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What are L1 and L2 Blockchains?

Are Crypto Jargons like Level 2 Blockchains confusing you? Let's break it down.

Not all blockchains are made equal. Sure, Bitcoin was the first universally accepted blockchain that dawned the era of decentralized thinking. Then came Ethereum, and with it, Decentralized Finance was born. Polygon has opened a new world with fast transactions and cheap gas fees.

Gif by Matthew Butler

Layer 1 Blockchain (L1)

I am starting with Layer 1 since most readers will be familiar with these blockchains. Bitcoin, Ethereum, Solana, Cardano, and Tron are some L1 Blockchains.

What are some essential characteristics of L1 Blockchains? They are independent and work without other blockchains. They have a consensus mechanism like Proof of Work or Proof of Stake. L1 Blockchains will have a ledger (history of all transactions), nodes to verify transactions, an encryption algorithm, and typically, their token. If everything is hunky-dory in L1, then why do we need L2 Blockchains? To answer that, let's understand the infamous Blockchain Trilemma.

The Blockchain Trillema

The Perfect Blockchain will have the following three properties: Security, Decentralization, and Scalability. Finding the balance between these three factors is a challenge, and this problem is known as the Blockchain Trilemma. If we consider Ethereum and Bitcoin, they score points for Decentralization and Security but have a less than desired Scalabity score. With Ethereum reaching over a million daily transactions, Gas Fees have increased tremendously. There is a demand for L2 Blockchains that can solve the scalability problem.

Layer 2 Blockchain (L2)

Layer 2 Blockchains essentially build on top of the Ethereum Blockchain, thereby inheriting Security and Decentralization and providing Scalability by its design. L2 Blockchains communicate regularly with Ethereum by submitting bundles of transactions. The Ethereum chain takes care of the Decentralized Security. The L2 Blockchain processes the transactions and posts only the final proofs back to the Ethereum chain. This way, the transaction load is removed from the L1 chain, the base layer becomes less congested, and the entire ecosystem becomes more scalable.

Polygon, Arbitrum, Optimism, and Immutable X are some examples of popular Layer 2 Solutions.

Layer 0 Blockchain (L0)

Now that we understand L1 and L2 Blockchains, let's dive below into the world of Layer 0 Blockchains. L0 Blockchain attempt to provide interoperability between different L1 Blockchains.

For example, Changpeng Zhao built the famous Binance chain (L1) on Cosmos SDK, which has the interoperability framework for building blockchains. Using this inter-blockchain communication protocol (IBC), Cosmos wants to create an 'Internet of Blockchains.' Crypto.com and Terra are made using the Cosmos SDK and are interoperable through the ecosystem of Cosmos.

Another example of L0 Blockchain is Polkadot. It uses blockchain shards called parachains and parathreads, which are sovereign blockchains connected to and secured by Polkadot Relay Thread. Polkadot's bridges allow these parachains and parathreads to communicate with external networks like Bitcoin and Ethereum.

Layer 3 Blockchain (L3)

The decentralized applications (Dapps) that run on the blockchain are known as Layer 3. Dapps use blockchain technology and make it accessible to regular people who may not completely understand the underlying technology. Famous examples are Cryptokitties, Decentraland, Uniswap, and OpenSea. Without Dapps, we may not reach the true potential of web3.

Key Takeaways

L0 Blockchains are the foundational architecture for Interoperable Blockchains. They make communication between L1 Blockchains. L1 Blockchains are the definition of Blockchain technology with a transaction ledger, nodes for validations, an encryption method, and tokens. L2 Blockchains solve the scalability problem of the Blockchain Trilemma, providing fast transaction speeds at lower gas fees. L3 Blockchains are essentially the Dapps running on the blockchain.

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