What is blockchain layer 1?
Blockchain layer 1 is the traditional Ethereum blockchain that has been around since 2015. It was first used as a crowdfunding tool via ICOs, which helped its development by raising Ether to fund the projects. It functions on the proof-of-work consensus mechanism, which uses miners to validate transactions and produce new blocks for the chain, with rewards coming in the form of Ether.
The Ethereum blockchain is also revolutionizing the current status quo of digital data, given its decentralized nature and the ability to store computer programs on it. This has led to countless developers working relentlessly on smart contracts, which will eventually lead to mass adoption of blockchain technology.
What is blockchain layer 2?
Blockchain layer 2 crypto is an off-chain scaling solution that enables high transaction throughput, practically eliminating any concerns of clogging the network. They are independent networks designed to help Ethereum run thousands of decentralized applications at scale by using innovative technology such as state channels and plasma. Examples include Truebit, Raiden Network, FunFair, Counterfactual, OmiseGo, 0x, Kyber Network and more.
How do blockchain layer 1 and blockchain layer two function?
Blockchain layer 2 crypto is independent of blockchain layer 1but they are designed to work with each other. For example, an Ethereum-based game running on the blockchain would require users to pay Ether for playing the game. This Ether would go to the players, followed by a transaction fee that is paid to the miner.
A state channel or payment channel can be created between two users that wish to play the game over and over again. This enables each user to only send their moves off-chain securely rather than broadcasting it on blockchain layer 1 for every single move. Although the blockchain is still used to record each move, it does not cost gas for users to make these moves. This way, players can play as much as they want with only a small fee being paid at the end of the day rather than a larger fee every single time.
In this example, blockchain layer 1 is unaffected by the state channel between the two users. It only records what is happening externally, without having to be involved in every single move made.
How are blockchain layer 1 and blockchain layer two connected?
Blockchain layer 2 crypto solutions are being built for Ethereum to handle transactions 1 on it. They can be used by games, financial companies or other applications that would require high throughput. Eventually, as more and more decentralized applications are built on Ethereum, networks could start to get congested as there is only a certain amount of data that can be included in a block. This will lead to blockchain layer two scaling solutions being used so the blockchain does not have to process everything happening within it.
The importance of a blockchain layer two with layer 1?
Ethereum can only function as intended if it has implementations of blockchain layer 2 crypto to help maintain the integrity of the network. They are designed to be compatible with each other and work together hand in hand, without sacrificing decentralization. Although many believe that having both technologies working simultaneously is not necessary, it remains possible given its benefits. There exists a possibility of having both blockchains function as a whole and work simultaneously, thus creating an optimal environment for developers and the user base.
The blockchain layer two is a solution for scalability issues
As seen in the example above, blockchain layer two can be used to handle players moving in a game efficiently and off-chain. This prevents congesting the network and slowing down transactions occurring within it. Although scaling may happen with current implementations of blockchain layer 1, they will inevitably reach their limit and lead to users having to wait for transactions or fees rising immensely.
Raiden Network illustration
Blockchain layer 1 records all transactions occurring on-chain. On the other hand, blockchain layer 2 crypto facilitates payments between users without having to record every single one of them on blockchain layer 1. Although it is an independent blockchain, they are designed to work with each other.
Blockchain layer 1 facilitates all activity happening on the Ethereum network. It should be noted that it should not be compared to other cryptocurrencies’ blockchains. For example, Bitcoin’s blockchain only records transactions of its native token, BTC, while blockchain layer 1 records everything that happens on the Ethereum network. In this sense, it is protocol-level as opposed to a cryptocurrency’s blockchain. For blockchain layer 1 to work as intended, implementations of blockchain layer two must be used as well.
Although blockchain layers one and two are independent of each other, they still work hand-in-hand to provide a faster and more secure transaction experience. Without having to record every single move and transaction on the blockchain, users can enjoy higher throughput with lower fees for transactions. This opens up the door for new applications that require high-frequency use but cannot afford extremely high fees. Eventually, as more people start to use Ethereum and decentralized applications appear on it, blockchain layer two will be needed for the network to handle all of it efficiently.