Layer 1 blockchains are the foundational protocols in a blockchain ecosystem. They process and finalize transactions on their own network, providing the necessary infrastructure for various applications. Examples include Bitcoin and Ethereum, which have their own native tokens used to pay for transaction fees.
Key Features
Decentralization
Decentralization ensures that no single entity has control over the entire network. This is achieved by distributing the control across a large number of nodes (computers) that validate and record transactions. This feature enhances security and trust, as it prevents any single point of failure or manipulation.
Native Cryptocurrency
Each Layer 1 blockchain has its own cryptocurrency, used to pay transaction fees and incentivize network participants (miners or validators). For example, Bitcoin uses BTC, Ethereum uses ETH.
Scalability Challenges
As the number of transactions increases, Layer 1 blockchains can become slow and expensive due to the limited capacity of their networks. Various methods like increasing block size, changing consensus mechanisms (from PoW to PoS), and implementing sharding are being explored to address these issues.
Layer 1 Scaling Solutions
SegWit (Bitcoin): Segregated Witness (SegWit) increased transaction capacity by changing how transaction data is stored, allowing for more transactions per block.
Ethereum 2.0: Transitioning to Proof of Stake (PoS) to improve scalability, reduce energy consumption, and increase security.
Sharding: Dividing the network into smaller, more manageable parts (shards) to increase throughput. Each shard processes its own transactions and smart contracts, improving overall network efficiency.
Layer 1 Upgrades: Other upgrades can include adjusting consensus algorithms and implementing new technologies to enhance performance and security.
Layer 1 vs. Layer 2
| Property | Layer 1 (L1) | Layer 2 (L2) |
|---|---|---|
| Native token | Native token needed to pay gas fees | Native token is not essential. Most L2 native tokens are used for governance |
| Gas fees payment | Gas fees paid in native L1 tokens | Some use ETH to pay gas fees, others like Polygon use their governance tokens for fees |
| Gas fee cost | L1 gas fees are almost always higher than L2 | L2 gas fees are typically lower though each uses different methods to keep them low |
| Scalability | Often limited scalability due to focus on security, decentralization | Enhanced scalability |
| Security | Higher level of security and decentralization | Can be more centralized, which increases security risks |
| Consensus mechanism | Critical to the security of the L1 | Usually relies on the consensus of the underlying L1 |
Popular Layer 1 Blockchains
Bitcoin
Bitcoin is the first and most well-known cryptocurrency, using Proof of Work (PoW) to secure its network. It is primarily used as a digital store of value and medium of exchange. However, it faces scalability issues due to its limited transaction throughput and high energy consumption.
Ethereum
Ethereum is a versatile blockchain that supports smart contracts and decentralized applications (dApps). It is used for a wide range of applications, from DeFi to NFTs. Ethereum is moving towards Ethereum 2.0 with Proof of Stake (PoS) to enhance scalability and reduce energy usage.
Bottom Line
Layer 1 innovation will continue to shape the future of the crypto industry. L1s provide critical infrastructure on top of which exciting and innovative solutions like decentralized finance, blockchain gaming, NFTs, and decentralized socials are built.