The main reason we do this Blockchain 101 Twitter thread and Blog series is because we understand how intimidating some of the terminology is surrounding Blockchain technology.
We wish there were more resources to help us on our journey to understanding Blockchain tech, so we’ve answered our own call and write these to help you and others learn in an easy to understand way.
In this week’s post, we will be explaining what Layer-1 and Layer-2 are – giving you an overview of the benefits and tradeoffs of each.
Before we dive in, let’s first look at what a Blockchain is.
A blockchain is a digital ledger of transactions that are recorded in “blocks” and linked immutably with all previous transactions in the ledger. The ledger is distributed across a peer-to-peer network of computers known as nodes, and each node must validate and agree on a transaction before it can be added to a block and appended to the blockchain. Once a transaction is added to the blockchain, it cannot be altered or tampered with, making it a secure and permanent digital record. The decentralized nature of a blockchain and its use of cryptography make it a reliable and trusted method for recording transactions in a secure manner.
Next, we need to take a look at Blockchain Scalability.
Scalability refers to how many Transactions a blockchain network can digitally record, verify, & validate in a second.
Scalability is mostly referred to as TPS aka Transactions Per Second (or Throughput).
As a blockchain grows in popularity & usage, users require more transactions to be processed and this creates a transaction bottleneck which slows down the network or halts it entirely.
This network congestion can also increase the cost of doing a transaction on the network.
In a decentralized ecosystem, a Layer-1 network refers to the blockchain itself, while a Layer-2 protocol is a third-party integration that can be used in conjunction with a Layer-1 blockchain.
Layer-1 scaling solutions augment the base layer of the blockchain protocol itself in order to improve scalability.
An Example of a Layer-1 Blockchain is Stellar Lumens. Did you know that WisdomTree Prime™ uses Stellar Lumens in the app?
Prime is not yet launched to the general public, but once it is, you will be able to witness Stellar as a Layer-1 Blockchain in action!
Stellar is a Layer-1 open-source, decentralized, peer-to-peer blockchain network providing a framework for developers to create applications, issue assets, and connect to existing financial rails.
Bitcoin is a Layer-1 network, whereas the lightning network is a Layer-2 network providing Bitcoin increased transaction throughput
Bitcoin Blockchain’s Layer-1 can process about 15 transactions per second (TPS), while Layer-2 solutions could offer up to hundreds of thousands of TPS.
Examples of Layer-2 scaling solutions are Arbitrum, Polygon, and Optimism.
A number of methodologies are currently being developed & practiced that improve the scalability of blockchain networks directly.
Layer-1 scaling solutions can be increasing the amount of data contained in each block, or accelerating the rate at which blocks are confirmed and verified to be truthful.
This would increase overall network throughput.
Layer-2 refers to a network or technology that operates on top of an underlying blockchain protocol to improve its scalability and efficiency.
Layer-2 scaling solutions can entail shifting a portion of a blockchain’s transactional burden to an adjacent system architecture, which then handles most of the network’s processing & subsequently reports back to the MAIN/Layer-1 blockchain to finalize its results.
By abstracting the majority of data processing to auxiliary architecture, the main blockchain becomes less congested and more scalable, thereby increasing its overall TPS.
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