Welcome, Cryptonaut, to the subsequent step in your journey to understanding the wacky and fantastic world of crypto. I do know this business can appear overwhelming and sophisticated at occasions, however it doesn’t need to be once you take issues one step at a time. Getting a agency grasp on the core ideas is a good way to start out, and that’s precisely why we will likely be masking every thing you want to find out about layer 1 blockchains on this article at present.
To make crypto much more complicated, this business can also be recognized for making up goofy phrases like hodl, GameFi, DeFi, CeDeFi, DApp, Tokenomics, Satoshi, moonbags, and extra to make your head spin. Then, the subsequent factor somebody begins speaking about layer 0, layer 2, and layer 3, once you didn’t even know there was a layer 1, or Jack Dorsey begins speaking about Web5 after we haven’t even understood Web3 but!
Fret not although, my crypto mates. Crypto is nice within the sense you could nerd-out and go as deep and technical as you need in the event you take pleasure in a brain-busting problem, or, in case you are extra like me with a banana-level IQ and as soon as received caught staring on the wet-floor signal at an artwork gallery attempting to determine if it was artwork or not, we will break this down into simple to digest items.
To assist get you caught in control, you may additionally take pleasure in our articles:
What’s Bitcoin
What’s Ethereum
What’s Blockchain Expertise
What are Ethereum Sensible-Contracts
What’s Net 3.0
Disclaimer: I maintain lots of the cryptocurrencies talked about on this article as a part of my private crypto portfolio.
And now, with out additional ado, let’s clear up some confusion and canopy what layer 1s are.
What’s a Layer 1 Blockchain?
Layer 1 might be regarded as the core layer, or the blockchain itself. I may also make a fast notice that the phrases “blockchain network” and “blockchain protocol” refers back to the identical factor and the phrases are sometimes used synonymously.
A straightforward solution to determine a layer 1 protocol is whether or not or not it has a coin on the community. Bitcoin is a coin, Ethereum is a coin, identical goes for Cardano, Solana, NEAR, Avalanche, VeChain, Theta, and many others. These are all layer one blockchain protocols with a local token, lots of which might help good contracts, DApps, and different tokens.
There are a whole bunch of layer 1 blockchains, too many to call all of them right here. In response to Chainalysis, listed here are the highest ten layer 1 blockchains by market cap:
Many may argue in opposition to the inclusion of Polkadot and Cosmos in that checklist. Whereas these blockchains do share many traits and match the definition of a layer 1 protocol in lots of regards, some would take into account these networks extra appropriately labeled as a layer 0 and layer 3 community respectively, as a consequence of a few of their traits. We’ll focus on that extra in-depth later.
Anyway, a layer 1 blockchain protocol is the foundational blockchain community accountable for on-chain transactions and core performance. The layer 1 blockchain is the underlying core structure upon which different options, DApps, good contracts, and even different chains might be constructed.
Completely different layer 1 blockchains are designed and optimized for various objectives. Bitcoin was designed to be a peer-to-peer foreign money for easy, trustless transactions and to be a retailer of worth, whereas Ethereum was the primary blockchain to include good contract performance and DApps and could possibly be used to create tokens that run on the identical community.
Here’s a visible that helps clarify a few of the variations between Bitcoin and Ethereum:
Then there are the opposite good contract layer 1 protocols that immediately compete with Ethereum resembling Solana, Cardano, Avalanche, and a plethora of others. Some layer 1s concentrate on worldwide funds, resembling Ripple and Stellar, some concentrate on interoperability, resembling Polkadot and Cosmos, whereas tasks resembling Theta concentrate on the way forward for video streaming, VeChain focuses on provide chain logistics, and so forth. So, you possibly can see that there are completely different layer 1 blockchains designed for various jobs, and the competitors is fierce.
Actually, if we check out DeFi Llama, a well-liked web site that tracks good contract-enabled blockchain protocols and DApps, there are 130 Ethereum rivals listed. It is very important perceive the vastness and significance of Ethereum as a layer 1 protocol because it presently has over 58% market share dominance over your complete DeFi business:
As large as Ethereum is, with over $40 billion in complete worth locked on the time of writing, even ETH is eclipsed by Bitcoin:
Although regardless of the depth of those belongings, Bitcoin, Ethereum, and practically each different cryptocurrency face a problem that dangers the very way forward for their utility.
Layer 1 Protocols: The Scaling Drawback / The Blockchain Trilemma
There are a lot of points in crypto that we’re all conscious of. There are DeFi hacks, scams, rug-pulls, worth volatility, and Warren Buffet thinks that Bitcoin is silly.
These are all points that give the business a black eye, and whereas they’re unlucky, there may be one challenge that’s bigger than all of these and threatens the viability of Blockchain expertise at its core and in its very design idea. This challenge rots the very seed of layer 1 blockchain protocols and threatens the longer term use of the expertise.
This challenge is scalability, and it has confirmed to be essentially the most tough downside in crypto to resolve. We have to perceive this challenge earlier than we will perceive why there are completely different protocol layers and tech constructed on prime of some blockchain protocols.
This challenge is often known as the Blockchain Trilemma. The Blockchain Trilemma was first coined by Ethereum co-founder Vitalik Buterin and proposes a set of three fundamental targets that exist in any layer 1 protocol. For a crypto community to be helpful, in keeping with Vitalik, and most within the business, a blockchain wants to satisfy these three necessities:
- Decentralization– Quite than being managed and managed by a single authority or entity, blockchains ought to distribute management of the community to individuals.
- Safe– Safety is paramount in blockchain, and every community needs to be impervious to hacks and stop malicious actors from taking management of the community or altering transactions and historical past.
- Scalable– Blockchains want to have the ability to help an infinite quantity of transactions and exercise quantity with out a rise in transaction occasions or charges.
Builders face the problem that when constructing blockchains, one of many three typically must be sacrificed as a trade-off to realize the opposite two.
A great instance of that is Ethereum, which is very decentralized and extremely safe, although it isn’t scalable in any respect with its gradual affirmation occasions, low transactions per second, and excessive fuel charges.
Examine this to Binance’s standard BNB Chain (beforehand often called the Binance Sensible Chain), which is safe and really scalable. It’s a extremely environment friendly blockchain with lightning-fast transactions and low charges, however it’s severely centralized, which is the antithesis of what many consider cryptocurrency needs to be.
Here’s a take a look at these two layer 1s aspect by aspect:
Anyway, again to the scaling trilemma. The difficulty of not with the ability to make a blockchain community that’s decentralized, safe, and scalable, has led to a number of improvements and a various vary of layer 1 and layer 2 options to beat these challenges to unravel the trilemma.
A layer 1 answer is one that’s constructed immediately inside the core protocol itself. All of the transactions and transaction historical past are processed on-chain, in real-time, and no off-chain options or sidechains are required. Layer 2 options contain processing transactions off-chain, then broadcasting to the primary chain at periodic intervals decided by the protocol. This enables for a lot of the amount to be dispersed and dealt with in batch transactions or on aspect chains.
The one community that I’m conscious of that claims to have resolved this trilemma with out using layer 2s is Algorand. You’ll be able to be taught extra about this extremely superior, spectacular and highly effective community in our Algorand overview.
Alright, so we all know that scalability is without doubt one of the most tough points to beat and is the first criticism in opposition to blockchains like Bitcoin and Ethereum. Neither protocol is able to supporting a worldwide monetary fee or web infrastructure by itself. At their core layer, neither community can course of sufficient transactions per minute, and the charges are too excessive to make them viable world infrastructure options, which is why the extra layers are wanted.
The primary answer to sort out the scalability challenge is the introduction of layer 1 options. A layer 1 answer improves the bottom protocol itself to make the general system extra scalable. The 2 approaches right here to make the bottom protocol extra environment friendly are issues like consensus protocol choice and sharding.
Consensus Protocol
A number of completely different consensus protocols are being examined out and tried on completely different networks. Every has its professionals and cons, and are fairly completely different from a technical perspective. Whereas there are too many to cowl all of them right here, I’ll point out the primary two.
Proof-of-Work– This was the primary consensus protocol that was launched and is the consensus protocol utilized by the likes of Bitcoin, Litecoin, Ethereum, Dogecoin, and extra. Now, you could be listening to all kinds of discuss Ethereum 2.0 or the Ethereum merge, and that is referring to the truth that Ethereum is transitioning from Proof-of-Work (PoW) to Proof-of-Stake (PoS). I received’t go into element on that right here, however Man has this nice video the place he sums up precisely what is going on with the Ethereum merge:
PoW is used to realize each consensus and safety and makes use of miners to decode complicated cryptographic algorithms to provide blocks that get added to the blockchain and mine extra tokens. The PoW consensus mechanism struggles from three key shortfalls: It’s typically slower than PoS, isn’t scalable, and is useful resource intensive.
You’ll be able to be taught extra about PoW and Bitcoin mining in our article on Bitcoin mining
Proof-of-Stake– is a mechanism that makes use of a distributed consensus over the blockchain community and permits customers to authenticate block transactions on the premise of their stake. Proof-of-Stake makes use of validators as an alternative of miners, and cash might be staked by individuals to safe the community. PoS is extra environment friendly than PoW when it comes to transaction speeds, requires much less power, and has decrease charges, however is arguably much less safe and might endure from centralization points.
There are a lot of various kinds of consensus mechanisms resembling Proof-of-Authority, Proof-of-Capability, Proof-of-Burn, Proof-of-Historical past, Delegated Proof-of-Stake, Pure Proof-of-Stake, and others, however the primary two are Proof-of-Work and Proof-of-Stake. Fashionable layer 1 protocols that use PoS are Cardano, BNB, VeChain, Circulation, Tezos, Avalanche, Theta and a whole bunch extra.
If you wish to be taught extra concerning the completely different consensus mechanisms, Man covers them right here:
The consensus mechanism chosen by completely different layer 1 blockchains is step one that can decide lots of the core features and options of a community. The consensus mechanism prevents dangerous actors from intentionally dishonest the blockchain with double-spend assaults, and determines the issue of proposing new blocks, which ends up in issues like transaction throughput and TPS. The consensus mechanism additionally concurrently incentivizes the nice nodes to suggest blocks to be accepted.
The consensus mechanism is actually a fault-tolerant mechanism used to realize settlement, belief, and safety throughout the community, whereas dictating the community’s core layer sustainability and scalability.
Sharding
Now, earlier than you begin guffawing like a schoolgirl, sure, sharding is an actual time period and methodology used for scaling on the layer 1 stage. Sharding is an method that entails breaking apart a community right into a sequence of separate database blocks often called “shards.” This basically makes the blockchain extra manageable and eases the necessities for all of the nodes to course of transactions to be able to preserve and run the community.
Blockchain blocks want to carry a whole lot of data such because the sending and receiving data, and in lots of instances, your complete blockchain historical past, so there may be a whole lot of information that must be transmitted in every block. By sharding and breaking apart the community, these blocks now have much less information that must be transmitted and processed, leading to quicker and extra environment friendly transactions.
Right here is a superb visible displaying how sharding works from the paper: Constructing Blocks of Sharding Blockchain Techniques: Ideas, Approaches, and Open Issues
These shards are processed in a parallel sequence and permit for elevated processing capabilities and capacities. Now, it’s good to say that whereas many networks are implementing sharding options, a lot of that is theoretical and regarded experimental. Do not forget that blockchain expertise remains to be new, and like monkeys studying how you can use instruments, we too, are nonetheless basically throwing spaghetti on the wall and seeing what sticks.
So, the consensus mechanism and sharding are the 2 key methods to realize scalability to a level on the layer one protocol, although these strategies have their limits, which is why layer 2 options have been applied. There are a lot of layer 1 protocols which are utilizing superior sharding mechanics to keep away from the necessity for scaling options altogether.
One of the superior layer 1 protocols that’s utilizing extremely superior cryptographic options to realize scalability immediately inside the protocol with out the necessity for layer 2 options is Cardano. Yow will discover out extra about what makes Cardano one of the superior networks in our Cardano Deep Dive Article.
One other attention-grabbing blockchain protocol that makes use of sharding as a solution to keep away from reliance on layer 2 scaling options is Elrond. Elrond makes use of a mix of Safe Proof-of-Stake (SPoS) consensus mechanism, together with Adaptive State Sharding to realize a theoretical transaction output of 100,000 TPS.
Layer 2 and Past
Layer 2 can also be sometimes called layer 2 scaling options as a result of it goals to sort out the problem of scaling. Layer 2 refers to a secondary framework or protocol that’s constructed on prime of an current blockchain, and permits for transactions to be processed off the primary chain to assist distribute workload and keep away from bottlenecks and congestion.
As talked about, the consensus mechanism and sharding can solely take a undertaking thus far, which is why many tasks have been developed to assist a blockchain scale. Essentially the most outstanding of those exist on Ethereum. Here’s a take a look at the Ethereum layer 2 scaling answer ecosystem:
As Ethereum is, by far, essentially the most used community with essentially the most DApps and use instances, there was an intense want for scaling options to roll out on Ethereum ASAP. Layer 2 scaling options are fairly complicated, and we will’t go into deep technical element about them right here with out turning this text into textbook size, however essentially the most notable layer 2 scaling options for Ethereum are:
Zk rollups– that are utilized by tasks like Loopring and Polygon Hermez.
Optimistic rollups-used by the likes of Arbitrum and Optimism.
Validiums– Utilized by tasks like DeversiFi and Immutable X.
State Channels– Utilized by tasks like Raiden Community and Liquid Community
Nested Blockchains– Resembling Ethereum’s OMG Plasma Community
One other scaling answer whereas we’re on the subject, is the utilization of Sidechains. Sidechains are Ethereum-compatible blockchains that help the Ethereum Digital Machine (EVM). Sidechains can function an exterior execution layer for Layer 1s like Ethereum, and essentially the most outstanding sidechain answer for Ethereum is the Polygon (MATIC) community.
To present you an concept of how Polygon works, right here is an efficient diagram from Coin Central
For a deeper look into Polygon, be happy to try Man's video: Can Matic with the ETH scaling race?
Plasma chains are additionally a reasonably new introduction to scaling options and depend on fraud proofs like optimistic rollups however preserve information availability off-chain which helps with transaction throughput. You’ll be able to be taught extra about Ethereum's completely different scaling options right here:
Additionally it is vital to level out that Bitcoin’s Lightning Community can also be thought of a layer 2 scaling answer as it’s a second protocol constructed on prime of Bitcoin’s base protocol. The Lightning Community falls underneath the State Channels class and permits Bitcoin for use significantly extra effectively and successfully as a worldwide fee community. This has allowed Bitcoin to realize considerably larger scalability and throughput.
You’ll be able to be taught extra about Bitcoin’s Lightning Community and why it might be a very powerful improvement in crypto for the reason that creation of Bitcoin itself from Man's video: Bitcoin Lighting Community, What you Have to Know!
So, that covers the nuts and bolts about what layer 1s and layer 2s are, however have you ever been listening to the time period layer 0 thrown round?
This one is a bit humorous and never everybody agrees with the time period. Very like in the event you ask two folks to outline the web, you’re going to get two completely different solutions, some consider within the layer 0 idea, whereas others aren’t satisfied. The idea is kind of easy, and I personally assume it is smart to check with some protocols as layer 0, whereas others would classify these as layer 1s.
Permit me to elucidate:
There are a lot of of us who consider that the way forward for blockchain expertise will likely be multi-chain, that it’s going to not be a single protocol winner takes all state of affairs. Many Ethereum maxies consider that the longer term will likely be constructed on Ethereum and every thing else will fail, whereas others consider that simply as Microsoft and Apple exist at present, a number of layer 1s will exist sooner or later and concentrate on completely different duties and industries.
If we take a look at all of the completely different use instances for blockchain, I feel it’s fairly clear that the world of Net 3 will likely be sufficiently big to include a couple of layer 1 blockchain protocol:
As we speak, computer systems and telephones, no matter their producer or working system can work together with each other due to the functions constructed on prime of the working system. Many consider that crypto blockchains would be the identical, that networks like Ethereum, Cardano, Solana, and others will all exist and be used for various features and functions, but nonetheless be capable to talk with each other.
If that is the course we’re going, one thing might want to occur to permit these presently siloed networks to have the ability to combine with each other.
That is the place attention-grabbing and progressive tasks like Polkadot come into play. Polkadot is engaged on turning into the blockchain of blockchains and connecting completely different layer 1 blockchains to allow them to talk. Many individuals within the crypto area check with Polkadot as a layer 0 protocol for that purpose, as will probably be constructed beneath layer 1s in a way, and capable of join them as they sit and construct on prime of the 0 layer.
You’ll be able to be taught extra about Polkadot in our Polkadot article.
Then we get into Layer 3, which can also be involved with interoperability as is layer 0. Word that there isn’t any single authority who creates these phrases or determines their utilization, so you could hear these phrases and tasks labelled in another way. That is merely my take as that is what is smart to me, and what I’ve realized from following the area.
Layer 0 and Layer 3 are sometimes used to explain the idea of connecting blockchains. Some declare that interoperability is constructed under the layer 1, and a few declare that the interoperability protocols are constructed on prime of the layer 2 scaling options, which is how we arrive on the numbers 0 and three.
In essence, they will each be correct, however for me, I consider we might be extra correct because the distinction lies inside the protocol structure. The layer 3 protocols are mainly options for empowering completely different blockchain networks with cross-chain capabilities, permitting them to work together with each other with out intermediaries or custodians.
Some examples of layer 3 options are the likes of the Interledger Protocol (ILP) for Ripple, the Inter-Blockchain Communication Protocol (IBC) of Cosmos, in addition to tasks ICON and Quant.
Cosmos is the chief within the layer 3 area and is an extremely superior and attention-grabbing undertaking because it acts as a communications protocol, a sidechain by way of the Cosmos SDK, and is the chief within the interconnectivity race by way of the Cosmos Hub. Cosmos has already made nice strides within the connectivity between Ethereum, the Crypto.com Cronos chain, BNB Chain, and extra.
You’ll be able to dive deeper into Cosmos (ATOM) in our devoted Cosmos article, or watch Man’s protection on Cosmos on the Tube.
Can Self-Contained Layer 1 Blockchains Survive?
We coated how some tasks like Cardano, Algorand, and Elrond select distinctive and superior cryptographic options to scale on the layer 1 stage, whereas different Layer 1s like Ethereum and Bitcoin depend on layer 2 options to dump a few of the site visitors and congestion onto sidechains and course of transactions off-chain.
Different networks which have taken the self-contained route and make the most of superior consensus mechanisms on the layer 1 stage to scale are the likes of Solana, THORChain, Avalanche, Fantom, Tron, Radix and others.
The reality is, we have no idea which methodology will win out in the long term… Heck, as a neighborhood, we will’t even determine whether or not Proof-of-Work or Proof-of-Stake consensus mechanisms are superior but. A current report launched by Kraken Intelligence sums up the strengths of PoS vs PoW properly:
Whereas individuals are fast to argue that Proof-of-Stake is the longer term and level to protocols like Solana and Avalanche as proof, a vital factor to recollect is that not a single community has been stress-tested like Ethereum has.
We have no idea if layer 1 options will be capable to deal with the quantity of quantity skilled by Ethereum. We probably received’t know this for a few years, or we could probably by no means know if Ethereum continues its domination of layer 1s, as no decentralized community comes near matching the full worth locked and transaction numbers that Ethereum experiences.
Although we’ve already begun to see cracks within the armor of networks like Solana and Avalanche that present they aren’t able to scale to Ethereum’s stage but. As quickly as community exercise began choosing up, Solana skilled a number of outages this yr, and we noticed the charges on Avalanche begin to creep up when complicated transactions had been carried out.
In contrast to Solana, Ethereum has by no means skilled an outage, and although the price improve on Avalanche was nowhere close to the excessive charges seen on ETH, AVAX solely skilled a fraction of the exercise quantity of Ethereum. It’s unknown how any community will fare underneath related market circumstances.
This leads many to consider that layer 2 scaling options are the required future, however that isn’t to say that sharding and different layer 1 options can’t be pretty much as good because the layer 2 options, simply that none have been developed but which have confirmed themselves. The 2 networks which are making essentially the most important and superior technological strides within the layer 1 scaling race are Cardano and Algorand, and all eyes will likely be on these networks to see how they are going to cope in the event that they begin to see a fraction of the site visitors as we see on Ethereum.
Summing all of it up
So, as you now know, the layer 1 blockchain protocol is the primary blockchain community accountable for on-chain transactions and core performance. Layer 1s embrace networks like Bitcoin, Ethereum, Cardano, Solana and many others. Layer 2s are scaling options which are accountable for performing off-chain transactions to place it merely, and might embrace issues like optimistic rollups, Zk rollups, and even sidechains. These embrace protocols like Polygon, Artbitrum, Optimism, and the Bitcoin Lightning Community.
Then we get into layer 0s and layer 3s that are constructed on prime of or beneath the layer 1 & 2 protocols and are chargeable for the interconnection and interoperability of blockchain networks.
Sooner or later, these layers will probably be capable to do extra than simply scale and join, and I’d not be stunned to see layer 4s, 5s, and extra as new improvements and use instances roll out. Simply because the web itself is constructed on layers beginning with net 1, net 2, and the online 3 that we discover ourselves presently on the cusp of, blockchain may also evolve in an identical method in layers as new applied sciences and options construct on prime of current infrastructure and framework.