While blockchain technology is establishing itself as a new pillar of the global economy, its underlying structure of decentralized networks confronts a unique issue known as the Blockchain Trilemma: balancing decentralization, security, and scalability within a blockchain infrastructure.
Blockchain decentralization refers to the meaningful distribution of processing power and consensus throughout a network. In contrast, security refers to the defences of a blockchain protocol against bad actors and network assaults. Both are deemed non-negotiable for a blockchain network’s operation.
Scalability is vital because it is the only way for blockchain networks to compete with older, centralized systems that have fast settlement times. Bitcoin handles about 4–7 transactions per second, which is an often-cited comparison to show the difference in scalability (TPS). Visa, on the other hand, handles around 1,700 TPS. Blockchain technology must match or exceed these high levels of scalability to compete with these existing systems. There is now an entire sub-sector of the blockchain business dedicated to enhancing scalability.
Fortunately, a new generation of blockchains and scaling solutions designed particularly to address this transaction-capacity issue is rapidly improving the scaling limitations of blockchain and making significant progress. These projects handle scalability in two ways: layer-1 scaling solutions and layer-2 scaling solutions.
A layer-1 blockchain can be scaled by making improvements in the protocol itself. The consensus-level protocol modifications and sharding are the two most prevalent ways to scale layer-1.
When it comes to consensus protocol upgrades, projects like Ethereum are transitioning from older, cumbersome consensus protocols like proof-of-work (PoW) to significantly quicker and less energy-intensive protocol like proof-of-stake (PoS).
Sharding is another prominent layer-1 scalability approach. Instead of having a network operate sequentially on each transaction, sharding divides these transaction sets into little data sets known as “shards,” which may then be handled in parallel by the network.
One advantage of layer-1 solution is that there is no need to add anything on top of the current infrastructure.
Layer-2 Scaling Solutions
A layer 2 framework or protocol develops on top of an existing blockchain system. The primary purpose of these protocols is to address the networks’ transaction speed and scaling issues. Bitcoin and Ethereum, for example, are currently unable to perform thousands of transactions per second (TPS), which is damaging to their long-term growth & adoption. Higher throughput is required before these networks can be effectively adopted and used on a larger scale.
The phrase “layer 2” refers to the many solutions presented to the blockchain scalability challenge in this context. The Bitcoin Lightning Network and the Ethereum Plasma are two examples of layer 2 solutions. Despite their distinct functioning principles and characteristics, both technologies aim to boost the throughput of blockchain network. The Lightning Network, in particular, is based on state channels. These are essentially connected channels that conduct blockchain activities and report them to the main chain. It employs the state channels mostly for the payment. The Plasma framework, on the other hand, is made up of sidechains, which are effectively miniature blockchains organized in a tree-like layout.
In a larger sense, layer 2 protocols establish a supplementary framework in which blockchain transactions and operations can occur independently of the layer 1 framework (main chain).
One of the primary benefit of a layer 2 solution is that there is no need to alter the main-chain structurally because it functions as an additional layer on top of the base layer (layer 1). As a result, layer 2 solution can provide high throughput while relying on main-chain security.
In other words, most of the work that the main-chain would normally do may get delegated to the second layer. So, while the layer 1 (the main chain) provides security, the second layer provides tremendous throughput, capable of doing hundreds, if not thousands, of transactions per second.
Layer 1 vs Layer 2 Solution
Blockchain technology has several advantages, including increased security, hassle-free transactions, and the ability to retain records. However, as its use grows in popularity, several issues arise. Scalability is one such issue.
- Every transaction in a decentralized system on a blockchain require a large amount of processing power and time. Dapp developers are developing directly on Layer 2 solutions to boost their dapps performance in order improve the user experience.
- Layer 1’s are generally known as the settlement layer. For example, Layer 1 would correspond to Ethereum’s blockchain, but Layer 2 would refer to the Polygon Network (Layer 2).
- Transactions on Layer 1 are currently costly and not scalable. As a result, project’s have begun building on the Layer2 solutions. However, computing on Layer 2 entails trade-offs. While transaction costs are low, security and decentralization get jeopardized.
The word “trade-off” is vital to emphasize here since the properties of Layer 1, and Layer 2 differ.