Layer 1 (Blockchain)

What Is Layer 1 In Blockchain?

A Layer 1 (L1) blockchain is a base blockchain on which secondary blockchain networks and applications are sometimes built. Bitcoin and Ethereum are the two biggest L1 blockchains in the world. L1 blockchains provide the basic infrastructure and security that Layer 2 (L2) blockchains need to function.

Advertisements

An example of an L1 network and an L2 network functioning in tandem is the relationship between Ethereum and Optimism.

Ethereum is the base blockchain. Optimism is also a blockchain, but it is built on top of Ethereum as a second layer. Optimism depends on Ethereum for security, using its secure proof-of-stake (PoS) consensus mechanism. Ethereum has a network of stakers, node operators, and block producers that secure and validate transactions on the L1.

Optimism also depends on Ethereum for data availability, as all the transactions conducted on Optimism are posted on the L1. The data can be used to get the state of the L2 and to dispute transactions on the L2.

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 put in place to 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 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, block creators 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, proof-of-authority, proof-of-history, hybrid PoW/PoS consensus, proof-of-burn, and delayed proof-of-work.

Bitcoin

Bitcoin is the world’s first and most valuable public blockchain network. The Bitcoin blockchain follows the PoW consensus mechanism, where miners are paid block rewards to validate transactions and create new blocks.

The blockchain has a native cryptocurrency called Bitcoin (BTC), which is a peer-to-peer 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, that is comprised of the history of all BTC transactions.

BTC is used to pay for gas fees on the Bitcoin blockchain. A user will not be able to process any transaction if they do not have enough BTC to pay for the gas fees.

Bitcoin has a number of Layer 2 networks built on top of it because it can be slow and congested. Lightning Network is the most popular L2 blockchain built on it.

Ethereum

Ethereum is the world’s second-most valuable blockchain. It is arguably the most popular L1 in the world due to its smart contract capabilities. Ethereum pioneered smart contracts in blockchain, which allow the Ethereum L1 to host decentralized applications (dApps) as well as other tokens such as non-fungible tokens (NFTs) and ERC-20 tokens such as Shiba Inu (SHIB).

Compared to Ethereum, Bitcoin lacks significant functionality as it can’t easily allow developers to create their own cryptocurrencies and NFTs that exist on the blockchain. However, the innovation of Bitcoin Ordinals is starting to allow for much more Bitcoin functionality.

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 and Cardano, are built with smart contract capabilities like Ethereum to harness the same functionality. They often differ in their approach to decentralization and scalability. For example, Solana enables faster transactions at cheaper fees than Ethereum. However, it sacrifices decentralization in order to gain this advantage.

Most competitive L1 networks implement significant changes, but Cardano is an outlier in the level of its innovation. It uses an altered consensus mechanism nicknamed Ouroboros and utilizes the unspent transaction output (UTXO) model.

Ethereum, on the other hand, uses an account-based model for its ledger. Avalanche, BNB Chain, Aptos, Algorand, and Tezos are among the plethora of competitive L1 blockchains that exist today.

Differences Between L1 and L2

L2 blockchains exist on top of a base blockchain (L1). The L2 depends on the L1 blockchain for security and data availability. L2’s main purpose is almost always to increase the scalability of the L1 network.

Here are the main differences between L1 and L2 blockchains:

Property  L1 L2
Native token Native token needed to pay gas fee Native token is not essential. Most L2 native tokens are used for governance
Gas fees payment Gas fees paid in native L1 tokens Some use ETH to pay gas fees, and others, such as Polygon, use their governance tokens for fees
Gas fee cost L1 gas fees are almost always higher than L2 L2 gas fees are typically lower though each uses different methods to keep them low
Scalability Often limited scalability due to focus on security, decentralization Enhanced scalability
Security Higher level of security and decentralization Can be more centralized, which increases security risks
Consensus mechanism The consensus mechanism is critical to the security of the L1 Usually relies on the consensus of the underlying L1

Bottom Line

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, blockchain gaming, NFTs, and decentralized socials are built.

Advertisements

Related Terms

Latest Blockchain Terms

Related Reading

Mensholong Lepcha

Mensholong Lepcha is a financial journalist specializing in cryptocurrencies and global equity markets. He has worked for reputed firms such as Reuters and Capital.com. Fascinated with blockchain technology, NFTs, and the contrarian school of investing, Mensholong has expertise in analyzing tokenomics, price movement, and technical details of Bitcoin, Ethereum, and other blockchain networks. He has also written articles on a wide range of financial topics including commodities, forex, central bank monetary policies, and other economic news.