Layer 1 vs Layer 2 vs Layer3 : Similarities and Dissimilarities need to know about different Blockchain Layer solutions

The Blockchain ecosystem provides a space for developers and investors alike. Every few years we notice a certain type of project that catches the eyes of investors that disrupts the whole ecosystem, seeming to provide the most value/ returns in the eyes of the investors. Oftentimes, as history has proven these projects are nothing but a mirage formed by complex mechanisms that prove no utility/ work in a way that seems valuable at first but is an implementation of something very simple once understood. Decentralized Autonomous Organizations are a recent ecosphere of projects that took over the industry- built over possibly every layer 1,layer 2 blockchain and layer3 blockchain.

A blockchain is a type of distributed database or ledger — one of today’s top tech trends — which means the power to update a blockchain is distributed between the nodes, or participants, of a public or private computer network. This is known as distributed ledger technology.Decentralization, scalability, and security are the three main goals for any Blockchain network. As emphasized by Vitalik Buterin, networks may only provide two of these functions and not three at the same time, this is referred to as the blockchain Trilemma. For example, Bitcoin is great in areas of decentralization and security but suffers as regards scalability. Scalability seems the most challenging and a major concern for Bitcoin and other layer1 blockchains.

Scalability refers to the ability of the network to perform multiple transactions in a second, this is often represented as throughput. As more and more transactions are performed on the blockchain, the network becomes slower. There is a need to scale layer1 blockchain networks to achieve higher transaction throughput, so they can compete with centralized platforms.

Scalability continues to be a threat to global Crypto adoption, as congested networks give rise to astronomical gas fees, particularly in the Ethereum network. Ethereum processes about 15 transactions per second and even Bitcoin has recorded lower speeds of 7 transactions per second with a block confirmation time of 10 mins. These figures are nowhere comparable to Centralized payments like Visa and MasterCard which can handle thousands of transactions per second.

Modern blockchains and the solutions built on them are often represented by three main layers.The main goals for scaling layer 1 blockchain as well as building layer 2 and layer 3 blockchain are to decongest the main chain and improve transaction throughputs. The aim of this article is to draw the line between these three blockchain layers as it relates to effectively scaling the blockchain.

Layer 1 Blockchain

Layer 1 blockchain refers to the foundation or base layer. It is the main or underlying blockchain protocol and is usually limited by its slow consensus protocol and block time. Examples of layer one blockchain may include; Bitcoin, Ethereum, Solana, Cardano, Polkadot, Avalanche, Terra, Algorand, and Tron

Traditionally, Layer 1 blockchain like Bitcoin employs a proof of work consensus mechanism which involves miners solving complex mathematical problems to add a new transaction to the blockchain. This can be slow, resource-intensive, and environmentally unfriendly, hence the need for a layer 1 scaling solution

Layer 1 scaling solutions like proof-of-stake consensus mechanism and sharding are applied in layer 1 blockchain to achieve higher throughputs. Proof of stake is a consensus mechanism that involves cryptocurrency owners staking their coins to be able to verify transactions and add a new block to the chain. POS generally increases transaction speeds, unlike the Proof-of-work mechanism.

Sharding is also a scaling solution for the layer 1 blockchain and this involves breaking down the blockchain network into smaller components to enable higher transaction speeds or throughput.

Layer 2 Blockchain

Layer 2 blockchains are built on top of the existing layer 1 infrastructure to achieve increased transaction speeds or throughput. They execute transactions off-chain and take some pressure off the main blockchain. Some examples of layer 2 blockchains are polygon, X-dai, Immutable-X, Arbitrum, Loopring

Layer 2 blockchain has a different scaling solution from layer 1 and this includes; State channels, Sidechains, and Rollups

State Channel

State channels are 2-way communication between 2 users or nodes in a network. This is conducted via smart contracts and the users are able to do micro transactions between themselves, afterward the final state of the transaction is added to the blockchain. This speeds up the transaction as it does not include the main network, for example, Bitcoins’s lighting network, Ethereum’s Raiden network, and the liquid network.

• Lightning Network

Bitcoin’s lightning network is built to facilitate peer-to-peer transactions, it has its own nodes separate from the regular Bitcoin nodes and does not record all transactions on the Bitcoin blockchain. Lightning Network is quite fast and does not require one to wait a long time to verify a transaction. For example, two users can do a series of micro transactions before submitting the finality to the main chain, saving on transaction fees.

• Raiden Network

Ethereum’s Raiden network is built on top of the Ethereum blockchain, it offers higher speeds and low fees. They work with any ERC20 compatible token.

Sidechains

Sidechain transactions are off the main chain but are publicly recorded, unlike state channels which are private, Sidechains have their own miners and are responsible for their own security. Although side chains offer a lower degree of decentralization, they help to speed up transactions by taking some burden off the main chain, they also have an independent method of consensus. Examples of Sidechains include; Ethereum plasma and Bitcoin’s liquid network.

• Liquid Network

Liquid Network is built on Bitcoin’s layer 1 blockchain and they enable fast as well as confidential transactions. They are utilized for the issuance of stable coins as well as arbitrage, also, they are used mainly by traders and crypto exchanges. In the Liquid network, blocks are signed by 15 Liquid functionaries who verify transactions and create blocks. These functionaries are decentralized and are similar to nodes in a Bitcoin network.

• Plasma Network

Plasma Network is a side or child chain of the Ethereum blockchain. They are built to run smart contracts as copies of the main Ethereum chain, so they can decongest the main chain.

Rollups

Rollups generally move computation off-chain but keep data on layer 1 blockchain. There are two types of Rollups with very different security models; Optimistic and ZK rollups. While optimistic rollup assumes by default that all transactions are valid and only does computation when fraud is suspected. In ZK rollups, no such assumption is made, instead, computation is done and validity proofs are submitted to the main chain.

Polygon is an example of ZK rollups built on the Ethereum blockchain. It is an Ethereum virtual machine (EVM) compatible Sidechain, scaling and powering about 7000 DApps.The great thing about Polygon is that it offers lower gas fees than the Ethereum network.

Layer 3 blockchains

Layer 3 blockchains are called the Application layer, they host the decentralized applications (DApps) and their protocols. The application layer may consist of APIs, User interface (UI), scripts, and smart contracts. Ethereum’s tools, popularity, security, and the speed at which one can launch a project is the reason why it remains the leader and continues to dominate DApps development. Some of the DApps on the Ethereum blockchain include; Yearn. finance, Uniswap, Foundation, and Dark Forest.

Layer 1 vs layer 2 vs layer 3 blockchain

In summary of this article ,Layer 1 blockchain refers to the underlying blockchain architecture.Layer 2 blockchain refers to various protocols that are built on top of layer 1 to improve the original blockchain’s functionality.Layer 3 is represented by blockchain-based applications, such as decentralized finance (DeFi) apps, games, or distributed storage apps.