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What is Layer 1 in Blockchain?
A Layer 1 (L1) in blockchain is a base-layer blockchain on top of which secondary blockchain networks and applications are built.
Bitcoin (BTC) and Ethereum (ETH) are the two largest L1 blockchains in the world by market cap. L1 blockchains record transaction details, onchain events and provide the basic infrastructure and security for Layer 2 (L2) blockchains to function.
An example of an L1 network and an L2 network functioning in tandem is the relationship between Ethereum and Optimism (OP). Here, Ethereum is the base blockchain. Optimism is a standalone blockchain, but it is built on top of Ethereum as a second layer where Optimism depends on Ethereum for security and data availability.
All the transactions conducted on the L2 are posted on the L1. This data can be used to check the state of the L2 and dispute transactions on the L2.
Key Takeaways
- L1 blockchains are base layer blockchains on top of which secondary blockchain networks and applications are built.
- Bitcoin and Ethereum are the two largest L1 blockchains in the world by market cap.
- L1s differ based on their consensus mechanism, blockchain architecture, and approach to scaling, decentralization, and security.
- Proof-of-work (PoW) and proof-of-stake (PoS) are the two most popular consensus mechanisms used by L1 chains.
- Alternative L1s include Solana, Cardano, Avalanche, BNB Chain, Sui, Aptos, Tron, and more.
Common Properties of Layer 1 in Crypto
Layer 1 blockchains:
- Safely store a history of transaction data in a decentralized ledger
- Use a consensus mechanism to incentivize network participants to secure and validate the network
- Have a native cryptocurrency that is used to pay fees for the network’s resources
- Provide the underlying infrastructure that secondary blockchains and applications are built on
- Act as the source of truth for transaction settlement
- Can often be slower and more expensive than Layer 2 networks
Consensus Mechanisms: A Key Component of Layer 1 Blockchains
The consensus mechanism refers to rules and incentives that allow blockchain nodes (computers validating and recording transactions) to reach an agreement on the state of the blockchain. It is the consensus mechanism that stops bad actors from cheating the system. It prevents malicious activities like “double-spending” and Sybil attacks by incentivizing honest actors.
Proof-of-work (PoW) and proof-of-stake (PoS) are the two most popular consensus mechanisms.
Bitcoin uses the PoW consensus mechanism, which requires network participants called “miners” to expend computational power and energy to get the chance to add new blocks of transactions to the blockchain ledger.
Meanwhile, Ethereum uses the PoS consensus mechanism where block creators do not need expensive hardware and exorbitant amounts of electricity. Instead, they have to lock in a certain amount of their crypto (usually a large amount) as collateral to be eligible to validate transactions, add new blocks, and earn block rewards.
Other consensus mechanisms implemented in L1 blockchains are delegated proof-of-stake (dPoS), proof-of-authority (PoA), proof-of-history (PoH), hybrid PoW/PoS consensus, proof-of-burn, and delayed proof-of-work.
L1 Explained: Bitcoin vs. Ethereum & Alternative L1s
Let’s understand the meaning of L1 by studying the two largest L1 chains in the world: Bitcoin and Ethereum.
Bitcoin
Bitcoin is the world’s first and most valuable public blockchain. It is a peer-to-peer (P2P) decentralized payment network.
The Bitcoin blockchain secures itself with the help of the PoW consensus mechanism, where miners are paid block rewards to validate transactions and create new blocks.
The blockchain has a native cryptocurrency called BTC which is a currency that can be used for payments without the support and supervision of intermediary financial institutions. The Bitcoin blockchain is a decentralized ledger, open to all, containing the history of all BTC transactions.
Transaction fees, also known as gas fees, are paid to Bitcoin miners who process and validate transactions. Gas fees are paid in the blockchain’s native cryptocurrency, which in the case of Bitcoin is BTC.
Bitcoin has a number of Layer 2 networks built on top of it to help it facilitate more transactions at faster speeds and lower costs.
Lightning network is the most popular L2 blockchain built on Bitcoin.
Ethereum
Ethereum is the world’s second-most valuable blockchain and the most popular smart contract L1.
Ethereum pioneered the use of programmable smart contracts in blockchain, which enables the Ethereum L1 to host decentralized applications (dApps), non-fungible tokens (NFTs) and ERC-20 tokens.
In contrast, Bitcoin lacks smart contract support and is mainly used as a payment network and a store-of-value cryptocurrency. However, the introduction of Bitcoin inscription technology in late 2023 has added to its functionality. With inscription, developers can create fungible tokens and NFTs on the Bitcoin blockchain.
Ethereum also differentiates itself from Bitcoin in its use of the PoS consensus mechanism. PoS consensus is considered more scalable than the PoW consensus because it doesn’t require a tremendous amount of hardware and electricity. This has allowed Ethereum to embark on a new scalability roadmap.
The network is still plagued with congestion issues and high fees, but it plans to achieve high scalability using L2 rollups.
Alternative L1 in Crypto
The growth of the crypto industry has given birth to many alternative L1 blockchains. Many of these competing L1s, such as Solana (SOL) and Cardano (ADA), are built with smart contract capabilities like Ethereum.
These alternative L1s differ in their approach to decentralization and scalability. For example, Solana is a performance-focused L1 that implements innovative blockchain architectural changes, such as parallel transaction processing, to increase network throughput.
Cardano uses an altered consensus mechanism nicknamed Ouroboros and utilizes the unspent transaction output (UTXO) model. Meanwhile, some L1 use sharding to achieve scalability.
Ethereum, on the other hand, uses an account-based model for its ledger. Avalanche (AVAX), BNB Chain (BNB), Aptos (APT), Sui (SUI), Algorand (ALGO), and Tron (TRX) are among the plethora of competitive L1 blockchains that exist today.
L1 vs. L2 & L3
L2 blockchains exist on top of a base blockchain. The L2 depends on the L1 blockchain for security and data availability. Their main purpose is almost always to increase the scalability of the L1 network.
2024 has also seen the emergence of a new breed of blockchain known as Layer 3 (L3) chains. As the name suggests, L3 chains are built on top of L2 chains.
L3s are highly-customizable blockchains built to host specific applications. They are mainly used to host decentralized applications (dAapp) that need customized functionality such as privacy, hyper-scalability, custom gas fees or interoperability.
L3 chains may choose to prioritize scalability at the expense of decentralization to fulfill their application-specific needs.
Some examples of L3 chains are blockchain gaming-focused Xai, the decentralized social chain Momoka, and the meme coin chain Degen.
Here are the main differences between L1, L2 and L3 blockchains:
| Property | L1 | L2 | L3 |
|---|---|---|---|
| Native token | Native token needed to pay gas fee | Native tokens are not essential. Most L2 native tokens are used for governance. | L3 chains may issue native tokens to meet application-specific need, such as custom gas fee payment tokens. |
| Gas fees payment | Gas fees paid in native L1 tokens | L2s typically use the native token of the underlying L1 to pay gas fees | L3 chains may use custom tokens to pay gas fees depending on their needs. |
| Gas fee cost | L1 gas fees are almost always higher than L2 | L2 gas fees are significantly lower than L1 gas fees | L3s can be customized for low gas fees. |
| Scalability | Often limited scalability due to focus on security, decentralization | Enhanced scalability | L3s can be customized to prioritize hyper-scalability at the expense of decentralization. |
| Security | Higher level of security and decentralization | Can be more centralized, which increases security risks | L3s depend on the underlying L2 and L1 for security. |
| Consensus mechanism | The consensus mechanism is critical to the security of the L1 | Usually relies on the consensus of the underlying L1 | L3s can use a custom consensus mechanism depending on their application-specific needs. |
The Bottom Line
Today, crypto enthusiasts are spoilt for choice when it comes to L1s. There are security-first L1s like Bitcoin and Ethereum, privacy-focused L1s like Monero (XMR), and a new breed of performance-focused L1s like Aptos and Sui.
L1 innovation will continue to shape the future of the crypto industry. L1s provide critical infrastructure on top of which exciting and innovative solutions like decentralized finance (DeFi), blockchain gaming, NFTs, and decentralized socials are built.
