Layer 1 Blockchain includes updates such as changing the block size or consensus mechanism, or splitting the database into multiple parts (known as sharding). While Layer 2 includes rollups (bundling transactions), parallel blockchains (known as side chains), and off-chain handling of transactions (known as state channels). Layer 1 and Layer 2 blockchain scaling solutions are improvements to the throughput—or processing speed—of any cryptocurrency blockchain network. They can include protocol updates or additional network solutions to help process more transactions.

MEANING OF SCALABILTY IN CRYPTO

Cryptocurrencies operate on a decentralized network, known as the blockchain. There are certain limitations to this style of network, namely the inability to increase the network capacity without code changes or additional solutions. The scalability of a particular cryptocurrency refers to the ability to update the network itself, or Layer 2 solutions that allow transactions to be processed much more quickly.

THE IMPORTANCE OF LAYER 1 AND LAYER 2 SCALING SOLUTIONS.

A blockchain is a decentralized network of nodes that processes crypto transactions independently, with common rules or consensus mechanism to verify the accuracy of the transactions. The transactions are then recorded in sequential order, forming a chain of data blocks that can’t be changed. Unfortunately, the more popular a blockchain becomes (Bitcoin as a case study), the more processing power is needed to handle its growing number of transactions. Cryptocurrency blockchain protocols also may limit the number of transactions that can be processed, creating a bottleneck in the network. This has caused popular blockchain networks to become very slow, sometimes taking up to 10 minutes (or more) to process a transaction. To solve this issue, scaling activities have been developed to help provide a more efficient means of holding a much larger volume of transactions. There are several ways to scale each network, and dozens of scaling solutions have been developed for various popular blockchains. These solutions help offload the transaction processing power onto other networks, or improve the base-layer network itself through a code update. With continued increases in network demand, blockchain networks will rely on scaling solutions such as Layer 1 and Layer 2 to provide stable and efficient transaction handling in the future.

LAYER 1 BLOCKCHAIN VS. LAYER 2 BLOCKCHAIN

A Layer 1 blockchain is the base architecture for a decentralized cryptocurrency network. Examples of Layer 1 blockchains includes: "Bitcoin, Ethereum, and Cardano". These blockchains handle the processing and security of a cryptocurrency network through a common consensus mechanism, such as proof of work (PoW) or proof of stake (PoS). On the other hand, a Layer 2 blockchain refers to network protocols that are layered on top of a Layer 1 solution. Layer 2 protocols use the Layer 1 blockchain for network and security infrastructure, but are more flexible in their ability to scale transaction processing and overall throughput on the network. Examples are "Polygon (which layers on top of Ethereum) and Bitcoin’s Lightning Network". Coinbase launched Base, its Ethereum Layer 2 network, in August 2023.

TYPES OF LAYER 1 BLOCKCHAIN SCALING SOLUTIONS.

Several ways to scale Layer 1 blockchains includes:

1. Increased Block Size Some Layer 1 cryptocurrency blockchains have updated their code to increase the block size, allowing more transactions to be verified at a time, thus expanding the overall capacity of the network. An example of this is the "Bitcoin Cash" (BCH) network, which upgraded its block size to 8 megabytes (MBs) from 1 MB, then further to 32 MBs, allowing it to process more than 100 transactions per second vs. Bitcoin’s seven transactions per second.

2. Updated Consensus Mechanism The consensus mechanism of a blockchain is the method by which it validates transactions to ensure the accuracy and security of the network. Bitcoin, for example, uses a proof-of-work (PoW) consensus mechanism, requiring tremendous processing power to solve a complex equation in order to be allowed to record the next block in the blockchain.

3. Sharding Sharding is similar to database partitioning, allowing a blockchain database to be broken up into smaller parts so that transactions can be processed simultaneously. This increases the overall capacity of a Layer 1 blockchain network.

TYPES OF LAYER 2 BLOCKCHAIN SCALING SOLUTION

There are also several types of Layer 2 blockchain scaling solutions which includes:

1. Rollups Instead of processing transactions individually, bundles of transactions can be “rolled up” into a single transaction, vastly increasing the number of transactions that can be processed at once. The transactions are outsourced to be recorded off chain, bundled, and then brought onto the main chain to process as a single entity.

2. Side Chains Side chains are independent blockchain networks with their own set of validators that allow transactions to be processed in parallel. This vastly increases the transaction-processing power of a blockchain, but you must trust the integrity of the side chain network, as well as the bridge network that connects it to the main blockchain.

3. State Channels State channels are similar to a side chain, as transactions are recorded off chain, but these transactions are recorded in bulk off chain, then the state of the channel is set at complete. The transactions are then recorded in bulk on the main blockchain network by broadcasting a completed “state” to the main network.11 This is how Bitcoin’s Lightning Network is set up. Let's look at some of the risk of this aforementioned layers (Layer 1 and Layer 2)

RISKS OF LAYER 1 AND LAYER 2 BLOCKCAHIN SCALING SOLUTIONS

While scaling a blockchain is a great way to improve transaction handling and increase overall adoption, there are a few risks inherent to using a scaling solution which imcludes:

1. Blockchain forks: Blockchains are a chain of data blocks that hold a record of all transactions in sequential order. Updating the blockchain to scale may require a fork of that blockchain, which can cause division among the blockchain supporters. Forking the code allows the scaling update to take place, but results in two networks running simultaneously (such as Bitcoin and Bitcoin Cash). This can confuse users and devalue the overall cryptocurrency.

2. Harder to verify: Some scaling solutions move transactions to an off-chain network, which means verification doesn’t happen publicly. This lack of transparency may put a blockchain at risk of exposure to bad actors that aim to manipulate the transaction data.

IS THERE ANY DIFFERENCE BETWEEN LAYER 1 AND LAYER 2 SCALING?

Layer 1 scaling solutions are changes to the blockchain network’s base protocol that improve scalability. Layer 2 scaling solutions instead use off-chain services or networks to make scalability better.

N.B: Scaling a blockchain network is important to the overall adoption and increased capacity of a cryptocurrency network. Both Layer 1 and Layer 2 scaling solutions help preserve the integrity of the underlying blockchain, while improving the ability to handle far more transactions. But there are inherent risks that can compromise the security of a particular blockchain—or even the integrity of the overall project.