Layers are different components of blockchain architecture. Layer 1, or the base layer, is the main blockchain itself where new data is confirmed and recorded. Layer 1 blockchains, such as Bitcoin and Ethereum, use their native cryptocurrencies for transaction fees, rewards, running decentralized apps, and executing smart contracts. They function independently of other networks.

Meanwhile, Layer 2 refers to scaling solutions built on top of the main blockchain. Many newer Layer 1 blockchains can process thousands of transactions per second, but older blockchains such as Bitcoin and Ethereum were not designed with this capacity. To scale them, Layer 2 solutions are used to perform transactions outside the blockchain and send the data back to be confirmed and recorded. This lessens their load and prevents the network from being congested.

Layer 1 Scaling Solutions

Layer 1 solutions scale the blockchain by making core changes to the main network, or mainnet, such as:

Changing the Consensus Mechanism

Consensus mechanisms that take a long time to complete can create bottlenecks within the network. Therefore, modifying the consensus mechanism to a faster alternative is an effective way to increase the network’s scalability. However, since the protocol used by all the devices in the network will have to change, this type of scaling solution can be complex and time-consuming to implement​​. For example, in September 2022, Ethereum completed the Merge and effectively switched from Proof-of-Work to Proof-of-Stake.

Increasing Block Size

Increasing the size of the blocks allows them to accommodate more transactions. This saves space and cuts down on processing time. One example is Bitcoin Cash (BCH), a hard fork of Bitcoin that increases the block size from the standard 1MB of Bitcoin to 32MB per block. This allows the BCH network to process far more transactions per second than Bitcoin with the added benefit of reduced transaction fees.

Sharding

Splitting the blockchain network into interconnected segments called “shards” that work parallel to each other allows the blockchain to process multiple transactions simultaneously. Ethereum’s recent Dencun upgrade introduced “proto-danksharding” which allows the blockchain to separately manage large chunks of data without having to constantly sync with the entirety of the network. NEAR is also using sharding in its architecture — its sharding solution Nightshade keeps the data in a single chain while distributing the workload into several shards. NEAR is currently on track to complete Phase 2, or stateless validation, which will let the shards function independently at the consensus level without compromising on security.

Layer 2 Scaling Solutions

Layer 2 solutions on the other hand speed up a blockchain by processing transactions outside the mainnet. The transactions are then recorded on the mainnet in batches, saving time and processing power. They are more efficient than many Layer 1 blockchains; however, they are also less secure. Some of these are:

Optimistic Rollups

Optimistic rollups perform transactions off-chain, consolidate the data into batches, and send the data back to the mainnet. The mainnet automatically assumes that the data is correct and records each batch as a single transaction. If an error is found, the wrong transaction is re-executed, the records are updated, and anyone who approved the wrong transaction is penalized. Optimism is an example of a Layer 2 blockchain that scales Ethereum using optimistic rollups.

Zero-Knowledge Rollups

These also process transactions off-chain in batches and send the data back to the mainnet. However, they use advanced cryptographic techniques called zero-knowledge proofs to prove the validity of the transactions. An example is ImmutableX, which uses ZK-rollups to power scalable Web3 games.

Sidechains

These are secondary blockchains connected to the mainnet. They independently execute and confirm transactions using their own consensus mechanisms and transmit the data back to the mainnet. One of these is Skale, an Ethereum sidechain that focuses on decentralized apps and offers instant transaction speeds and zero gas fees.

State Channels

These let users transact with each other using channels outside the mainnet. Once the transactions are finished, the channels are closed and the data is sent back to the mainnet. One of the most popular ones is Bitcoin’s Lightning Network. It lets Bitcoin users send and receive payments instantly through micropayment channels. You can learn more about the Lightning Network and other scaling solutions for Bitcoin here.

Generally, a Layer 1 solution offers higher security, but can be quite complex to implement. Meanwhile, a Layer 2 solution is often easier to implement, but may not be as secure since transactions take place outside the main blockchain. Both options have their own role to play in the blockchain ecosystem. By speeding up transactions, lowering costs, and increasing the efficiency of blockchain networks, they help make crypto and Web3 more accessible to all.