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Key Takeaways

The blockchain trilemma highlights the difficulty that blockchain networks face when trying to balance security, decentralization, and scalability. 

There are multiple scaling solutions being explored to address such limitations. Some are focused on the main chain (Layer 1) while others focus on a separate chain (Layer 2).

Layer 1 scaling solutions refer to changes to the main blockchain architecture and rules to improve its performance (e.g., changing how consensus works or using sharding).

Layer 2 solutions are made of secondary frameworks built on top of a Layer 1 to help alleviate its workload (e.g., by handling transaction processing off the main chain).

The future of blockchain will likely rely on a mix of both systems, using Layer 1 for security and settlement while relying on Layer 2 for higher speeds and lower costs.

Introduction

The popularity of cryptocurrency continues to grow, bringing an influx of new users and transactions. While the revolutionary nature of blockchain is clear, scalability (a system’s capacity to handle increasing demand) remains a primary challenge. Public blockchains that prioritize decentralization and security often struggle to achieve high throughput.

This challenge is known as the blockchain trilemma, which states that it is difficult for a decentralized system to simultaneously achieve high levels of decentralization, security, and scalability. Typically, networks prioritize two at the expense of the third.

To solve this, developers have created different scaling approaches. Some solutions tweak the architecture of the main blockchain (Layer 1), while others operate on secondary protocols that run on top of the underlying network (Layer 2).

Layer 1 vs. Layer 2

The term Layer 1 refers to the foundational level of a blockchain architecture. It is the main network where transactions are finalized. Examples include Bitcoin, Ethereum, BNB Chain, and Solana.

Layer 2 refers to networks or protocols built on top of these Layer 1 blockchains. For example, the Lightning Network is a Layer 2 solution for Bitcoin, and Arbitrum is a Layer 2 for Ethereum.

Scaling improvements are categorized based on where they occur:

A Layer 1 solution changes the rules or mechanisms of the base blockchain directly (e.g., changing the consensus mechanism).

A Layer 2 solution uses an external, parallel network to facilitate transactions away from the main chain to reduce congestion.

Common Layer 1 Scaling Solutions

1. Consensus mechanism

Some blockchains are switching from slow, energy-heavy systems like Proof of Work (PoW) to more efficient ones like Proof of Stake (PoS). For instance, Ethereum moved to PoS to improve its ability to process data and be more eco-friendly. This method uses staking (locking up coins) instead of mining to verify transactions.

2. Sharding

Sharding is like breaking a large database into smaller, easier-to-manage pieces called "shards". So, instead of having every computer on the network doing all the work, the work is split up. This allows the blockchain to process multiple transactions at the same time, increasing overall efficiency.

3. Block size increases

Some blockchains simply increase the size of the blocks. This lets more transactions fit into a single block. However, this can make it harder for regular computers to run as validating nodes in the network, which might hurt decentralization.

Common Layer 2 Scaling Solutions

1. Rollups

Rollups are currently the most popular scaling solution for Ethereum. They "roll up" (bundle) hundreds of off-chain transactions into a single batch before submitting them to the main chain.

Optimistic rollups: Used by networks like Optimism and Arbitrum, these assume transactions are valid by default. They offer a "fraud-proof" period where invalid transactions can be challenged.

Zero-knowledge (ZK) rollups: Used by networks like zkSync and Scroll, ZK rollups use cryptographic proofs to verify the validity of transactions instantly. They offer high security and privacy without the need for a dispute period.

2. Sidechains

Sidechains are independent blockchains with their own sets of validators. A prime example is the Polygon PoS network. Unlike rollups, sidechains are responsible for their own security. While they are often faster and cheaper, they do not directly inherit the security of the main Layer 1 chain in the same way rollups do.

3. State channels

A state channel is a two-way communication environment between participants. Users transact off-chain as many times as they like, and only the opening and closing balances are recorded on the blockchain. The Bitcoin Lightning Network operates on this model, allowing for instant, low-fee Bitcoin payments.

4. Nested blockchains

In this setup, the main blockchain gives work to "child" chains. The child chains do the work and send the results back to the "parent" chain. The Plasma framework on Ethereum is an example of this.

Layer 1 vs. Layer 2: Key Differences

Both layers want to make the network faster, but they do it differently.

Feature

Layer 1

Layer 2

Purpose

Operates as the base source of truth and settlement layer.

Designed to increase throughput and reduce fees for the base layer.

Method

Changes the protocol rules (e.g., sharding, consensus).

Offloads processing to an auxiliary network or application.

Security

Relies on its own decentralized consensus mechanism.

Typically relies on the main chain for security and data availability.

Complexity

Upgrades can be difficult and require network-wide consensus (forks).

Can be implemented and upgraded more flexibly without disrupting the main chain.

Limitations of Scaling Solutions

Layer 1: Upgrading the main chain is difficult. Major changes, such as increasing block size or changing consensus, often require a hard fork, which can split the community.

Layer 2: While fast, L2s can add complexity. Users have to bridge funds between networks, and liquidity can become fragmented across different L2s. Additionally, some L2s rely on centralized sequencers, which introduces a potential point of failure compared to the decentralized main chain.

Closing Thoughts

The blockchain world is growing fast. To handle mass adoption, we need networks that are both secure and fast. Layer 1 upgrades like sharding are important for the long term. However, Layer 2 solutions offer the speed and low costs we need right now. Going forward, it will likely be more common to see a mix of both: a strong Layer 1 for security and flexible Layer 2 networks for everyday transactions.

Further Reading

What Is the Blockchain Trilemma? 

What Are Zk-Rollups? The Layer-2 Scalability Technique 

What Are Bitcoin Layer 2 Networks? 

What Is Sharding and How Does It Work? 

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