The popularity of cryptocurrencies and Blockchain is growing profoundly, as is the number of users and transactions. While it is clear that Blockchain is revolutionary, scalability - or the system's ability to grow while accommodating increasing demand - has always been a profound challenge with Blockchain. High throughput is often a problem for public blockchain networks that are highly decentralised and secure.
It is known as the Blockchain Trilemma, which states that it is nearly impossible for a decentralised system to simultaneously achieve equally high levels of decentralisation, security, and scalability. In practice, blockchain networks can only have two of the three factors.
The Need for Scaling solutions:
On the other hand, hundreds of enthusiasts and experts are working on scaling solutions. Scaling solutions are intended to modify the main Blockchain's architecture (Layer 1), while others are aimed at Layer 2 protocols that operate on top of the underlying network.
Layer-2 scaling solutions run on top of a blockchain protocol to improve the underlying Blockchain's speed and efficiency.
Why is Blockchain Scalability Important?
In blockchain technology, the leading network would be Layer 1, while the other service roads would be Layer 2 solutions (secondary network to improve the overall capacity).
Layer 1 blockchains include Bitcoin, Ethereum, and Polkadot. They are the foundational blockchains that process and record transactions for their respective ecosystems. In addition, they have a native cryptocurrency typically used to pay fees and provide broader utility. Polygon is one example of an Ethereum Layer 2 scaling solution. The Polygon network regularly sends checkpoints to the Ethereum Mainnet to keep it updated on its status.
A blockchain's throughput capability is critical. It's a speed and efficiency metric that shows how many transactions can be processed. A Layer 1 blockchain can become slow and expensive to use as the number of users, and simultaneous transactions grow. This is especially true for Layer 1 blockchains that use Proof of Work rather than Proof of Stake.
Layer-1 vs Layer-2 Blockchains
Layer 1 is the distributed database — the network that connects all Blockchain's nodes into a single system with its underlying consensus mechanisms. Layer-1 of Bitcoin, for example, is the Bitcoin network, and Layer-1 of Ethereum is the Ethereum network. Both use a Proof of Work (PoW) consensus mechanism at present.
Layer 2, on the other hand, is a network that sits on top of the Blockchain. For example, the Lightning Network is Bitcoin's Layer-2 solution. Layer-2 networks built on Ethereum include Plasma, Polygon, Optimism, and Arbitrum.
Why Are They Important?
In terms of network security and stability, Ethereum is one of the most advanced blockchains. As a result, most individuals and businesses choose to use this Blockchain for transactions or project development. The network, however, becomes increasingly congested as the number of transactions increases.
Miners prioritise confirming transactions with higher gas prices to combat this. However, these higher costs are passed on to the user, raising the minimum gas fee, which can sometimes exceed the value of the transaction itself.
The underlying network (mainnet) does not need to process large amounts of data with Layer-2 because it sends this data to different processing channels (third parties), only recording the final result on the Layer-1 Blockchain.
Advantages of Layer-2 Solutions
- Increased transactions per second (TPS) can enhance the user experience while reducing mainnet network congestion.
- Transactions get combined into a single package before being recorded on the mainnet, lowering gas fees.
- Since Layer-2 gets constructed on top of the Blockchain, updates to a Layer-2 solution do not affect the Blockchain's underlying technology, enhancing network security.
- Allows for application-specific customization-Layer-2 networks that are purpose-built to optimise a specific feature.
Disadvantages of Layer-2 Solutions
- Liquidity may get removed from the primary Blockchain.
- Prospective security and privacy flaws; users should conduct their research before implementing Layer-2 solutions.
- Using an L-2 could make connecting to other Ethereum-based applications more challenging.
The pursuit of improved scalability has resulted in a two-pronged approach, with Layer 1 improvements and Layer 2 solutions. You already have exposure to both Layer 1 and Layer 2 networks if you have a diverse crypto portfolio.