Before you start reading this article, do check out my previous articles to get a basic understanding of what a blockchain is and how it works.

What is Bitcoin?

What is Ethereum?

These articles are here to help crypto beginners to get a basic understanding of cryptocurrency. It is not written for experts with advanced knowledge and it definitely will not make you an expert as well.

If you have just started digging into the rabbit hole of cryptocurrency, chances are that you will have heard of terms like Layer-1 & Layer-2 protocols. In this article, we will explore what these layers are, and why they are needed.

As blockchains continue to revolutionise the world with its decentralised network, it is faced with a unique challenge known as the Blockchain Trilemma.

The Blockchain Trilemma is a conundrum that all public blockchains face, where they must either sacrifice decentralisation, security or scalability.

Decentralisation is the backbone of every blockchain. It refers to the consensus mechanisms that blockchains uses to validate transactions instead of relying on third-party intermediaries. Some examples are the Proof-of-Work and Proof-of-Stake systems.

Blockchain security, similar to traditional IT systems, refers to the protocol’s defense mechanisms against malicious attacks on the networks. One popular type of such attacks is the 51% Attack.

Blockchain scalability refers to the blockchain’s throughput rate in processing transactions. In order for blockchains to overtake mainstream processing channels and be adopted globally, it must be able to match or exceed the current throughput rate of legacy systems.

Throughput rate — number of transactions per second (TPS)

A common example used to show the current difference in throughput rate is the comparison between Bitcoin & Visa. While Bitcoin is one of the most secure, decentralised networks, it can only process 7 TPS. On the contrary, Visa processes 1700 TPS. A huge difference there!

However, the Blockchain Trilemma tells us that if a public blockchain intends to pursue scalability, it will suffer a lapse in their decentralisation or security as a consequence. Hence, a new generation of blockchains and scaling solutions known as Layer-1, Layer-2 solutions are introduced to address this conundrum.

Layer-1 solutions basically refer to solutions that tackle the foundation layer of the blockchain itself. This foundation layer consists of the consensus mechanisms, programming codes, and the rules that govern and maintain the blockchain’s functionality.

Some Layer-1 solutions include the changing of rules in the blockchain, increasing the number of data stored in each block etc. The most popular solutions are:

Some consensus mechanisms are more efficient than others. For instance, the Proof-of-Work system used in Bitcoin is much slower than the Proof-of-Stake system used in newer cryptocurrencies such as Solana.

This is because Proof-of-Work requires computing power to solve cryptographic problems, but Proof-of-Stake only requires staking collateral from its participants.

That is also one of the reasons why Ethereum is slowly moving towards Ethereum 2.0, where it will adopt the Proof-of-Stake mechanism.

Sharding is one of the most popular Layer-1 solutions. It basically breaks transactions up into smaller chunks so that the network can split the computational workload across its nodes. At the same time, every shard retains its own unique data as proofs so that it can still interact with the mainchain and other shards.

Layer 2 solutions are 3rd-party integrations of networks that operate on the current underlying blockchain infrastructure to improve its scalability.

This process is very similar to outsourcing. The public blockchain passes some of their transactional burden to another system, which will then subsequently return the final result back to the blockchain after all the hard work is completed.

Some of the popular Layer-2 solutions include:

This solution entails having secondary blockchains (child) on top of the primary blockchain (parent). These blockchains have a parent-child connection, where the parent chain sets the parameters and the child chains execute the processes and reports back after completion.

One parent chain can have several child chains. This is similar to a typical organisational structure where the boss delegates a project to the subordinates after setting the project scope.

This distribution of work across multiple blockchains helps to improve scalability by reducing the transactional burden of the parent chain.

Sidechains are separate blockchains that are typically used for larger transactions. They work separately from the mainchain; They possess their own consensus mechanisms to help validate these transactions and any security breaches on the sidechain will not affect the mainchain.

Even though sidechains are independent, they cannot operate without a mainchain (much like a parasite-host situation).

Here is a short list of some projects that I am currently invested in.

This is not financial advice. Please DYOR before investing in any of these projects.

Hope this helps! Please feel free to leave a note if you have any burning questions to ask me. Thanks!

This is the 3rd article of my crypto series “What is xx?” where I try to summarise the limitless world of cryptocurrency. I hope this series will help people out in understanding a specific cryptocurrency and introduce more people to the world of cryptocurrency.If you haven’t already, do check out my 1st article on Bitcoin

Before you start reading this article, do check out my previous articles to get a basic understanding of what a blockchain is and how it works.

What is Bitcoin?

What is Ethereum?

These articles are here to help crypto beginners to get a basic understanding of cryptocurrency. It is not written for experts with advanced knowledge and it definitely will not make you an expert as well.

If you have just started digging into the rabbit hole of cryptocurrency, chances are that you will have heard of terms like Layer-1 & Layer-2 protocols. In this article, we will explore what these layers are, and why they are needed.

As blockchains continue to revolutionise the world with its decentralised network, it is faced with a unique challenge known as the Blockchain Trilemma.

The Blockchain Trilemma is a conundrum that all public blockchains face, where they must either sacrifice decentralisation, security or scalability.

Decentralisation is the backbone of every blockchain. It refers to the consensus mechanisms that blockchains uses to validate transactions instead of relying on third-party intermediaries. Some examples are the Proof-of-Work and Proof-of-Stake systems.

Blockchain security, similar to traditional IT systems, refers to the protocol’s defense mechanisms against malicious attacks on the networks. One popular type of such attacks is the 51% Attack.

Blockchain scalability refers to the blockchain’s throughput rate in processing transactions. In order for blockchains to overtake mainstream processing channels and be adopted globally, it must be able to match or exceed the current throughput rate of legacy systems.

Throughput rate — number of transactions per second (TPS)

A common example used to show the current difference in throughput rate is the comparison between Bitcoin & Visa. While Bitcoin is one of the most secure, decentralised networks, it can only process 7 TPS. On the contrary, Visa processes 1700 TPS. A huge difference there!

However, the Blockchain Trilemma tells us that if a public blockchain intends to pursue scalability, it will suffer a lapse in their decentralisation or security as a consequence. Hence, a new generation of blockchains and scaling solutions known as Layer-1, Layer-2 solutions are introduced to address this conundrum.

Layer-1 solutions basically refer to solutions that tackle the foundation layer of the blockchain itself. This foundation layer consists of the consensus mechanisms, programming codes, and the rules that govern and maintain the blockchain’s functionality.

Some Layer-1 solutions include the changing of rules in the blockchain, increasing the number of data stored in each block etc. The most popular solutions are:

Some consensus mechanisms are more efficient than others. For instance, the Proof-of-Work system used in Bitcoin is much slower than the Proof-of-Stake system used in newer cryptocurrencies such as Solana.

This is because Proof-of-Work requires computing power to solve cryptographic problems, but Proof-of-Stake only requires staking collateral from its participants.

That is also one of the reasons why Ethereum is slowly moving towards Ethereum 2.0, where it will adopt the Proof-of-Stake mechanism.

Sharding is one of the most popular Layer-1 solutions. It basically breaks transactions up into smaller chunks so that the network can split the computational workload across its nodes. At the same time, every shard retains its own unique data as proofs so that it can still interact with the mainchain and other shards.

Layer 2 solutions are 3rd-party integrations of networks that operate on the current underlying blockchain infrastructure to improve its scalability.

This process is very similar to outsourcing. The public blockchain passes some of their transactional burden to another system, which will then subsequently return the final result back to the blockchain after all the hard work is completed.

Some of the popular Layer-2 solutions include:

This solution entails having secondary blockchains (child) on top of the primary blockchain (parent). These blockchains have a parent-child connection, where the parent chain sets the parameters and the child chains execute the processes and reports back after completion.

One parent chain can have several child chains. This is similar to a typical organisational structure where the boss delegates a project to the subordinates after setting the project scope.

This distribution of work across multiple blockchains helps to improve scalability by reducing the transactional burden of the parent chain.

Sidechains are separate blockchains that are typically used for larger transactions. They work separately from the mainchain; They possess their own consensus mechanisms to help validate these transactions and any security breaches on the sidechain will not affect the mainchain.

Even though sidechains are independent, they cannot operate without a mainchain (much like a parasite-host situation).

Here is a short list of some projects that I am currently invested in.

This is not financial advice. Please DYOR before investing in any of these projects.

Hope this helps! Please feel free to leave a note if you have any burning questions to ask me. Thanks!

This is the 3rd article of my crypto series “What is xx?” where I try to summarise the limitless world of cryptocurrency. I hope this series will help people out in understanding a specific cryptocurrency and introduce more people to the world of cryptocurrency.If you haven’t already, do check out my 1st article on Bitcoin