August 3, 2022

Blockchain Basics Layer 1 vs Layer 2 Blockchain

Layer 1 Blockchain (L1 Blockchain)

Layer 1 blockchain is the underlying protocol for decentralized networks, providing the foundation for secure transactions. Learn more about L1...

Written By

Shardeum Content Team

Home » Blog » Blockchain Basics » Layer 1 Blockchain (L1 Blockchain)

Getting your Trinity Audio player ready...

Table of Contents

Introduction

A Layer 1 or L1 blockchain is the core protocol layer of distributed blockchain networks that bolsters the network’s security, decentralization, and scalability. Applications and products built on L1s derive their key features and benefits from it significantly, akin to how iOS or Android underpins mobile apps. In blockchain, these decentralized applications (dApps) can be freely developed and deployed without centralized oversight. Unlike Web2 systems, dApp developers are largely expected to keep 100% of their revenues, eliminating the need to share commissions with the layer 1 blockchain.

The primary feature of a public decentralized Layer 1 network is its consensus mechanism. Various consensus mechanisms offer varying levels of security, and speed. Layer 1 blockchains process and record commercial transactions to their native ledgers utilizing specific consensus mechanisms to ensure accuracy and security.

Layer 1 blockchains often feature their own native cryptocurrency to replace fiat currency because traditional fiat systems lack the speed, security, and global accessibility that blockchain technology provides. Native tokens facilitate decentralized, borderless transactions without intermediaries, lowering transaction fees and processing times. They also support smart contracts, governance, and staking, allowing more efficient, scalable, and programmable financial systems. Creating new digital assets helps establish robust, autonomous ecosystems that promote transparency, accessibility, and user-driven innovation within the blockchain framework. Prominent examples include Bitcoin and Ethereum, which have built robust ecosystems around their native assets while fostering security, scalability, and network participation.

What is Layer 1 Blockchain?

A Layer 1 blockchain refers to the foundational layer of a distributed blockchain network and the infrastructure upon which decentralized applications (dApps) and other services operate. It establishes the core rules and protocols governing consensus, security, and transaction validation, providing the fundamental base for scaling and building the entire ecosystem without an intermediary.

How Does Layer 1 Blockchain Work?

At a high level, these blockchains function through a peer-to-peer network of nodes, where each node holds a copy of the entire or partial blockchain ledger. This distributed approach ensures that transactions are securely recorded and consensus is maintained across the network. Layer 1 blockchain protocols commonly employ decentralized consensus mechanisms like Proof-of-Stake (PoS) or Proof-of-Work (PoW) to validate new transactions. They then reach network-wide agreement (consensus) on transaction accuracy among the nodes before adding them to the blockchain, ensuring integrity, consistency, and transparency throughout the distributed ledger.

Consensus Mechanisms

We’ll look at two major types of consensus mechanisms used by layer 1 public blockchain networks with a a common goal – to help maximize security, scalability and decentralization. A decentralized consensus mechanism is especially crucial for public blockchains where nodes are predominantly unrelated and can be operated by anyone from the public. Given the distributed architecture of these blockchains, there’s a pressing need for a system where these independent nodes reach an agreement. This mechanism ensures that a majority consensus validates the legitimacy of transactions, providing a unified and trustworthy record in an environment where participants does not know each other.

1. Proof Of Work

Proof of Work (PoW) is a consensus mechanism in blockchain networks where “miners” compete to solve computational puzzles. Miners act like random number generators using powerful computers, testing different inputs to produce the right hash number that matches the network’s target criteria. Once a miner solves the puzzle, their solution is verified by others, and a new block is added to the blockchain. The winning miner is often rewarded with native cryptocurrency. This process ensures security by making it computationally expensive to tamper with the blockchain, thereby preventing double-spending and establishing trust without a central authority. However, PoW is more energy-intensive, which has spurred the development of alternative mechanisms like Proof of Stake – an equally efficient but consumes far less energy.

2. Proof of Stake

In the Proof of Stake consensus mechanism, validators (instead of miners) are chosen randomly after fulfilling the staking requirement – which is nothing but the minimum amount of native cryptocurrencies they have to lock up as collateral. These validators are responsible for verifying transactions, adding a new block and updating the state of the blockchain. As compensation for their services, they also earn cryptocurrency and a portion of transaction fees as rewards. If a validator acts maliciously or attempts to compromise the network, they risk losing their staked funds. This approach requires significantly less energy than Proof of Work and provides strong security incentives while promoting decentralization.

Proof of Stake (PoS) and its variations, such as Delegated Proof of Stake (DPoS), are more recent consensus mechanisms adopted by modern blockchains because they are environmentally friendly and don’t rely on energy-intensive processes to secure the network.

Purpose

Blockchain technology offers numerous advantages. These include increased security, advanced record keeping, and transparent transactions. Applications and solutions developed on top of L1s are intrinsically tied to its foundational architecture and principles. This means that their core features, functionalities, and advantages are often a direct result of the Layer 1 blockchain’s capabilities. For instance, the security, speed, or decentralization attributes of a Layer 1 blockchain will directly influence the performance of the applications built upon it. As such, these applications not only integrate with but also heavily rely on the robustness and innovations provided by the underlying L1 platform.

Moreover, Layer 1 blockchains play a pivotal role in fostering interoperability within the Web3 ecosystem. They serve as the bedrock, establishing standardized protocols that allow diverse applications and even other chains to communicate and share data seamlessly. Similar to the Web2 world, atomic swaps and synthetics are used frequently in blockchain ecosystem to transport value, albeit, without a middleman. By providing a reliable consensus mechanism, Layer 1 blockchains ensure the immutability and verifiability of data — essential traits for trust in decentralized systems. Additionally, their native tokenomics often play a role in incentivizing network participation and governance by the public, and overall ecosystem growth, acting as the economic backbone that drives sustainability and innovation in the Web3 space

Limitations

After Ethereum introduced smart contracts and proved to the world that blockchains have use cases beyond just peer-to-peer payments, the users and the volume of transactions have significantly increased. With the increasing number of blockchain use cases, L1 networks are still playing catch-up since the technology was introduced focused only on security and decentralization right after the 2008 financial crisis. As a result of a rapidly expanding ecosystem, processing speeds and scalability capacities of layer 1 networks have slowed or throttled leading to congestion, outages and high transaction costs. Today, layer 1 blockchains can only process a limited number of transactions per second (TPS). Even the more recently introduced networks does not process beyond an average of 400 TPS in reality when the centralized peers like Visa and Twitter can process an average of 5000 TPS.

Unless the scalability or blockchain trilemma is solved, layer 1 networks ultimately end up compromising one or more of the following – decentralization, security, scalability or transaction fees. Good news is there are active research and development of protocols/technology that aims to solve the scalability and transaction fee challenges in the ecosystem.

Components of L1 Blockchain

Some of key components L1 blockchains typically include the following:

Consensus Mechanism– To tackle the absence of a centralized authority to verify the authenticity of transactions, a consensus mechanism is used. Here, the network uses nodes (individuals or companies using computer servers) across the world to validate and agree on the authenticity of transactions among them before appending the validated transactions to the network immutably.

Data Structure- The data gets stored on a blockchain network in the form of a ledger that is publicly accessible and records each and every transaction made on it. This characteristic establishes the blockchain as a “distributed ledger.” Each node in the network holds a copy, either partial or complete, state of this ledger, ensuring decentralization and providing ample redundancy to safeguard against potential node failures or crashes and security attacks.

Cryptography – L1 blockchains have known to use asymmetric key cryptography for safeguarding the network, which contains both private and public keys to allow users access to transactions on the network – right from initiation of the transaction to confirmation of transaction on the network. Cryptography/hashing algorithms are crucial for having a robust security system in place to ensure every transaction made on the blockchain gets encrypted and is linked with these respective keys for users.

Transaction Finality- Similar to how a bank transfer becomes irreversible once money is sent, transaction finality in blockchains ensures that your transaction is permanent and cannot be reversed. The blockchain’s architecture including consensus mechanisms they use dictates the finality time of transactions. Further, transaction settlement and finality on Layer 2 networks, decentralized applications (dApps), or off-chain systems generally involves final confirmation on the underlying Layer 1 (L1) blockchain

Native Assets or Cryptocurrencies – As mentioned at the beginning, native tokens facilitate decentralized, borderless transactions without intermediaries, lowering transaction fees and processing times. They also support smart contracts, governance, and staking, allowing more efficient, scalable, and programmable financial systems.

Block Production – Block production is the process where validators create individual units called blocks, forming the backbone of the blockchain network. Each block contains data on new transactions and references the previous blocks, ensuring continuity and immutability. These blocks are recorded on the Layer 1 blockchain, maintaining a permanent, linked history of all transactions in the ecosystem

Layer 1 vs Layer 2 – What’s the Difference?

As the base layer of a blockchain network, Layer 1 directly processes and secures all transactions. Consensus mechanisms like Proof of Work or Proof of Stake maintain the network’s integrity. While this direct processing ensures high security and decentralization, it also introduces limitations in transaction throughput, often resulting in slower speeds and higher costs.

Layer 2 networks are overlay solutions built on top of existing Layer 1 blockchains. They aim to increase transaction throughput by offloading some transaction processing to a secondary layer, making transactions faster and more affordable. Despite this secondary layer processing, Layer 2 networks rely on the security of the underlying Layer 1 blockchain, periodically anchoring transaction data to ensure consistency and finality. Notable examples include Bitcoin’s Lightning Network and Ethereum’s Optimistic Rollups.

Curious to know more about the difference between L1 & L2 blockchains? Read this article on Layer 1 and Layer 2 Blockchain.

What are the Benefits of L1 Blockchains?

Security: Layer 1 blockchains use consensus protocols like Proof of Work (PoW) or Proof of Stake (PoS) to secure the network. Transactions are verified by decentralized nodes and immutably recorded on the blockchain. Cryptographic hashing ensures data cannot be altered, and digital signatures authenticate each transaction. This makes tampering or double-spending extremely difficult.
Decentralization: In Layer 1 networks, control is distributed among nodes globally. By eliminating centralized authorities, these chains minimize censorship risks and points of failure. The consensus protocol ensures transactions occur peer-to-peer, providing equitable network participation. This structure maintains the decentralized integrity crucial for blockchain trustworthiness.
Foundation for dApps: Layer 1 blockchains offer a stable and programmable base for decentralized applications (dApps). Developers leverage smart contracts, which can automate tasks like transactions and governance. With robust network security, these dApps benefit from the underlying chain’s scalability and interoperability, enabling seamless application building.
Transparency: Every transaction on the blockchain is recorded in a public ledger visible to anyone, fostering trust and accountability. The immutability of these records ensures that historical data remains intact and accessible. This transparency allows for independent verification of data, strengthening confidence in decentralized processes.
Privacy: Some Layer 1 networks incorporate privacy features like zero-knowledge proofs or private smart contracts, keeping transaction details confidential. These measures allow data to be verified without revealing sensitive information while maintaining overall transparency. They provide enhanced data security and help protect user identities and transaction details.
Instant Remittance and Settlement: L1 blockchain technology enables near-instant remittance and settlement due to its decentralized, always-on nature. They are often enabled through applications or layer 2 blockchains built atop L1s. Cross-border payments occur in seconds or minutes without reliance on intermediaries or clearinghouses, reducing delays. This speed benefits individuals and businesses alike, providing immediate liquidity and helping streamline global commerce. Furthermore, blockchain’s transparent ledger ensures that transactions are securely recorded and verifiable. Reduced transaction fees make this method more cost-effective compared to traditional financial networks, supporting financial inclusion worldwide.

L1 Blockchain Examples

Here is a list of layer 1 or L1 blockchains:

Bitcoin
Ethereum
Shardeum
Elrond
Harmony
Celo
THORChain
Kava
IoTeX
Algorand

Frequently Asked Questions (FAQs)

1. What is the Difference Between Layer 1 and Layer 2?

Layer 1 blockchains form the base layer, where primary consensus mechanisms operate, ensuring decentralization, security, and core transaction processing. Examples include Bitcoin and Ethereum’s mainnet. In contrast, Layer 2 solutions are secondary protocols built atop Layer 1 to enhance scalability and speed without compromising base layer security. These solutions, like Lightning Network or rollups, handle transactions more efficiently, offloading some of the main chain’s burdens, and later settling those transactions on Layer 1. This layered approach facilitates greater transactional throughput.

2. What are the Best Layer 1 Blockchains?

There is a long list of layer 1 blockchains out there attempting to enhance their scalability capacity. A few of the prominent ones include Bitcoin, Ethereum, Elrond, Harmony, Celo, THORChain, Kava, IoTeX, Algorand, and Shardeum.

3. What is the Purpose of Layer 1 Blockchain?

The primary purpose of Layer 1 blockchain is to serve as the foundational layer of a blockchain system, ensuring security, decentralization, and integrity. It operates the core consensus mechanisms and processes transactions directly on its main chain. This layer is responsible for establishing trust within the network, validating and recording transactions, and maintaining a consistent and immutable ledger. Layer 1 sets the fundamental rules and standards, making it the bedrock upon which secondary layers and applications can be built. It’s crucial for the overall stability and reliability of a blockchain ecosystem

4. How Many Layer 1 Blockchains Exist?

As of today, there are over 10,000 systems utilizing blockchain technology, with a significant portion of them functioning as layer 1 solutions. These layer 1 blockchains serve as the foundation for various decentralized applications and have attracted a substantial user base, with approximately 81 million crypto wallet users distributed across these diverse networks.