What are blockchain layers one and two and what are they for?

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In blockchain technology, the term "scaling" describes an increase in system throughput, measured by the number of transactions performed per second. Due to the constant increase in the use of cryptocurrencies, it has become necessary to create "tiers" to improve network security, record-keeping, and more.
Layer 1 in a decentralized ecosystem is the blockchain itself. Tier 2 is a third-party superstructure over Tier 1, which increases the number of nodes and therefore the throughput of the system. Many Layer 2 solutions are currently being implemented. These solutions use smart contracts to automate transactions.

L1 vs. L2 solutions

Blockchain technology has many advantages: it increases security, makes transactions easy, and keeps a record of all transactions. However, as its use becomes more widespread, a number of problems arise. One of these challenges is scalability.

In blockchain, each transaction must go through several steps that require significant computing power and time. To improve blockchain throughput, developers are incorporating Layer 2 scalability solutions into its structure. Let's learn more about how they work.

Why is blockchain scalability important?

Experts disagree on the definition of "scalability". However, at its core, the term blockchain scalability describes the ability of a system to maintain stability and performance at all times, regardless of the total number of users.

The term "throughput" describes the number of transactions processed by the system per second. Visa's electronic payment network, VisaNet, processes nearly 20,000 TPS, while the bitcoin blockchain, meanwhile, can only perform between 3 and 7 TPS.

The difference in performance may be shocking, but it is very simple to explain. Bitcoin uses a decentralized system, while VisaNet uses a centralized system. A decentralized system requires more processing power and time to protect the privacy of its users. Each transaction goes through several steps, including acceptance, mining, distribution and confirmation by nodes.

Cryptocurrency is expected to become a leading tool in the business world soon, so developers are trying to increase the power and speed of the blockchain. It is to accomplish these tasks that blockchain layers and Layer 2 scalability optimizations are being worked on.

Bitcoin's scalability problem

Initially, bitcoin was a simple blockchain that allowed users to send and receive digital currency. However, the scalability problem has been known since its inception, raising the question: what happens when more people start using bitcoin?

This scenario can be seen as a network problem. Each system has a certain bandwidth and can only handle a certain number of transactions per second. Moreover, every transaction in a decentralized system is validated, which requires quite a lot of storage space.

Why does blockchain need L2 technology?

The answer is simple: increased demand and higher transaction costs. Let's break this down using Ethereum as an example.

ETH has a consensus mechanism that allows multiple decentralized applications. The blockchain consensus mechanism is a fault-tolerant system that maintains the same network state across distributed nodes. Using these protocols, all nodes agree on transactions and synchronize with each other. This makes the Ethereum blockchain extremely secure against data overwrite and hacker attacks.

The stability and security of Ethereum has caused an ICO frenzy, leading to the creation of a large number of new coins on the blockchain. Consequently, the influx of users and the number of transactions made on Ethereum increased. As the number of users increased, so did the transaction fees, the "gas" paid to parties processing transactions on the Ethereum network.

When the blockchain network is overloaded, active transactions are sent to the memory pool and take longer to process. To solve this problem, miners start prioritizing transactions with higher gas prices. This further increases the minimum cost required to complete a transaction.
In the end, this causes gas prices to skyrocket, making things worse for everyone involved. L2 scaling is designed to solve this problem and reduce transaction costs.

The problem with Layer 1

A layer 1 (L1) network is a blockchain in a decentralized system. Two examples of such networks are Bitcoin and Etherium.

In L1 scaling, the underlying blockchain protocol is changed to implement scalability. With these solutions, the rules of the protocol are changed, increasing the throughput and speed of transactions.
Layer 1 scaling can include:
  • Increasing the block acknowledgement rate
  • Increasing memory block capacity.

Together, these scaling solutions increase network throughput. However, Layer 1 does not seem to be able to handle the increase in the number of blockchain users. Below are some shortcomings of the system.

Inefficient consensus protocol

Tier 1 blockchain still uses the old and "wooden" consensus mechanism of proof-of-work.

Although this mechanism is safer than the others, its speed is extremely low. This protocol needs the computing power of miners to solve cryptographic algorithms. Thus, it requires more processing power and time in general.


An alternative consensus "proof of ownership" which is applied in Ethereum 2.0. This consensus mechanism validates new blocks of transaction data according to the stacking provisioning of network participants, making the process more efficient.

Excessive load

As the number of users increases, so does the workload on the Layer 1 blockchain. Because of this, processing speed and performance decrease.


The scaling solution for this problem is sharding. Simply put, sharding (segmenting) breaks down the work of transaction verification and authentication into small and simple subtasks. In this way, the workload can be distributed across the network, allowing the computing power of more nodes to be used.
The sharding workflow mechanism allows for sequential processing of multiple transactions.

Tier 2 scaling solutions

Layer 2 blockchain increases the efficiency of the native layer. L2 takes some of the Layer 1 blockchain's transaction load and transfers it to another system architecture, effectively offloading the system during an influx of transactions.
Layer 2 blockchain then takes over the load and reports back to Layer 1. Since most of the processing load is borne by this adjacent auxiliary architecture, the load on the rest of the network is reduced, making the Layer 1 blockchain not only less congested but also more scalable.

An example of a Tier 1 blockchain is the BTC Lightning Network, a scaling Tier 2 solution that simultaneously accepts workloads from Bitcoin and reports back to it. As a result, the Lightning Network increases processing speed in the Bitcoin blockchain. In addition, Lightning Network introduces smart contracts on the Bitcoin Tier 1 blockchain.
Here are some other L2 scaling solutions:

Nested (nested) Plasma blockchain

A nested L2 blockchain runs on top of another blockchain. In this arrangement, layer 1 sets the parameters and the nested layer 2 blockchain executes the processes.
The primary blockchain can have multiple layers. This is easy to visualize based on a typical company structure. A manager receives work tasks, he assigns them to subordinates, who later report back to the manager on the completion of their tasks. In this way, the manager's workload is reduced and scalability is increased.
An example of this is the OMG Plasma project, which acts as a layer 2 blockchain for layer 1 Ethereum protocol, providing cheaper and faster transactions.

State channels

State channels allow two-way communication between blockchain participants. It reduces latency because there are no intermediaries (e.g., miners) involved in the process.

Here's how it works:
  • According to smart contracts, participants agree to reserve a portion of the base layer beforehand.
  • They can then interact with each other directly, eliminating the need for miners.
  • After all transactions are made, they add the final state of the channel to the blockchain.

The Raiden Network on Ethereum and the Lightning Network on Bitcoin are examples of state channels. The Lightning Network allows participants to run multiple microtransactions over a period of time. Raiden allows participants to launch smart contracts over private channels.
Moreover, state channels are completely secure because only participants know about the transactions. On the other hand, Ethereum's L1 blockchain records all transactions in a public ledger.


Sidechains are also a solution to scale the technology Layer 2 blockchain technology. A Sidechain is a transactional chain that facilitates a large number of transactions. It has a consensus mechanism that is independent of the native layer. This mechanism can be optimized to improve scalability and processing speed. With a sidechain, the underlying blockchain must validate transaction records, provide security, and resolve disputes.

Sidecards differ from state channels in that they publicly record all transactions in the ledger. In addition, if a security breach occurs in a sidingchain, it does not affect other sidingchains or the underlying base-level blockchain.


Rollups are Layer 2 blockchain scaling solutions that execute transactions outside of the Layer 1 blockchain and host data about the transactions performed on it. The data resides on the underlying layer, which allows Layer 1 to secure rollups.

Rollups come in two security models:
  • Optimistic rollups: in such rollups, transactions are valid by default. As such, they only perform fraud detection actions if there is a problem.
  • Zero-disclosure rollups: These rollups perform calculations outside the blockchain. Once the operation is performed, they send a proof of validity to the underlying layer or master blockchain.

Rollups help increase blockchain throughput and lower gas charges for users.

The limiting factors of Tier 1 and Tier 2

Allocating blockchain tiers has several advantages. The main advantage of Tier 1 solutions is that developers do not need to add anything to the existing architecture because only the base tier is changed.

Tier 2 scaling solutions, in turn, do not affect the base layer protocol. In addition, these solutions allow for multiple microtransactions, and users do not have to pay exorbitant transaction fees or spend time on verification from the miner.
However, both of these layers of blockchain have limitations that need to be considered.

The scalability trilemma

Vitalik Buterin, the founder of Ethereum, coined the term "scalability trilemma" to refer to three interrelated properties of the blockchain:
  • Security
  • Scalability
  • Decentralization

According to the trilemma, any blockchain technology can have no more than two of these properties. Thus, current blockchains will always have to compromise on one of the fundamental properties. An excellent example of this is Bitcoin. Although this blockchain has managed to optimize decentralization and security, it has had to compromise on scalability.

What happens after tier one and tier two solutions?

Scalability is one of the reasons why mass adoption of cryptocurrencies in the blockchain industry is currently impossible. As the demand for cryptocurrency grows, the need to scale blockchain protocols will also increase. Since both layers of blockchain have certain limitations, the solution in the future will be to create a protocol that can solve the scalability trilemma.

To summarize

As for the aforementioned constraint, there are two options to address it: 1) mitigate the scalability problem or 2) find a workable alternative. Blockchain developers are choosing the first option, moving to second-level scaling in Ethereum 2.0.

At the time of publication, blockchain systems are still under development. The big question is, will blockchain tiers and tier two scaling become temporary or permanent solutions? No one knows for sure at this point.

Whew!... I hope I didn't overload you with new information in this article, because it turned out to be really not simple and certainly not small!

Keep your nose in the wind and know that Fortune, Luck and Success always favor you,

when you're with us!

Always yours C.J.

All the above is not a financial advice, but only a subjective opinion of the author. If you doubt something, do your own research and double-check the information yourself.
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