Welcome, Cryptonaut, to the next step on your journey to understanding the wacky and wonderful world of crypto. I know this industry can seem overwhelming and complicated at times, but it doesn’t have to be when you take things one step at a time. Getting a firm grasp on the core concepts is a great way to start, and that is exactly why we will be covering everything you need to know about layer 1 blockchains in this article today.
To make crypto even more confusing, this industry is also known for making up goofy words like hodl, GameFi, DeFi, CeDeFi, DApp, Tokenomics, Satoshi, moonbags, and more to make your head spin. Then, the next thing you know someone starts talking about layer 0, layer 2, and layer 3, when you didn’t even know there was a layer 1, or Jack Dorsey starts talking about Web5 when we haven’t even understood Web3 yet!
Fret not though, my crypto friends. Crypto is great in the sense that you can nerd-out and go as deep and technical as you want if you enjoy a brain-busting challenge, or, if you are more like me with a banana-level IQ and once got caught staring at the wet-floor sign at an art gallery trying to figure out if it was art or not, we can break this down into easy to digest pieces.
To help get you caught up to speed, you may also enjoy our articles:
Disclaimer: I hold many of the cryptocurrencies mentioned in this article as part of my personal crypto portfolio.
And now, without further ado, let’s clear up some confusion and cover what layer 1s are.
What is a Layer 1 Blockchain?
Layer 1 can be thought of as the core layer, or the blockchain itself. I will also make a quick note that the terms “blockchain network” and “blockchain protocol” refers to the same thing and the terms are often used synonymously.
An easy way to identify a layer 1 protocol is whether or not it has a coin on the network. Bitcoin is a coin, Ethereum is a coin, same goes for Cardano, Solana, NEAR, Avalanche, VeChain, Theta, etc. These are all layer one blockchain protocols with a native token, many of which can support smart contracts, DApps, and other tokens.
There are hundreds of layer 1 blockchains, too many to name them all here. According to Chainalysis, here are the top ten layer 1 blockchains by market cap:
Many might argue against the inclusion of Polkadot and Cosmos in that list. While these blockchains do share many characteristics and fit the definition of a layer 1 protocol in many regards, some would consider these networks more appropriately classified as a layer 0 and layer 3 network respectively, due to some of their traits. We will discuss that more in-depth later.
Anyway, a layer 1 blockchain protocol is the foundational blockchain network in charge of on-chain transactions and core functionality. The layer 1 blockchain is the underlying core architecture upon which other solutions, DApps, smart contracts, and even other chains can be built.
Different layer 1 blockchains are designed and optimized for different goals. Bitcoin was designed to be a peer-to-peer currency for simple, trustless transactions and to be a store of value, while Ethereum was the first blockchain to incorporate smart contract functionality and DApps and could be used to create tokens that run on the same network.
Here is a visual that helps explain some of the differences between Bitcoin and Ethereum:
Then there are the other smart contract layer 1 protocols that directly compete with Ethereum such as Solana, Cardano, Avalanche, and a plethora of others. Some layer 1s focus on international payments, such as Ripple and Stellar, some focus on interoperability, such as Polkadot and Cosmos, while projects such as Theta focus on the future of video streaming, VeChain focuses on supply chain logistics, and so forth. So, you can see that there are different layer 1 blockchains designed for different jobs, and the competition is fierce.
In fact, if we take a look at DeFi Llama, a popular site that tracks smart contract-enabled blockchain protocols and DApps, there are 130 Ethereum competitors listed. It is important to understand the vastness and importance of Ethereum as a layer 1 protocol as it currently has over 58% market share dominance over the entire DeFi industry:
As massive as Ethereum is, with over $40 billion in total value locked at the time of writing, even ETH is eclipsed by Bitcoin:
Though despite the depth of these assets, Bitcoin, Ethereum, and nearly every other cryptocurrency face an issue that risks the very future of their utility.
Layer 1 Protocols: The Scaling Problem / The Blockchain Trilemma
There are many issues in crypto that we are all aware of. There are DeFi hacks, scams, rug-pulls, price volatility, and Warren Buffet thinks that Bitcoin is stupid.
Those are all issues that give the industry a black eye, and while they are unfortunate, there is one issue that is larger than all of those and threatens the viability of Blockchain technology at its core and in its very design concept. This issue rots the very seed of layer 1 blockchain protocols and threatens the future use of the technology.
This issue is scalability, and it has proven to be the most difficult problem in crypto to resolve. We need to understand this issue before we can understand why there are different protocol layers and tech built on top of some blockchain protocols.
This issue is commonly referred to as the Blockchain Trilemma. The Blockchain Trilemma was first coined by Ethereum co-founder Vitalik Buterin and proposes a set of three main objectives that exist in any layer 1 protocol. For a crypto network to be useful, according to Vitalik, and most in the industry, a blockchain needs to meet these three requirements:
- Decentralization– Rather than being managed and controlled by a single authority or entity, blockchains should distribute control of the network to participants.
- Secure– Security is paramount in blockchain, and each network should be impervious to hacks and prevent malicious actors from taking control of the network or altering transactions and history.
- Scalable– Blockchains need to be able to support an enormous amount of transactions and activity volume without an increase in transaction times or fees.
Developers face the issue that when building blockchains, one of the three often needs to be sacrificed as a trade-off to achieve the other two.
A good example of this is Ethereum, which is highly decentralized and incredibly secure, though it is not scalable at all with its slow confirmation times, low transactions per second, and high gas fees.
Compare this to Binance’s popular BNB Chain (previously known as the Binance Smart Chain), which is secure and very scalable. It is a highly efficient blockchain with lightning-fast transactions and low fees, but it is severely centralized, which is the antithesis of what many believe cryptocurrency should be.
Here is a look at these two layer 1s side by side:
Anyway, back to the scaling trilemma. The issue of not being able to make a blockchain network that is decentralized, secure, and scalable, has led to multiple innovations and a diverse range of layer 1 and layer 2 solutions to overcome these challenges to solve the trilemma.
A layer 1 solution is one that is built directly within the core protocol itself. All the transactions and transaction history are processed on-chain, in real-time, and no off-chain solutions or sidechains are required. Layer 2 solutions involve processing transactions off-chain, then broadcasting to the main chain at periodic intervals determined by the protocol. This allows for much of the volume to be dispersed and handled in batch transactions or on side chains.
The only network that I am aware of that claims to have resolved this trilemma without the use of layer 2s is Algorand. You can learn more about this highly advanced, impressive and powerful network in our Algorand review.
Alright, so we know that scalability is one of the most difficult issues to overcome and is the primary criticism against blockchains like Bitcoin and Ethereum. Neither protocol is capable of supporting a global financial payment or internet infrastructure on its own. At their core layer, neither network can process enough transactions per minute, and the fees are too high to make them viable global infrastructure solutions, which is why the additional layers are needed.
The first solution to tackle the scalability issue is the introduction of layer 1 solutions. A layer 1 solution improves the base protocol itself to make the overall system more scalable. The two approaches here to make the base protocol more efficient are things like consensus protocol selection and sharding.
Multiple different consensus protocols are being tested out and tried on different networks. Each has its pros and cons, and are quite different from a technical perspective. While there are too many to cover them all here, I will mention the main two.
Proof-of-Work– This was the first consensus protocol that was introduced and is the consensus protocol used by the likes of Bitcoin, Litecoin, Ethereum, Dogecoin, and more. Now, you may be hearing all sorts of talk about Ethereum 2.0 or the Ethereum merge, and this is referring to the fact that Ethereum is transitioning from Proof-of-Work (PoW) to Proof-of-Stake (PoS). I won’t go into detail on that here, but Guy has this great video where he sums up exactly what is happening with the Ethereum merge:
PoW is used to achieve both consensus and security and uses miners to decode complex cryptographic algorithms to produce blocks that get added to the blockchain and mine more tokens. The PoW consensus mechanism struggles from three key shortfalls: It is often slower than PoS, is not scalable, and is resource intensive.
You can learn more about PoW and Bitcoin mining in our article on Bitcoin mining
Proof-of-Stake– is a mechanism that utilizes a distributed consensus over the blockchain network and allows users to authenticate block transactions on the basis of their stake. Proof-of-Stake uses validators instead of miners, and coins can be staked by participants to secure the network. PoS is more efficient than PoW in terms of transaction speeds, requires less energy, and has lower fees, but is arguably less secure and can suffer from centralization issues.
There are many different types of consensus mechanisms such as Proof-of-Authority, Proof-of-Capacity, Proof-of-Burn, Proof-of-History, Delegated Proof-of-Stake, Pure Proof-of-Stake, and others, but the main two are Proof-of-Work and Proof-of-Stake. Popular layer 1 protocols that use PoS are Cardano, BNB, VeChain, Flow, Tezos, Avalanche, Theta and hundreds more.
If you want to learn more about the different consensus mechanisms, Guy covers them here:
The consensus mechanism chosen by different layer 1 blockchains is the first step that will determine many of the core functions and features of a network. The consensus mechanism prevents bad actors from deliberately cheating the blockchain with double-spend attacks, and determines the difficulty of proposing new blocks, which leads to things like transaction throughput and TPS. The consensus mechanism also simultaneously incentivizes the good nodes to propose blocks to be accepted.
The consensus mechanism is essentially a fault-tolerant mechanism used to achieve agreement, trust, and security across the network, while dictating the network’s core layer sustainability and scalability.
Now, before you start giggling like a schoolgirl, yes, sharding is a real term and method used for scaling at the layer 1 level. Sharding is an approach that involves breaking up a network into a series of separate database blocks known as “shards.” This essentially makes the blockchain more manageable and eases the requirements for all the nodes to process transactions in order to maintain and run the network.
Blockchain blocks need to hold a lot of information such as the sending and receiving information, and in many cases, the entire blockchain history, so there is a lot of data that needs to be transmitted in each block. By sharding and breaking up the network, these blocks now have less data that needs to be transmitted and processed, resulting in faster and more efficient transactions.
Here is a great visual showing how sharding works from the paper: Building Blocks of Sharding Blockchain Systems: Concepts, Approaches, and Open Problems
These shards are processed in a parallel sequence and allow for increased processing capabilities and capacities. Now, it is good to mention that while many networks are implementing sharding solutions, much of this is theoretical and considered experimental. Remember that blockchain technology is still new, and like monkeys learning how to use tools, we too, are still essentially throwing spaghetti at the wall and seeing what sticks.
So, the consensus mechanism and sharding are the two key ways to achieve scalability to a degree at the layer one protocol, though these methods have their limits, which is why layer 2 solutions have been implemented. There are many layer 1 protocols that are using advanced sharding mechanics to avoid the need for scaling solutions altogether.
One of the most advanced layer 1 protocols that is using incredibly advanced cryptographic solutions to achieve scalability directly within the protocol without the need for layer 2 solutions is Cardano. You can find out more about what makes Cardano one of the most advanced networks in our Cardano Deep Dive Article.
Another interesting blockchain protocol that uses sharding as a way to avoid reliance on layer 2 scaling solutions is Elrond. Elrond uses a combination of Secure Proof-of-Stake (SPoS) consensus mechanism, along with Adaptive State Sharding to achieve a theoretical transaction output of 100,000 TPS.
Layer 2 and Beyond
Layer 2 is also often referred to as layer 2 scaling solutions because it aims to tackle the issue of scaling. Layer 2 refers to a secondary framework or protocol that is built on top of an existing blockchain, and allows for transactions to be processed off the main chain to help distribute workload and avoid bottlenecks and congestion.
As mentioned, the consensus mechanism and sharding can only take a project so far, which is why many projects have been developed to help a blockchain scale. The most prominent of these exist on Ethereum. Here is a look at the Ethereum layer 2 scaling solution ecosystem:
As Ethereum is, by far, the most used network with the most DApps and use cases, there was an intense need for scaling solutions to roll out on Ethereum ASAP. Layer 2 scaling solutions are quite complex, and we can’t go into deep technical detail about them here without turning this article into textbook length, but the most notable layer 2 scaling solutions for Ethereum are:
Zk rollups– which are utilized by projects like Loopring and Polygon Hermez.
Optimistic rollups-used by the likes of Arbitrum and Optimism.
Validiums– Used by projects like DeversiFi and Immutable X.
State Channels– Used by projects like Raiden Network and Liquid Network
Nested Blockchains– Such as Ethereum’s OMG Plasma Network
Another scaling solution while we are on the topic, is the usage of Sidechains. Sidechains are Ethereum-compatible blockchains that support the Ethereum Virtual Machine (EVM). Sidechains can serve as an external execution layer for Layer 1s like Ethereum, and the most prominent sidechain solution for Ethereum is the Polygon (MATIC) network.
To give you an idea of how Polygon works, here is a good diagram from Coin Central
For a deeper look into Polygon, feel free to take a look at Guy’s video: Can Matic with the ETH scaling race?
Plasma chains are also a fairly new introduction to scaling solutions and rely on fraud proofs like optimistic rollups but maintain data availability off-chain which helps with transaction throughput. You can learn more about Ethereum’s different scaling solutions here:
It is also important to point out that Bitcoin’s Lightning Network is also considered a layer 2 scaling solution as it is a second protocol built on top of Bitcoin’s base protocol. The Lightning Network falls under the State Channels category and allows Bitcoin to be used considerably more efficiently and effectively as a global payment network. This has allowed Bitcoin to achieve significantly greater scalability and throughput.
You can learn more about Bitcoin’s Lightning Network and why it may be the most important development in crypto since the creation of Bitcoin itself from Guy’s video: Bitcoin Lighting Network, What you Need to Know!
So, that covers the nuts and bolts about what layer 1s and layer 2s are, but have you been hearing the term layer 0 thrown around?
This one is a bit funny and not everyone agrees with the term. Much like if you ask two people to define the internet, you will get two different answers, some believe in the layer 0 concept, while others aren’t convinced. The concept is quite simple, and I personally think it makes sense to refer to some protocols as layer 0, while others would classify these as layer 1s.
Allow me to explain:
There are many of us who believe that the future of blockchain technology will be multi-chain, that it will not be a single protocol winner takes all scenario. Many Ethereum maxies believe that the future will be built on Ethereum and everything else will fail, while others believe that just as Microsoft and Apple exist today, multiple layer 1s will exist in the future and specialize in different tasks and industries.
If we look at all the different use cases for blockchain, I think it is quite clear that the world of Web 3 will be big enough to incorporate more than one layer 1 blockchain protocol:
Today, computers and phones, regardless of their manufacturer or operating system can interact with one another thanks to the applications built on top of the operating system. Many believe that crypto blockchains will be the same, that networks like Ethereum, Cardano, Solana, and others will all exist and be used for different functions and purposes, yet still be able to communicate with one another.
If this is the direction we are going, something will need to happen to allow these currently siloed networks to be able to integrate with one another.
This is where interesting and innovative projects like Polkadot come into play. Polkadot is working on becoming the blockchain of blockchains and connecting different layer 1 blockchains so they can communicate. Many people in the crypto space refer to Polkadot as a layer 0 protocol for that reason, as it will be built underneath layer 1s in a sense, and able to connect them as they sit and build on top of the 0 layer.
You can learn more about Polkadot in our Polkadot article, or if you prefer video format, Guy also covers the project in detail:
Then we get into Layer 3, which is also concerned with interoperability as is layer 0. Note that there is no single authority who creates these terms or determines their usage, so you may hear these terms and projects labelled differently. This is simply my take as this is what makes sense to me, and what I have learned from following the space.
Layer 0 and Layer 3 are often used to describe the concept of connecting blockchains. Some claim that interoperability is built below the layer 1, and some claim that the interoperability protocols are built on top of the layer 2 scaling solutions, which is how we arrive at the numbers 0 and 3.
In essence, they can both be accurate, but for me, I believe we can be more accurate as the difference lies within the protocol architecture. The layer 3 protocols are basically solutions for empowering different blockchain networks with cross-chain capabilities, allowing them to interact with one another without intermediaries or custodians.
Some examples of layer 3 solutions are the likes of the Interledger Protocol (ILP) for Ripple, the Inter-Blockchain Communication Protocol (IBC) of Cosmos, as well as projects ICON and Quant.
Cosmos is the leader in the layer 3 space and is an incredibly advanced and interesting project as it acts as a communications protocol, a sidechain via the Cosmos SDK, and is the leader in the interconnectivity race through the Cosmos Hub. Cosmos has already made great strides in the connectivity between Ethereum, the Crypto.com Cronos chain, BNB Chain, and more.
You can dive deeper into Cosmos (ATOM) in our dedicated Cosmos article, or watch Guy’s coverage on Cosmos below:
Can Self-Contained Layer 1 Blockchains Survive?
We covered how some projects like Cardano, Algorand, and Elrond choose unique and advanced cryptographic solutions to scale at the layer 1 level, while other Layer 1s like Ethereum and Bitcoin rely on layer 2 solutions to offload some of the traffic and congestion onto sidechains and process transactions off-chain.
Other networks that have taken the self-contained route and utilize advanced consensus mechanisms at the layer 1 level to scale are the likes of Solana, THORChain, Avalanche, Fantom, Tron, Radix and others.
The truth is, we do not know which method will win out in the long run… Heck, as a community, we can’t even decide whether Proof-of-Work or Proof-of-Stake consensus mechanisms are superior yet. A recent report released by Kraken Intelligence sums up the strengths of PoS vs PoW nicely:
While people are quick to argue that Proof-of-Stake is the future and point to protocols like Solana and Avalanche as evidence, a very important thing to remember is that not a single network has been stress-tested like Ethereum has.
We do not know if layer 1 solutions will be able to handle the amount of volume experienced by Ethereum. We likely won’t know this for many years, or we may possibly never know if Ethereum continues its domination of layer 1s, as no decentralized network comes close to matching the total value locked and transaction numbers that Ethereum experiences.
Though we have already begun to see cracks in the armor of networks like Solana and Avalanche that show they are not ready to scale to Ethereum’s level yet. As soon as network activity started picking up, Solana experienced multiple outages this year, and we saw the fees on Avalanche start to creep up when complex transactions were performed.
Unlike Solana, Ethereum has never experienced an outage, and though the fee increase on Avalanche was nowhere near the high fees seen on ETH, AVAX only experienced a fraction of the activity volume of Ethereum. It is unknown how any network will fare under similar market conditions.
This leads many to believe that layer 2 scaling solutions are the necessary future, but that is not to say that sharding and other layer 1 solutions can’t be as good as the layer 2 solutions, just that none have been developed yet that have proven themselves. The two networks that are making the most significant and advanced technological strides in the layer 1 scaling race are Cardano and Algorand, and all eyes will be on those networks to see how they will cope if they start to see a fraction of the traffic as we see on Ethereum.
Summing it all up
So, as you now know, the layer 1 blockchain protocol is the main blockchain network in charge of on-chain transactions and core functionality. Layer 1s include networks like Bitcoin, Ethereum, Cardano, Solana etc. Layer 2s are scaling solutions that are in charge of performing off-chain transactions to put it simply, and can include things like optimistic rollups, Zk rollups, and even sidechains. These include protocols like Polygon, Artbitrum, Optimism, and the Bitcoin Lightning Network.
Then we get into layer 0s and layer 3s which are built on top of or beneath the layer 1 & 2 protocols and are responsible for the interconnection and interoperability of blockchain networks.
In the future, these layers will likely be able to do more than just scale and connect, and I would not be surprised to see layer 4s, 5s, and more as new innovations and use cases roll out. Just as the internet itself is built on layers starting with web 1, web 2, and the web 3 that we find ourselves currently on the cusp of, blockchain will also evolve in a similar manner in layers as new technologies and solutions build on top of existing infrastructure and framework.
Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.