Crypto series – What is layer 1 and layer 2 blockchains?

You’ve probably heard about networks like Bitcoin and Ethereum, along with a host of other confusing terminology. But what does it all really mean? In this short series, we aim to demystify some of these key concepts – today we deal with layer 1 and layer 2 blockchains.

In blockchain technology, the terms “Layer 1” and “Layer 2” refer to different levels of a blockchain ecosystem and how they handle transactions, scalability, and functionality.

Layer 1 refers to the base protocol or the blockchain network. These are the foundational blockchains where transactions are directly recorded onto the blockchain itself. Examples of Layer 1 blockchains include Bitcoin, Ethereum, Solana, Avalanche, and Cardano.

To address these issues, Layer 2 solutions are developed. Layer 2 refers to a secondary framework or protocol built on top of a Layer 1 blockchain. Its purpose is to handle transactions off the main chain (off-chain) while still relying on the security and finality of the underlying Layer 1. This reduces congestion and improves efficiency.

Examples of Layer 2 solutions include:

– Lightning Network for Bitcoin: enables fast, low-cost transactions by creating payment channels between users.

– Optimism and Arbitrum for Ethereum: use rollups to bundle many transactions into one, then settle on Ethereum’s main net.

– Polygon (formerly Matic): a sidechain which connects to Ethereum, providing faster and cheaper transactions.

Layer 2s are essential for scaling blockchain networks to support more users, applications, and use cases like DeFi, NFTs, and gaming without sacrificing decentralization or security.

In summary, Layer 1 blockchains are the base networks, and Layer 2 solutions are enhancements built on top of Layer 1 blockchains to improve performance. Both layers play critical roles in the evolution and usability of blockchain technology.