Why do blockchain networks need layered solutions: An in-depth comparison of Layer 1 and Layer 2

The Fundamental Dilemma Facing Blockchain

As blockchain technology gradually moves toward practical application, a pressing question emerges: how to ensure security and decentralization while handling massive transaction volumes? This is the famous “Blockchain Trilemma”—developers must balance decentralization, security, and scalability, making it difficult to achieve all three perfectly at the same time.

What is the Difference Between Layer 1 and Layer 2

Before discussing scaling solutions, it is essential to understand the fundamental differences between these two concepts.

Layer 1 refers to the underlying infrastructure of a blockchain, such as Bitcoin and Ethereum, which handle the final settlement of all transactions. These chains possess complete consensus mechanisms, data availability, and execution environments, serving as the “main chain” of the ecosystem.

Layer 2 is an extension built on top of the main chain, which transfers some transaction processing off-chain or to sidechains, then submits the results back to the main chain. The key difference is that Layer 1 modifies the base protocol itself, while Layer 2 creates additional channels to accelerate transactions.

How Layer 1 Scaling Solutions Work

Sharding Technology

Sharding divides the entire blockchain state into multiple smaller parts, called “shards.” Unlike sequential transaction processing, each shard can process transactions simultaneously, significantly increasing network throughput.

For example, Zilliqa employs a “transaction sharding” approach, grouping transactions and having different shards verify them in parallel. Shards can still communicate with each other, exchanging addresses, balances, and state information via cross-shard protocols.

Consensus Mechanism Optimization

Switching from Proof of Work (PoW) to Proof of Stake (PoS) is another key approach. PoS does not require miners to perform extensive computations but instead allows token holders to lock tokens as validators to verify blocks. This greatly reduces energy consumption and boosts transactions per second (TPS).

Ethereum’s upgrade path exemplifies this—transitioning from PoW to PoS aims for a throughput of 100,000 TPS, whereas the current mainnet handles about 30 TPS.

Segregated Witness (SegWit)

Bitcoin’s SegWit solution takes a different approach: separating signature data from the main transaction data. Since digital signatures occupy about 65% of a transaction’s size, separating them can reduce the transaction size to a quarter of its original, allowing more transactions within the same block size.

SegWit’s advantage lies in backward compatibility—both upgraded and non-upgraded nodes can communicate normally, ensuring a smooth transition.

Advantages of Layer 1 Solutions

• No additional chains needed: directly modify the base protocol to increase capacity
• Fundamental resolution: improve scalability through consensus algorithm improvements, increasing block size, or faster block times
• Long-term effectiveness: compared to temporary solutions, Layer 1 improvements have lasting effects
• Maintain decentralization: open upgrade processes ensure the network is controlled by the community rather than a few entities
• Lower transaction fees: reduced network congestion means users don’t need to compete for block space

Bottlenecks of Layer 1 Solutions

• Miner/Validator revenue decline: transitioning from PoW to PoS may reduce earnings for some participants, affecting participation
• Node storage and bandwidth limitations: hardware constraints of individual nodes can restrict overall network performance
• Transaction congestion: as TPS increases, the volume of data transmitted grows, potentially creating new bottlenecks
• Cross-shard transaction complexity: coordination between shards is still under development, with increased latency during cross-shard communication

How Layer 2 Scaling Solutions Work

Optimistic Rollups

Optimistic Rollups execute transactions and smart contracts off-chain, then write transaction data back to the main chain. This approach assumes all transactions are valid (“optimistic”) unless challenged.

Arbitrum is a leading example. It achieves higher throughput and lower fees on Ethereum while inheriting Ethereum’s security. Arbitrum has introduced its own governance token ARB and shifted toward a decentralized autonomous organization (DAO) structure.

Optimism also employs optimistic aggregation to expand Ethereum’s ecosystem. Currently, it hosts 97 protocols, including Synthetix, Uniswap, and Velodrome, with over $500 million total value locked (TVL). Users can add the Optimism network to MetaMask and bridge assets like ETH to use on Layer 2.

State Channels

State channels enable participants to conduct multiple off-chain transactions without broadcasting each to the network. By reducing on-chain transactions, overall throughput and cost efficiency are greatly improved.

Lightning Network is the most successful implementation of state channels in Bitcoin’s ecosystem. It allows users to perform fast micro-payments and transfers off-chain with low costs and quick confirmations. Its energy consumption is also much lower than Bitcoin’s main chain, aligning with modern green energy initiatives.

In practical applications, Nostr (a decentralized social network) uses Lightning Network for small tips; Strike facilitates fast, low-cost cross-border remittances; OpenNode enables merchants to accept Bitcoin payments with instant settlement.

Sidechains

Sidechains are independent blockchains connected to the main chain via two-way peg mechanisms. They have their own consensus mechanisms and can be optimized for specific transaction types, improving efficiency and reducing costs.

Sidechains do not inherit all security guarantees of the main chain, so users must trust the sidechain’s nodes and consensus process. However, this design offers developers more freedom—experiments and new features can be tested on sidechains without risking the stability of the main chain.

Polygon PoS, Skale, and RSK are well-known sidechain solutions. Polygon aims to create a “blockchain internet,” allowing developers to deploy Ethereum-compatible independent chains quickly. Originally called Matic Network, Polygon rebranded to reflect its multi-chain expansion infrastructure. Its DeFi ecosystem has a total value locked of about $1.3 billion, supporting protocols like Compound and Aave.

Advantages of Layer 2 Solutions

• Fast transaction speeds: off-chain processing greatly shortens confirmation times
• Low costs: reducing on-chain operations lowers user expenses
• Security retention: periodic settlement with Layer 1 ensures transaction finality
• Flexible applications: different Layer 2 solutions can be optimized for various scenarios
• Rapid deployment: easier to upgrade and iterate than modifying Layer 1 protocols

Challenges of Layer 2 Solutions

• Transaction limitations: some Layer 2 protocols may not seamlessly interoperate with other Layer 2s or the main chain, leading to ecosystem fragmentation
• Liquidity dispersion: multiple Layer 2 solutions can further fragment the limited liquidity
• User experience complexity: managing assets across multiple bridges and accounts increases user burden
• Access difficulty: multi-layer structures require more accounts and bridging steps

Practical Applications Are Already Underway

In Finance

Within the Ethereum ecosystem, MakerDAO uses smart contracts to provide a stablecoin DAI collateralized by Ether, maintaining a fixed price of $1. Lightning Network enables Bitcoin to evolve into true peer-to-peer electronic cash—allowing micro-payments, quick remittances, and in-game transactions with minimal energy consumption.

NFT Market

Ethereum is the primary platform for NFT trading, enabling the transfer of value for art, music, and other digital content via non-fungible tokens. Polygon further lowers entry barriers—transaction fees are minimal, making NFT trading more accessible to ordinary users.

Gaming Ecosystem

In July 2021, Polygon established Polygon Studios to migrate gaming from Web 2.0 to Web 3.0. The studio provides marketing support, community building, and investment resources for developers. With Polygon’s scalability, game applications see improved transaction speeds, reduced latency, and higher throughput, significantly enhancing NFT trading efficiency.

What Will Ethereum 2.0 Change

Ethereum’s upgrade path (including the completed The Merge and planned sharding) represents the latest advancements in Layer 1 optimization. The upgraded Ethereum aims to handle around 100,000 TPS, far surpassing the current 30 TPS.

However, this does not mean Layer 2 will become obsolete. On the contrary, Layer 2’s role in the Ethereum ecosystem may become even more critical:

• Layer 1 upgrades only partially address scalability
• Layer 2 offers better solutions for complex DeFi operations and cross-protocol interoperability
• Combining both layers can maximize overall ecosystem efficiency

For example, projects like Polygon are developing cross-chain compatibility frameworks to gradually eliminate barriers between different Layer 2 solutions.

Direct Comparison of Layer 1 and Layer 2

The Future Hybrid Approach

Leading projects recognize that no single solution can perfectly address all scenarios. Future development will focus on:

• Combining fundamental Layer 1 optimizations with flexible Layer 2 scaling
• Using cross-chain technology to reduce friction between different solutions
• Allowing users to switch flexibly between layers based on actual needs

This hybrid strategy can ensure system security and decentralization while significantly boosting throughput and user experience.

Outlook

The development of blockchain scaling technology is directly related to the large-scale adoption of cryptocurrencies. As Layer 1 and Layer 2 solutions mature, ecosystems with faster transactions and lower costs are forming. DeFi, gaming, payments, and other applications will flourish accordingly.

This is not only a technological progress but also an essential step to bring digital assets and smart contracts into daily life. For those eager to participate in this revolution, now is the best time.