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Layer-1 and Layer-2 Scaling Solutions — What You Need To Know

Scalability trilemma in blockchain networks and how layer-1 and layer-2 blockchain solutions are addressing it.

Layer-1 and Layer-2 Scaling Solutions — What You Need To Know

In the past few years, public blockchain networks have registered increasing demand. From supply chain management to financial ecosystems and NFTs — blockchains are now leveraged for the creation of decentralized applications. This has subsequently led to an increase in network congestion and transaction costs which triggered the scalability dilemma.

The earliest blockchain networks, like Bitcoin and Ethereum, are the layer-1 solutions forming the main decentralized blockchain architecture. Layer-2 refers to a third-party integration built on top of layer-1 to boost the number of nodes produced in the overall system. Bitcoin’s “ Lightning Network “ and Polygon are built on layer-2 solutions.

What is the scalability trilemma?

Scalability has always been a major concern in highly decentralized public blockchain networks. This dilemma is often described as the “Scalability Trilemma.”

Blockchain’s “Scalability Trilemma” is a term first penned by Ethereum co-founder Vitalik Buterin. It focuses on the three main concepts that determine the performance and operability of blockchain networks: scalability, security, and decentralization. According to Vitalik, to improve the operational capacity of blockchain networks, we need to keep a balance between these three fundamental concepts.

  • Scalability — The capacity to accommodate increasing demand for transactions per second.
  • Decentralization — Distribution of computational power among all network participants, instead of a single entity.
  • Security — Defense mechanisms to protect the network against malicious attacks.

Vitalik adds that in a decentralized system, it is practically impossible to attain all three factors at once. One has to be compromised to achieve the other two. In most cases, scalability is sacrificed because security and decentralization are critical for the smooth functioning of blockchain technology.

Blockchain scaling solutions

In a decentralized blockchain network, transactions need to be verified with consensus mechanisms. Not only is this time-consuming, but it also involves a lot of processing power. Due to the increasing number of transactions, the network can become clogged with transactions. Sometimes, in order to complete all the transactions, the network fails to provide equity in user experience. Moreover, the large volume of transactions also leads to an increase in gas fees. To become a sustainable foundation for future decentralized applications, blockchains need to be optimized with scalable infrastructure to improve transaction capacity and increase efficiency and speed.

Layer-1 Solutions

Layer-1 scaling solutions refer to the base protocol of the network or the main blockchain architecture. Layer-1 can facilitate improved scalability by making modifications in the base layer of the blockchain protocol. These protocols can change the protocol rules and accelerate overall network capacity and speed by increasing the number of nodes in each block.

Consensus mechanisms

There are two main consensus mechanisms-Proof-of-Work (PoW) and Proof-of-stake (PoS). PoW is the original consensus algorithm. In PoW systems, like Bitcoin, each new block is verified and generated by solving a mathematical puzzle. The process is known as “mining”, and the nodes that take part in the network are known as “miners”. The miner who successfully solves the puzzle is rewarded by the entire network and receives a reward. This process absorbs a lot of processing power and computational time, and also limits scalability in the network.

Proof-of-Stake is a smart, energy-efficient consensus algorithm that allows candidates to “stake” or contribute cryptocurrencies in order to validate a new transaction. The network algorithm chooses a winner from the pool of validators. The reward is based on the amount of cryptocurrency or collateral staked in the network pool. To participate in the validation process, coin owners must stake a minimum quantity. For example, the minimum amount to stake in Ethereum is 32 ETH.

Sharding

Sharding is a data-partitioning process used by layer-1 blockchain networks to improve scalability by splitting the blockchain network into smaller partitions, or “shards”. This improves network latency and more transactions can be processed in a second. Individual shards interact with each other and share shard addresses. Tezos, Qtum, and Ethereum 2.0 are some of the blockchain networks experimenting with sharding.

Layer-2 solutions

Layer-2 scaling solutions operate on top of the underlying layer-1 blockchain network to improve functionality and scalability. This process shifts the transactional burden to the adjacent layer-2 network. It handles the burden of processing the transactions and subsequently reports to the main blockchain network to finalize the transactions. As a majority of transactions are shifted to the auxiliary network, it removes the congestion and makes the network more scalable.

Examples of layer-2 solutions

  • Nested blockchain — A blockchain that exists within a blockchain, or is built on top of another blockchain. The mainchain in the nested architecture is interconnected with secondary chains. The mainchain is the parent chain, which then delegates work to its children or secondary chains. These secondary chains then report back to the parent chain after completion of the work. The work distribution reduces the burden and increases scalability. One example of nested blockchain is the OMG Plasma project.
  • State channels — A state channel creates interoperability between a blockchain network and other off-chain channels, thus increasing the overall speed and scalability. It deploys multi-signature mechanisms and smart contracts to complete a transaction. After completion of the transaction, everything is recorded in the underlying blockchain network. Ethereum’s Raiden Network and Bitcoin’s Lightning Network are examples of state channels.
  • Sidechains — These are smaller networks that operate separately alongside the main blockchain network or the parent chain. While the parent chain or the underlying main blockchain ensures the security of the network, sidechains have their own consensus mechanism and accelerate the scalability and transaction speed of the parent chain or the underlying network.
  • Rollups — An innovative layer-2 scaling technology designed to decrease the bulk of transactions and computational power in the base chain by moving the transactional activity into a second layer or sidechain. It maintains interoperability between the mainchain and sidechain, and makes the network more scalable by reducing congestion and gas fees. For instance, the Ethereum mainchain which currently processes 15 TPS (transactions per second) can deploy rollups and increase overall transactions to 1,000 TPS.

Bottom line

Today, scalability is the biggest challenge for mainstream adoption of blockchain technology and cryptocurrencies.

There is an ongoing debate about which one is better: layer-1 or layer-2 solutions? In short, layer-1 and layer-2 solutions complement each other. Layer-1 solutions come with security and decentralizations that allow seamless transactions, while layer-2 provides scalability by sharing the network workload.

Originally published at https://www.cryptohopper.com.

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