What is Layer 1 Blockchain?
Layer 1 protocol refers to a base blockchain like Ethereum that is capable of validating and settling transactions on its own network while providing the infrastructure for the dapps and protocols to be built on top of it. The primary attribute of any layer 1 network is the consensus mechanism adopted by it that decides the speed, security, and throughput.
Introducing Layer 1 Blockchain
Layer 1 blockchains have their own networks, a collection of nodes connected via the internet that work together to create and validate a distributed ledger, and their own protocols, a set of predefined rules for how a network operates.
As blockchains grew larger, they began to experience challenges in accommodating the increasing number of transaction requests due to the decentralization of security, which resulted in network congestion and poor user experience. This problem is often referred to as blockchain’s scalability problem.
Layer 1 blockchains may address the problem of scalability through on-chain solutions such as sharding, while some embrace off-chain solutions like layer 2 protocols that are integrated into the core blockchain.
This guide will explain the process of layer 1 blockchains, how their working causes the scalability problem and why it is important, and finally native and off-chain solutions.
How Do Layer 1 Blockchains Work
Base blockchains, or simply blockchains, constitute a distributed ledger system where participating nodes collectively manage the integrity of the network instead of relying on a central authority.
Layer 1 blockchain’s characteristics can be summarized as follows:
Distributed: The responsibility of maintaining the decentralized ledger is securely distributed to the nodes in the network, and all data is cryptographically sealed for confidentiality and security.
Secure: Every piece of information is stored in blocks, which can hold a finite amount of information and are cryptographically sealed. For a new block to be added to the chain, a node should solve a cryptographic puzzle and have the majority of the network approve its process. If it’s approved, a new block is added to the chain that is connected to the previous block.
Consensus-based: Although one node verifies the blocks of information, they must have more than half of the nodes in the network to approve their work. If they get it right, they are rewarded with a number of native tokens. The use of a method through which nodes reach a consensus about the verified transaction, along with the reward system is referred to as a consensus mechanism — it ensures that the nodes are in agreement regarding the state of the ledger.
The consensus mechanism not only ensures the authenticity of the network but also maintains its security and integrity. It’s fairly challenging for bad actors to tamper with the records due to the interconnectedness of blocks, or approve incorrect transactions as they would need the majority.
It is also believed that the economic incentives help nodes to have aligned interests: every node that holds the native token would have the best interests of the network in mind because they are financially invested.
As said before, layer 1 chains are self-contained, meaning that they include all components listed above needed to maintain a decentralized network without relying on another network. They are distributed, immutable, and also programmable: they provide a platform on which programs can be built, such as decentralized applications or decentralized autonomous organizations.
Bitcoin Trilemma: The Scalability Problem
Adhering to three main principles helps blockchain networks not only function but also thrive:
Decentralization is the main pillar on which blockchain networks are built. By allocating the authority to the members, decentralized networks cut the need for a central authority, or a broker who is trusted to execute agreements and thus the transfer fees that are associated with it. Banks, for example, hold a ledger for their customers and impose fees for overhead costs, processing, and profit.
In a decentralized system, the transfer fees are given as economic incentives to the members who participate by verifying transactions. So the profit made out of processing is distributed to the community.
While this ensures the integrity of the system, it also means that a high number of data inputs may potentially cause network congestion as every node needs to approve every transaction for security purposes. Network congestion may mean high transfer fees (because more nodes are working on processing) or slow transfer speeds.
Although prone to cause congestion, implementing consensus mechanisms is crucial for security: by means of self-executing rules, decentralized networks have the majority of the nodes authenticate transactions.
This has two implications: any change to the transaction needs to be approved by the majority, who also need to be convinced that the transaction entries are correct and genuine; and every participating node has a copy of the ledger, with which they can cross-check and identify wrongful acts.
Limiting the number of users may solve the network congestion problems, but it may also jeopardize security. A smaller pool of nodes means smaller barriers against bad agents taking over the majority of a network, and manipulating it thereafter. For this reason, scalability is required to maintain speed and security.
Scalability refers to a blockchain’s ability to accommodate increasing transactional throughput, measured by transactions per second (TPS). This means that no matter how much the network grows, the performance will not be affected.
Due to consensus mechanisms in use, blockchains are limited in how many transactions can pass through the system in a given period. The increasing number of users, and applications, began to create congestion in the system, resulting in decreasing the quality of the experience with long waiting times and high fees.
The trilemma comes from the belief that it’s incredibly hard, if not impossible, for blockchains to sustain all three pillars simultaneously. Scalability is absolutely needed for the wide adoption of blockchain networks and to compete against centralized institutions. But with current operational models, it is not sustainable.
This is where layered solutions factor in. The basic premise of layer 0 and layer 2 solutions is to create an alternative set of protocols, called layers, to be attached to base blockchains and help with the overdependence on them, in terms of data validation, application building and usage, and more. While layer 0 and layer 2 provide off-chain resolutions to the scalability problem, layer 1 blockchains also put forward self-sustained solutions.
Layer 1 Solutions for Scalability
Layer 1 solutions attempt to address the scalability issue by improving their base protocol, and without depending on a different chain. The most common attempts are improving the consensus mechanisms in use and resorting to sharding.
Changing Consensus Protocol
Most of the popular blockchain networks, including Bitcoin, Litecoin, and Monero use the proof of work consensus mechanism where miners solve complex arithmetical problems to create new blocks.
The process takes a lot of computational power and becomes the proof of work with which other nodes can acknowledge its validity and reach a consensus. The successful attempts are rewarded with a number of native tokens.
The biggest challenge is that these problems take an average of 10 minutes to solve. Bitcoin network, for example, processes 7 transactions per second. This is a competitive model where every node can be a validator.
To improve transaction times and prevent unverified transaction pools from forming, some blockchains, most notably Ethereum, have switched protocols and adopted proof of stake. In this model, validators are chosen among a group of nodes who staked tokens to become a validator.
The highest bidder typically gets the validation role, and like in the case of PoW and PoS, they are rewarded with a certain amount. Because validators are chosen, there is no need for such complex problems to prove the work as in PoW, thus PoS is much more efficient.
Currently being tested by Ethereum, sharding is among the most popular layer 1 solutions to tackle the scalability problem. Sharding is the process by which all transactions are divided into parts, called “shards”, and processed independently but simultaneously.
Each shard would have its own data, and every node in shards would only have the data of that partition rather than the whole ledger. Yet, shards can be shared with one other, and maintain the distributed quality of a blockchain network.
The main problem with shards is security: it’s unknown how vulnerable shards will be against attacks and hostile takeovers. Ethereum has recently rolled out 64 new shard chains as part of “the Merge”, where the platform is also embracing the PoS mechanism. Ethereum plans to ensure security by randomly assigning nodes to shards and reassigning them at intervals.
Layer 0 and Layer 2 Solutions
Layer 0 and layer 2 solutions propose to add an alternative to the main blockchain to which it can delegate the workload. Both solutions attempt to tackle the scalability problem:
Layer 0: Layer 0 solutions create a base infrastructure that can connect layer 1 blockchains. In a bid to resolve the scalability issue, layer 0 solutions help improve cross-chain communication and provide users with a helpful platform where they can start their own blockchain networks or build decentralized applications, so the overdependence on base blockchains is relieved.
Layer 0 solutions address the scalability problem by increasing base blockchains’ transaction throughput, which refers to the number of transactions a chain can handle at one time.
Layer 2: Layer 2 solutions propose to attach protocols to base layers which would take on some of the transactions from the base layer, helping scalability. In other words, the base blockchains can outsource the transaction verification to layer 2 protocols and thereby accommodate a growing userbase and transactions without much burdening.
The payment protocol Lightning Network, for example, is the layer 2 protocol the Bitcoin network is making use of to benefit from quicker transfers and lower fees. Using the Lightning Network, users can send one another Bitcoins using just their wallets. These transactions are off-chain as they are run through the secondary layer, and decrease the workload on the blockchain.
Will Layer 1 Prevail?
When talking about the scalability issue, it is important to differentiate between public and private blockchains. Private blockchains, by nature, are scalable solutions as they are inherently limited in how many users can be accepted, and more often than not are not fully distributed. In fact, Deloitte's survey shows that 81% of those in the financial services industry believe the technology is broadly scalable.
Public blockchains, on the other hand, risk a decrease in the experience they can offer to users due to their inability to accommodate the rising number of transactions. While layer 1 solutions are being time-tested to assess their efficiency and security, it is promising to see developers bringing about multi-chain solutions do unlock dead-ends.