Layer 1 and Layer 2: How to Scale Blockchain for Increased Performance

As blockchain technology becomes more popular, the need for improved scalability becomes more apparent. Scalability is the ability of a system to handle an increased load without negatively impacting performance. In the context of blockchain, scalability refers to a network’s ability to accommodate more users and transactions without compromising speed or security.

Currently, most blockchains are limited in terms of transactional throughput and the number of users they can accommodate. This presents a significant roadblock to widespread adoption. To scale a blockchain protocol and make it more viable for large-scale applications, two main approaches have emerged: Layer 1 scaling and layer 2 scaling.

In this article, we will explore these two approaches in more depth and discuss the trade-offs involved.

Layer 1 Blockchain Scalability

Layer 1 scaling solutions refer to changes made to the underlying blockchain protocol to improve transaction speed and throughput while allowing more data and users onto the network. One popular Layer 1 scaling solution is sharding.

Sharding is a process of dividing the network into smaller pieces or shards so that each node only needs to process a small subset of transactions. This can be done in various ways, but the most common is by dividing transactions into categories based on which account they are being sent from or received by. For example, in a sharded blockchain with four shards, each node would only need to process transactions relating to accounts in its own shard. This would allow more transactions to be processed in parallel, increasing throughput.

The main downside of sharding is that it can introduce security vulnerabilities if not implemented correctly. For example, if two shards have a high degree of interaction, then a malicious actor could potentially use this to their advantage.

Nonetheless, sharding is a promising solution for increasing the scalability of layer 1 blockchains. One of the most notable projects working on layer-one scaling is Ethereum’s Shard chains. Shard chains are being developed as part of Ethereum’s more extensive scalability solution, ETH-II. When complete, ETH-II will allow Ethereum to process up to 100,000 transactions per second.

Other common ways to scale at the layer 1 level include:

  • Proof of Stake (PoS): PoS is an alternative to Proof of Work (PoW), which is the consensus algorithm used by blockchains such as Ethereum. PoW requires miners to expend much energy to verify transactions, which can be costly and time-consuming. PoS, on the other hand, allows users to validate transactions based on the number of coins they hold. This allows for a more energy-efficient way of verifying transactions and results in faster transaction times.
  • Segregated Witness (SegWit): SegWit is a soft fork that reorganizes how data is stored on the blockchain. This results in smaller transaction size, allowing more transactions to be processed per block. In addition, SegWit enables second-layer solutions such as the Lightning Network.

Layer 1 scaling solutions offer a direct way to improve the performance of a blockchain protocol. However, they are often complex and can be challenging to implement. In addition, layer 1 scaling solutions tend to sacrifice decentralization in favor of increased transaction throughput.

Layer 2 Blockchain Scalability

Layer 2 solutions are protocols that run on top of an existing blockchain to increase transaction throughput and speed. These protocols do not require any changes to the underlying blockchain protocol and can be implemented without compromising decentralization. Layer 2 solutions rely on the security of the underlying blockchain and can be thought of as an ‘off-chain’ extension of the main blockchain.

The most common layer 2 scaling solutions are:

  • Nested blockchains: A nested blockchain is a blockchain that is connected to another blockchain. Transactions on the nested blockchain are verified by the main blockchain, allowing increased transaction throughput. One popular example of a nested blockchain is Ethereum’s Plasma.
  • Sidechains: A sidechain is a separate blockchain connected to the main blockchain. Sidechains allow for increased transaction throughput and parallel processing of transactions. One famous example of a sidechain is Bitcoin’s Liquid.
  • Rollups: Rollups are a layer 2 solution that aggregates multiple transactions into a single transaction, which is then recorded on the main blockchain. It allows for increased transaction throughput without sacrificing security or decentralization.
  • State channels: State channels are another type of layer 2 solution that allows for off-chain transactions. In a state channel, two or more parties can transact with each other without broadcasting the transaction to the entire network. This allows for increased privacy and faster transaction times. The Bitcoin lighting network and Ethereum’s Raiden Network are examples of state channels.

Layer 2 solutions offer a more flexible way to scale a blockchain protocol as they do not require changes to the underlying protocol. In addition, layer 2 solutions tend to be more energy-efficient as they do not need miners to verify transactions. However, layer 2 solutions can be complex and require users to have a certain amount of technical knowledge to use them.

Key Takeaways

It is important for blockchain protocols to be scalable to meet the demands of a growing user base. There are two main ways to scale a blockchain protocol: layer 1 and layer 2 solutions.

Layer 1 solutions involve changes to the underlying protocol. They are often complex and can sacrifice decentralization in favor of increased transaction throughput. The most common layer 1 scaling solution is sharding.

Layer 2 solutions are protocols that run on top of an existing blockchain to increase transaction throughput and speed. These protocols do not require any changes to the underlying blockchain protocol and can be implemented without compromising decentralization. Layer 2 solutions rely on the security of the underlying blockchain and can be thought of as an ‘off-chain’ extension of the main blockchain. The most common layer 2 scaling solutions are nested blockchains, sidechains, rollups, and state channels.

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