Blockchain

The popularity of cryptocurrency and blockchain has been growing exponentially, significantly increasing the number of users and transactions. This has caused infrastructural bottlenecks for blockchain network operations. To achieve mainstream adoption, the industry needs to look for solutions to resolve its scalability issues in order to cater to the burgeoning numbers of users, transactions and data.

Two of the main solutions employed by the industry include Layer 1 and Layer 2:

In this article, we’ll be exploring the 

, and how to help blockchains achieve scalability. 

 refers to the conundrum of a blockchain simultaneously achieving the following three characteristics:

It’s argued that any system can only achieve two out of the three characteristics, forcing it to give up on one.

Typically, blockchains have struggled with the blockchain trilemma. Let’s take a look at a few prominent examples.

Ethereum is decentralized and highly secure, with approximately 

 validators. It’s nearly impossible to attack Ethereum’s blockchain, as it would require an attacker 

 of the validators in order to compromise the network. However, this comes with a trade-off in scalability, which is why Ethereum’s network fees rocket during times of high activity.

In contrast to Ethereum, BNB Chain only allows a maximum of 

. It’s therefore apparent that BNB Chain isn’t decentralized. However, this allows it to achieve a high degree of security and scalability. 

The definition of the word “scalability” varies from expert to expert. However, at its core,

 refers to a system’s capacity to offer a rich experience to every user, irrespective of the total number of users at any given time.

 refers to the number of transactions a system handles per second. While companies/payment channels like Visa process nearly 20,000 

 with the VisaNet electronic payment network, Bitcoin’s

The difference in capacity might be shocking, but there’s a simple explanation behind it. Bitcoin adopts a decentralized system, while VisaNet runs on a centralized system. The former utilizes more processing power and time to safeguard the privacy of its users. Each data transaction has to go through multiple steps, including acceptance, mining, distribution, and validation by a node network.

With cryptocurrency expected to become an imperative force in the business world, blockchain developers are trying to increase the scope of blockchain handling. By creating blockchain layers and optimizing Layer 2 scaling, they want to speed up processing times and ramp up the number of TPS.

Let’s use Ethereum as an example. In blockchain technology, a consensus mechanism is a fault-tolerant system that allows agreements on a single network state in distributed nodes. These

 ensure that all nodes agree on transactions and are synchronized. This makes the Ethereum chain immensely difficult to overwrite or attack.

Due to the stability and security of Ethereum, the

 began, leading individuals to create cryptocurrencies and decentralized applications (

) on the blockchain. Consequently, there was an influx of users and an uptick in the number of transactions made on Ethereum. As the system became clogged, the transaction fee — or 

 paid to parties processing transactions on Ethereum’s network — increased.

When a blockchain network is clogged, pending transactions end up in the memory pool and take more time to process. To tackle this, miners start prioritizing transactions that have higher gas prices in order to confirm them. This further raises the minimum cost required to make a transaction.

The cycle of price increment gets to a point where gas fees skyrocket, making the situation worse for everyone. Layer 2 scaling is aimed at providing a solution to this problem and lowering the costs of transactions.

Layer 1s are the primary blockchain network on which other blockchains and DApps are built on. They are able to support transactions and operations that are conducted on the blockchain. To improve scalability, a Layer 1 will have to make direct changes to the blockchain’s code or architecture. Examples include enhancing the speed of block confirmation or increasing the data-containing capacity of a block.

Ethereum, Binance Smart Chain and Solana are the most prominent Layer 1s.

Let’s take a look at some Layer 1 scaling solutions.

 (PoW). Even though a PoW system is highly secure, it can be slow. This is because it requires substantial computing power to solve cryptographic algorithms. Ethereum started off with a PoW consensus mechanism, which led to severe network congestion when a large number of users came onto the Ethereum network.

Ethereum has since switched over to use a 

, and now processes and validates new blocks by consensus from the network. This switch has allowed Ethereum to change its speed from 

. This is achieved while retaining decentralization and security.

Layer 1 scaling solutions are usually introduced by the blockchain’s development team. Forking a chain means upgrading or adjusting a blockchain. There are 2 types of forks: 

Soft forks are architectural changes that are compatible with the existing blockchain. On the other hand, hard forks are changes to the blockchain architecture that is distinctly different from the existing one. 

, which helped increase the network’s performance from approximately 1,600 transactions per block to 3,000.

Whereas larger changes to be made to the blockchain, such as increasing Bitcoin’s block size to 8MB, requires a hard fork. This will create two versions of Bitcoin, one updated and one old network.

 is one of the scaling techniques that divides large transaction sets into smaller data sets known as "shards". The network processes these network shards concurrently in parallel, enabling sequential work on several transactions rather than having a network process each and every transaction sequentially. This is a faster and more effective mechanism.

Furthermore, rather than keeping a copy of the blockchain in its entirety, each network node is assigned to a certain shard. Individual shards exchange addresses, balances, and general states utilizing cross-shard communication protocols while also providing proofs to the mainchain.

Examples of blockchains that have integrated sharding are Ziliqa and Tezos.

However, it should be noted that Sharding is experimental and no Layer 1 has successfully implemented it yet.

A Layer 2 enhances the scalability and efficiency of a blockchain protocol by running on top of it. It will enable transactions away from Layer 1 using an external, parallel network.

To finish the transaction results, Layer 2s takes bundles of transactions from the main chain, processes them on their behalf, and then bundles the transactions back into Layer 1. The Layer 1 blockchain becomes less crowded and ultimately more scalable by abstracting the majority of data processing to auxiliary architecture.

Prominent examples of Layer 2s are Polygon, Optimism, Arbitrum, zkSync and Bitcoin’s Lightning Network.

Here are some of the Layer 2 scaling solutions.

Nesting is one of the Layer 2 scaling solutions whereby a blockchain protocol houses other blockchains within or on top. The nested blockchain architecture typically involves a main blockchain that sets rules and parameters for a broader network, while executions are undertaken on an interconnected web of secondary chains.

The nested chain comprises both parent and child chains. The parent chain will delegate to the child chains to perform the transaction. The transactions will be carried out by the child chains, who will then inform the parent chain of the outcome. The parent chain will provide Layer 1 with the outcome once the transactions have been completed. 

Unless it becomes required for dispute resolution, the underlying base blockchain does not participate in the network operations of nested chains. Because everyone is working together, it is one of the greatest scaling methods and is quicker. The division of labor in this paradigm lessens the processing load on the mainchain, improving scalability tremendously.

An example of this is the OMG Plasma Project, which acts as a Layer 2 blockchain for Ethereum to ensure cheaper and quicker transactions.

Two-way communication between a blockchain and off-chain transactional channels can be facilitated through a state channel. The state channel is essentially a network-adjacent resource which carries out activities using a 

 mechanism, without the need for validation by nodes of the Layer 1.

Transactions can be executed without having to submit transaction data to Layer 1. Once the transactions have been completed, the final state of the channel will be sent to Layer 1 for validation. This mechanism allows to improve transaction speed and increases the overall throughput of the network.

State channels feature unmatched speed and privacy. Without the need to route through third parties such as miners, state channels are one of the best existing scaling solutions.

Both Raiden Network on Ethereum and Lightning Network on Bitcoin are examples of state channels. Both of these use state channels that are executed by hashed timelock contracts (HTLCs). While the Lightning Network allows users to complete a lot of microtransactions in a short amount of time, the Raiden will also let users run smart contracts through their channels.

State channels like Lightning Network are also entirely secure, since only the participants know about the transactions. On the flip side, the Ethereum Layer 1 blockchain records all transactions in a publicly auditable ledger.

Large batch transactions frequently use sidechains, which are distinct blockchain networks with their own sets of validators (and consensus mechanisms), which coexist with a Layer 1 to improve its speed and scalability.

With a sidechain design, the Layer 1’s main responsibilities are to uphold general security, validate batch transaction records, and settle conflicts. Once the sidechain has finished processing transactions from the main chain, assets are locked. Also, the majority of sidechains have a federation or other independent third party that double-checks to see if there are any irregularities in the activities between the mainnet and the sidechain. Either smart contracts or a collection of humans can make up the federation.

Blockchain Layer 1 vs. Layer 2: The Essentials

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