Once we passed the stage about explaining to my dad what a blockchain does (lately I am working more with Web3 projects, protocols, etc), the biggest struggle was not so much the logistics (cloud, decentralization), but the motivations. “Nodes? yes, but why? who owns them, how do they find out about all this, … “. From there I moved to how does it operate and works (proof-of-work, proof-of-stake). Then I started to mention L1s and L2s.
If you are having trouble figuring out what are L1 and L2s, you are not the only one. Let’s give it a try to explain something relatively complex in a simple way.
What does it mean L1s and L2s?
The L means Layer (network) and the number indicates their “position” (duh). A Layer network is a blockchain in a decentralised system. Not very clear, isn’t it? we have a decentralized system, the blockchain would be the first layer (L1). It provides the core functionality of the system. The second layer (L2) would be third-party integrations that interact with the first layer to enhance the whole system throughput. They expand the blockchain protocol, augmenting its scalability. Examples of L1 are BTC (Bitcoin) or ETH (Ethereum). Examples of L2s are Plasma (extending Ethereum protocol) and Lightning (built on top of Bitcoin).
In an even simpler way to define it, we have the blockchain protocol. Conceptually exciting but hard to implement in real life. L1 solutions re-define how the protocol works to increase its utility (they make it a better, usable, native version). L2 solutions work on top of that protocol to improve its scalability and performance.
What is the difference between L1s and L2s
To understand the difference, we need to understand their “raison d’etre”. Let’s introduce the scalability trilemma. In Vitalik Buterin words:
The scalability trilemma says that there are three properties that a blockchain try to have, and that, if you stick to “simple” techniques, you can only get two of those three. The three properties are:
- Scalability: the chain can process more transactions than a single regular node (think: a consumer laptop) can verify.
- Decentralization: the chain can run without any trust dependencies on a small group of large centralized actors. This is typically interpreted to mean that there should not be any trust (or even honest-majority assumption) of a set of nodes that you cannot join with just a consumer laptop.
- Security: the chain can resist a large percentage of participating nodes trying to attack it (ideally 50%; anything above 25% is fine, 5% is definitely not fine).
L1 protocols eventually found scalability problems when they reach a high adoption rate. Layer 2 solutions solve scalability problems while preserving those three properties of the system.
How do Layer 2 solutions work?
By abstracting part of the transactional load to an auxiliary architecture. A different “layer” absorbs part of the burden of the native system. It processes part of the data, reporting back to the main network. By doing that, the base layer gets less congested, can scale up and handle overall higher levels of activity.
L2s promise to bring transaction costs down, speeding up transactions along the way.
I would like to note down that L2s are not a monolithic solution. There are different approaches to Layer-2 solutions. Nested blockchains, State channels, sidechains, all of them with their own particularities, making use of different mechanisms, with their set of tradeoffs and advantages towards solving the scalability problem. I’ll review some of those in future articles, probably.
The competition between L1s and L2s
How do they compete? In a world of finite attention and capital, there is a paradigmatic competition between L1s and L2s. On one side, L1s compete to be the base layer for L2s. On the other side, their future growth depends on how they look in terms of investment returns potential. They compete in terms of adoption (we can measure it in terms of daily transaction growth and Total Value Locked / TVL), public awareness as well as how rich is the ecosystem (participants, tooling, quality of satellite solutions).
There are great theses out there about how to evaluate the quality of those assets and useful information about the more probable bets, but for the moment the key idea is that said competition exist.
I hope what are Layer 1 and layer 2 is clear by now, how they operate and why they somehow are competing. If you have questions just send them my way!