What is Blockchain? Normally, when processing a transaction or signing up for a contract, you will need an intermediary to facilitate the process. For instance, when paying for your groceries using your card, a payment processor like Visa or Mastercard settles the payment if you have enough balance or are within your credit limit. Otherwise, your card is declined.
Now, imagine that you could pay the grocer digitally, without Visa or Mastercard. This is possible on the blockchain. Simply, a blockchain is a digital record of transactions that is shared with all users to verify and validate all transaction requests by other users. So, when you request to pay the grocer on the blockchain, users on the network will verify from the records that you have enough balance to settle the transaction and approve the payment. Blockchain’s distributed governance of authority to users is termed decentralization.
Blockchain’s Scalability Problem Despite blockchain’s many benefits, the technology has serious problems with scalability – that is, the network’s ability to increase its rate of processing transactions. As blockchain becomes popular, the growing number of users request more transactions to be processed. Some blockchains’ infrastructure cannot scale up their capacity to meet these new demands, leading to network congestion which is notorious for causing high transaction fees on blockchains. Different blockchain platforms have resorted to building new layers on top of the existing framework, to resolve this scalability problem. These new blockchain layers provide scalability solutions for the underlying framework to enhance the platforms’ efficiency. Let’s review blockchain Layer 1 and Layer 2.
Blockchain Layer 1 and Layer 2 Picture a simple grocery store with a single attendant. In this shop, the grocer picks the items for you and checks you out as the cashier. When there are more customers, the grocer may be overwhelmed and congestion at the store results in delays and a bad shopping experience overall. This system is more centralized as the grocer does all the work.
To improve this system, the grocer may decentralize operations by allowing customers to individually pick items from the shelves, and employ more cashiers to help them check out. This upgrade is equivalent to Layer 1 blockchain solutions – the underlying platform, in this case, the simple grocery store, is restructured to scale it and improve the capacity of processing transactions.
Even then, as the store grows and receives more customers, the existing cashiers may fail to process checkouts faster, resulting in more congestion and poor customer experience. To resolve this problem, the store may install more self-checkout machines and create an online shopping platform so that customers do not have to go through the cashiers to pay for their groceries. This solution is equivalent to the Layer 2 blockchain.
More About Layer 2 Layer 2 blockchain is an overlaying solution that does not interfere with the underlying infrastructure, just like the self-checkout machines and online shopping platform do not interfere with the previous operations of the store. Like the store upgrade allows more customers to buy and pay for their groceries faster, Layer 2 blockchain offers more scalability to blockchain platforms.
These solutions make blockchains more convenient to users as they increase transaction rates per second, known as throughput. For instance, Ethereum blockchain’s Layer 1 can process about 15 transactions per second (tps), while Layer 2 solutions could offer up to hundreds of thousands of tps.
The Scalability Trilemma Despite the increased capacity of the grocery store to process more purchases, the store is exposed to more risks such as shoplifting via self-checkout points or cyberattacks on the online platform. Similarly, Layer 2 blockchains have to deal with the scalability trilemma comprising decentralization, security, and scalability. Layer 2 solutions can only fully leverage two of these features. In the case of the grocery store, it leverages scalability and decentralization, while leaving the platform vulnerable to security risks.
Summary Layer 1 and Layer 2 are solutions to scale blockchain platforms, increasing their capacity to handle more transactions as blockchains get popular. Layer 2 solutions run parallel to the existing framework, not interfering with the underlying Layer 1 operations, and are known as off-chains. However, these scalability solutions still have to make a trade-off between security and decentralization.