Blockchain technology has become an integral part of other relevant advancements in the technological world, for example, game theory, cryptography, and so on. Its applications in operating cryptocurrency transactions are well known. Some of the best applications of blockchain include eradicating the need for intermediaries, bringing top-notch transparency, and lowering transaction costs while maintaining high security. Because of this, many businesses have started to find blockchain as a perfect technology for the betterment of their business operations and safety. Up to 74% of technical-savvy executive professional teams believe blockchain has a huge potential in the business sector.
Blockchain works by leveraging distributed ledger technology that does not require a central authority to control its processes. Network participants are the ones who oversee verification and rejection of the transactions as well as collectively determine what changes and upgrades a blockchain network should make.
Due to these qualities, the user base of blockchains is increasing with time. And this has raised the concern of whether these blockchains can provide higher scalability for handling traffic, huge asset data volume, consistent transactions, etc.
Out of the need for improvement in blockchain scalability, Layers came into existence, such as Layer 1, Layer 2, and Layer 3 blockchains.
The article aims to help readers understand these 3 Layers in detail and explore their differences in terms of scalability.
Understanding Blockchain Scalability
Blockchain scalability is known as the network’s ability to carry out multiple transactions within a duration of one second. It is also recognized as the network’s throughput. Due to the rapid increase in daily transactions across the blockchain platform, the network has become much slower. From obtained data, it was found that the distribution of over $270 billion worth of assets has occurred via blockchain transactions.
Therefore, scaling up Layer 1 blockchain networks is vital to attain a high transaction throughput. It is also necessary as high scalability would help the network in competing with centralized platforms.
In fact, the problem of low scalability has come up as a significant obstacle to worldwide crypto and other blockchain-based service adoption. Network congestion causes a drastic rise in astronomical gas fees. One good example is the scalability issue of the Ethereum blockchain.
Ethereum blockchain can process up to 15 transactions each second. Not only Ethereum but the Bitcoin network has also shown a low transaction speed of 7 transactions within one second and takes 10 minutes for block confirmation.
The congestion in the network has pushed them way back in comparison to existing centralized payments. For example, MasterCard and Visa. Both of these platforms can process thousands of transactions each second.
Because of this very reason, blockchain platforms are coming forward to scale up Layer 1 and build Layer 2 & Layer 3 as well. The prime goal of these developments is to remove heavy transaction traffic from the main chain and improve overall transaction throughputs.
Before we dive into the detailed explanation of all three blockchain Layers, let us take a quick look at the brief of their differences here:
| Criteria | Layer 1 | Layer 2 | Layer 3 |
| Scaling solution nature | These solutions refer to specific modifications to the base protocol of the blockchain network that further improves scalability | Layer 2 scaling solutions use off-chain networks or services to improve scalability. | Layer 3 doesn’t make any changes in the existing protocol to enhance scalability. |
| Working | The Layer 1 implements new consensus mechanisms and bigger block sizes for better scalability. | Layer 2 scaling solutions share the transaction order and process workload. | In this blockchain Layer, the scaling solutions need to sacrifice OCST ( on-chain settlement times) in order to improve scalability. |
| Types of scaling solutions | Sharding and Consensus protocol improvements ( PoS adoption). | State channels, Sidechains, and Rollups. | Batching or Batch transactions. |
Explanation of Layer 1, Layer 2, and Layer 3 blockchains
Layer 1 Blockchain
Blockchain Layer 1 is the base layer of the network. It is the underlying foundation protocol which usually has a slow block time and slow consensus protocol. Typically, Layer 1 executes a PoW ( Proof-of-stake) consensus mechanism to verify the transactions. This includes solving several complex mathematical problems by miners to proceed with the addition of new transactions to the chain. As these mathematical problems get more and more difficult with each new block approval, the process becomes slow-moving, environmentally unfriendly, and resource-intensive. Thus, the scaling solution for blockchain Layer 1 is a need. Some of the popular examples of blockchain Layer 1 include Ethereum, Terra, Bitcoin, Avalanche, Solana, Tron, and Algorand.
Layer 1 scaling solutions:
Execution of some effective scaling solutions like sharding and PoS consensus mechanism in blockchain Layer 1 can help in attaining higher throughput.
- PoS
In PoS or Proof-of-Stake, crypto owners stake their coins in order to be eligible to verify transactions. This practice adds new blocks to the blockchain. This consensus mechanism boosts the speed of the transactions.
- Sharding
Sharding also works as an efficient scaling solution. In sharding, the blockchain network breaks down into multiple smaller components to increase the throughput or transaction speeds.
Layer 2 Blockchain
A Layer 2 blockchain is built on the top of the Layer 1 blockchain infrastructure. It is done to increase the throughput or transaction speeds of the network. The Layer 2 blockchains reduce the transaction volume off the main chain by carrying out the transactions off-chain. Some popular examples of Layer 2 blockchains include X-dai, Polygon, Immutable-X, Loopring, and Arbitrum.
Layer 2 scaling solutions:
There are a few effective scaling solutions for Layer 2, such as state channels, rollups, and sidechains. Below are given their explanation with examples:
- State channels
These represent a 2-way private communication between 2 nodes or users in a network. They execute via smart contracts enabling users to perform small transactions among themselves. Later a final transaction state is added to the chain. This practice makes the transaction quicker as it does not take place in the main network. Some examples of state channels are Ethereum’s liquid and Raiden network and Bitcoin’s lighting network.
- Sidechains
The transactions over side chains do not take place on the main chain but are recorded in a public ledger. They have their own group of miners and ensure their own security. Though the decentralization is low, sidechains remove pressure off the main chain, increasing the transaction speed. Bitcoin’s liquid network and Ethereum plasma are some of the well-known examples.
- Rollups
These usually perform off-chain computation but store data on Layer 1 blockchains only. They are of two categories:
- Optimistic rollups: They, by default, assume that each transaction is valid and runs computation when they detect malicious activities.
- ZK rollups: They run computation for all transactions depending on validity proofs. The data is sent to the main chain. One example is Polygon, built on the Ethereum blockchain.
Layer 3 blockchains
These are the Application Layers. Basically, they host the DApps (decentralized applications) and their protocols. This layer might embed UI, APIs, smart contracts, popularity, scripts, security, Ethereum’s tools, and the speed at which a user can perform a product launch. Due to these advantages, it has been dominating the DApps development. A few examples of dApps on Ethereum include Dark Forest and Yearn. Finance, Foundation, Uniswap.
Layer 3 Scaling Solutions
Layer 3 blockchain applies batch transactions as an approach to scale up the network. Let’s see what it is.
- Batching/batch transactions
It is the most simple approach that can pass a higher number of transactions via an underlying blockchain infrastructure. In the bitcoin network, this Layer 3 scaling solution is achieved by the addition of multiple transactions from a sender into a sole transaction. This can save the sender around 80% on the transaction fee on Bitcoin, as per an early study.
On the other hand, in Ethereum, batching is done by making a smart contract that users can call for once only and transfer funds from one sender to different recipients.
The achieved scalability can be improved further for a particular application. For instance, if we consider a commerce application, then it is obvious that multiple transactions would share a similar receiver ( the seller of the product). Here the Layer 3 scaling solution would combine all of these transactions into a single transaction which will reduce its overall size. Hence, scalability will automatically improve due to reduced transaction traffic.
We can expect the development of upgraded batching processes like Taproot and signature aggregation.
Wrapping up
Blockchain technology has a wide range of revolutionizing potential in the technical areas of almost every industry. But, due to the scalability issue, its large-scale adoption is hindered. However, we need to give this technology the benefit of the doubt. Historical data says that technologies like wireless communication apps and the Internet have also faced scaling challenges in their early days. But, now we can call them integral parts of our day-to-day activities. Similarly, scaling solutions of Layer 1, Layer 2, and Layer 3 blockchains might bring expected improvement in the networks’ throughput.