Blockchain layers: L0 vs L1 vs L2

If you’ve consumed any crypto-related media you might have heard of the various “layers” of blockchain. This can be a confusing concept for many people new to the space: Aren’t they all just blockchains? The answer has more nuance than one may initially think. Recognizing the layer of a blockchain allows you to better understand how to use each layer, how they are connected, and where the biggest opportunities lie.

Layer 0:

As the name would suggest, Layer 0 blockchains are the very base level in this hierarchy of blockchains. Layer 0 chains are platforms, software development kits, and base architecture (such as communication) that allows blockchains to be built upon them. A great example of a layer 0 blockchain is Cosmos ($ATOM). Chains can be built upon the Cosmos chain utilizing the Cosmos SDK (software development kit). With this SDK, developers can quickly build a fast and cheap proof of stake chains. These subsequent blockchains can utilize the underlying architecture of Cosmos to communicate with other chains via IBC or Inter-Blockchain Communication. Any chain built upon the Cosmos chain can choose to rent security from the central Cosmos hub while they grow and develop their own security. Rather than having a chain that supports applications, Cosmos is primarily a blockchain that supports other blockchains. Oftentimes, you won’t even know if you have interacted with a blockchain built on/connected to Cosmos. Examples of chains built on Cosmos include the Binance Smart Chain, the Crypto.com chain, and the now infamous Terra Luna. Note that blockchains don’t necessarily need to be built upon layer 0 chains. Many layer 1 chains are simply built from scratch such as Ethereum. Layer 0 chains simply provide a tool kit that allows for easy creation, deployment, and security.

Layer 1:

Layer 1 chains or L1’s are likely what first comes to mind when one hears about blockchain. These are chains that propagate transactions and often support decentralized applications or dapps in areas such as finance. Layer 1 chains include Bitcoin ($BTC), Ethereum ($ETH), Cardano ($ADA), Solana ($SOL), and many more. Applications use these layer 1 chains to execute smart contracts (more on that in a future post) and immutably store data on the chain. While each layer 1 chain may have its own ecosystem of applications built upon it, some chains may connect to others via bridges. These bridges allow users to transfer funds across chains or use an application across multiple chains.

Layer 2s/Rollups:

Layer 2 chains are perhaps the hardest to understand. Layer 2 chains exist on top of Layer 1 chains. Unlike the relationship between layer 1 and layer 0 chains, layer 2s must be built on layer 1s.

But why build a blockchain on top of another blockchain? The answer is scalability. Since layer 1 blockchains might have a lot of usage due to 100s or even 1000s of dapps (decentralized applications) they can often become slow and congested. In some cases, this means the fees spike or the network goes down. This is especially true for proof of work systems which can only process a few transactions at a time. This is the reason why it might cost upwards of $15 to execute a simple swap of tokens on a popular network like Ethereum.

Layer 2 chains complete transactions then bundle up these completed transactions and submit proof of the transactions to the Layer 1 chain. In essence, the layer 2 chain rolls up a bunch of transactions and submits them in one transaction on the main chain. This behavior is why layer 2s are often referred to as rollups.

L2s can prove the validity of the transactions completed on their chain with different cryptographic methods including Optimistic rollups and Zero-knowledge rollups. Since a bundle of transactions from L2s takes up minuscule space on the layer 1 chain, layer 2 chains can expand the capabilities of L1s by orders of magnitude. With L2s Ethereum can scale to a chain with a size equivalent to 10 Ethereum. Popular L2s include the Arbitrum, Optimism, and Polyon networks which all scale the Ethereum layer 1 chain.

Wow! That was a lot of info. Let’s do a quick recap so you can remember the important concepts.

Layer 0:

• A blockchain that facilitates the building of other blockchains
• Provides tooling and pre-built functionality to the developer
• Examples: Polkadot and Cosmos (these are the only relevant chains that fall under this category)

Layer 1:

• A blockchain where end users interact with applications
• The vast majority of chains fall under this category
• Examples: Ethereum, Solana, Cardano, Avalanche, Bitcoin

Layer 2 AKA Rollups:

• A blockchain built on top of layer 1 that scales the base layer
• Bundles and completes transactions on the L2 chain before submitting the proof to a layer 1
• Examples: Polygon, Arbitrum, Optimism

~Kai Feinberg