channel.
Instead, a multi-signature or smart contract technique locks down a network-adjacent resource. The ultimate “state” of the “channel” and its inherent transitions are documented to the underlying blockchain when a transaction or batch of transactions is completed on a state channel.
State channels include the Liquid Network, Celer, Bitcoin Lightning, and Ethereum’s Raiden Network. State channels make a trade-off in the Blockchain Trilemma, giving up some decentralization for more scalability.
Sidechains: A sidechain is a transactional chain next to a blockchain and is frequently used for big batches of transactions. Sidechains employ a speed- and scalability-optimized independent consensus process, distinct from the main chain.
With a sidechain design, the mainchain’s primary responsibilities are to uphold general security, validate batch transaction records, and settle conflicts. There are several key ways that sidechains differ from state channels.
First, transactions made on a sidechain are not private between participants; instead, they are made public on the ledger. The mainchain and other sidechains are unaffected by sidechain security flaws.
As a sidechain’s infrastructure is often created from the bottom up, establishing one could involve significant work.
What Is Layer 3 Blockchain?
The application layer, or Layer 3, is a common term. It is a layer where DApps and the protocols that make the applications possible are hosted. While other blockchains, like Ethereum or Solana (SOL), are well-suited to hosting layer 3 applications, Bitcoin is not.
As a result, layer 2 solutions deviate the most from the existing core network of Bitcoin. Through forks of the original BTC network, several initiatives are aiming to integrate DApp capabilities into the BTC ecosystem.
Applications at Layer 3
For instance, CakeDeFi is a DeFi program that provides BTC coin holders with services like staking, lending, and liquidity mining.
CakeDeFi is built on the DeFiChain fork of the Bitcoin blockchain. Although DeFiChain keeps “an anchor” to the main Bitcoin chain for certain activities, it is nevertheless considered a distinct blockchain in its own right.
In the opinion of some industry watchers, one of the main restrictions on BTC is the absence of DApp capabilities. The value and ubiquity of layer 3 platforms have increased significantly since the introduction of Ethereum in 2015.
Currently, there are about 3,000 layer 3 apps on Ethereum. By now, the blockchain-based DeFi apps have a combined market cap of $185 billion.
Over 500 layer 3 DApps are hosted by Solana, one of the top blockchains, and the network’s DeFi applications have a combined worth of close to $15 billion.
In contrast, BTC lacks a working application that may be classified as a layer 3 application. The value of efforts intended to “force in” DApp functionality onto BTC is a current discussion topic.
Some in the sector contend that BTC will always be a network made for cryptocurrency fund transactions rather than DApps.
These people draw attention to the fact that the layer 1 BTC chain has an industry-leading market value (of $1.3 trillion as of this writing), which surpasses the TVL and market cap totals of all active layer 3 projects put together.
Therefore, layer 3 capabilities may not be necessary for Bitcoin based on the financial data.
Difference Between Layer 1 And Layer 2 Crypto
Method of Working
Comparing blockchain layers 1 and 2 would also consider the fundamental methodology or operation technique. The fundamental scaling strategy for layer 1 blockchain networks is to alter the base protocol.
In actuality, layer 1 scaling solutions require fundamental modifications to blockchain protocols. Therefore, even if the transaction load drastically decreases, you would not be able to reduce the alterations immediately.
Contrarily, layer 2 scaling solutions function as off-chain solutions that work apart from the core blockchain protocol. The core blockchain protocol’s primary need is for the off-chain protocols, networks, or solutions to only disclose the end outcomes.
Sharing the transaction load of the primary blockchain network is essentially how layer 2 scaling solutions for blockchains operate.
The type of solutions you can obtain would be the next crucial factor for determining the answers to “What is the difference between layer 1 and layer 2 blockchain?”
There are two main categories of layer 1 blockchain solutions: sharding and improvements to the consensus process. Layer 1 scaling also involves adjustments to block size or block generation speed to assure desirable functions.
There is no restriction on the kinds of blockchain layer 2 scaling solutions you may employ. Blockchain networks may use any protocol, network, or application as an off-chain layer 2 solutions.
However, you should know the well-liked layer 2 scaling options such as state channels, sidechains, and layered blockchains.
By concentrating on the characteristics of both types of networks, you may also get a good idea of how layer 1 and layer 2 vary from one another. Layer 1 networks perform as the definitive authority and are ultimately in charge of transaction resolution.
On layer 1 networks, a native token is available for gaining access to the network’s resources. Innovation in creating consensus mechanisms is a crucial characteristic of layer 1 blockchain networks.
With a few more characteristics, layer 2 scaling solutions or networks provide the same functionality as layer 1 blockchains.
As an illustration, layer 2 solutions increase programmability and network performance while lowering transaction costs. Every layer 2 solution has a different way of connecting transactions to the relevant base layer.
The drawbacks of the layer 1 and 2 methods do not consider variations. Instead, they highlight the similarities between the two categories of scaling solutions.
The difficulty of adding the layers to current protocols is the one issue that unites layer 1 and layer 2 blockchain systems.
Limitations of Layer 1 and Layer 2 blockchain
The benefits of blockchain stacking are numerous. For instance, the main advantage of employing Layer 1 solutions is that developers don’t have to change the present architecture because just the foundation layer is altered.
On the other hand, the base layer protocol is not hampered by the Layer 2 scaling techniques. Additionally, these techniques allow users to conduct several microtransactions without paying astronomical transaction fees or waiting a long time for miner verification to be finished.
On the other side, users must be aware of their limitations while utilizing one of these blockchain layers.
More protocols are being added to the current ones.
Adding blockchain layers to existing protocols is the most challenging part of the implementation. The market capitalizations of Bitcoin and Ethereum are both in the billions of dollars. Users exchange products and services worth millions of dollars every day.
Because doing so would cost a sizable sum of money, making the procedure more difficult with pointless coding and experimentation is not necessary.
The Scalability Dilemma
Three innate characteristics of blockchain are balanced: security, scalability, and decentralization.
It is stated that no blockchain system can have all three traits, only two of them at once. As a result, the current blockchain technology will always be required to give up one of the essential qualities.
Bitcoin is an excellent example of this idea. While its blockchain has been effective in maximizing security and decentralization, it has had to compromise on scalability, and this is due to no fault of its own.
Do the Layer 1 Vs Layer 2 Crypto Differ Much In Price?
Despite daily variations, Ethereum Layer 1 blockchain mining and transfers are typically between $50 and $125 on average (USD).
Compared to Layer 1 transactions, Polygon Layer 2 transactions cost about $0.05, a factor of 2,000 times cheaper. This shows that Layer 2 blockchains, which have more efficient designs than Layer 1, are more cost-effective than Layer 1 blockchains.
What Role Do L1 Vs L2 Blockchain Have in the Future?
Scalability is one of the reasons why the blockchain technology can now not attain mass crypto adoption. The need to expand blockchain platforms will increase as the demand for cryptocurrencies and dApps (smart contracts) rises .
The solution to the scalability trilemma in the future will be to create a system that can overcome the significant limitations both blockchain tiers have.
After L1 Vs L2 Crypto, What Comes Next?
As Layer 1 solutions become more scalable, one crucial question is whether we will even need Layer 2 solutions. Existing blockchains are getting better, and new networks are being built that are already scalable.
Major systems may eventually increase their scalability, but this is not a given and will take time. The most likely scenario is that Layer 1s concentrates on security while letting Layer 2 networks customize their services for specific use cases.
Large chains like Ethereum, which have a sizable user and developer community, will likely continue to rule in the foreseeable future.
However, it provides a strong foundation for focused Layer 2 solutions because of its broad, decentralized validator set and well-regarded reputation.
Layer 1 and Layer 2 solutions offer different scaling approaches that can benefit a crypto portfolio and help developers to build smart contracts on. Layer 1 improvements can help increase the speed and efficiency of transactions, while Layer 2 solutions can help increase the network’s capacity.
Both of these approaches can be used to improve the overall scalability of the network and make it more versatile. At the same time, the debate about whether BTC needs to enable layer 3 functionality is ongoing. BTC does not need to move towards enabling layer 3 functionality because it is worth multiple times more than all the layer 3 apps combined.
Disclaimer: The information provided in this article is not investment advice from Cove Markets. Cryptocurrency investment activities are yet to be recognized and protected by the laws in some countries. Cryptocurrencies always contain financial risks.