Layer 1 vs Layer 2 scaling: What’s the difference?

Level 1 and Level 2 scaling solutions represent two distinct approaches to addressing the scalability challenges of blockchain technology. Level 1 scaling involves making fundamental changes at the base layer of the blockchain protocol itself, such as modifying consensus mechanisms or core parameters, to increase the network’s capacity and throughput.

By comparison, Level 2 scaling solutions are built on top of existing blockchain networks and aim to enhance scalability by moving some transactions and computations off-chain, thereby reducing congestion and improving overall efficiency while maintaining the security of the underlying blockchain. These two approaches play complementary roles in achieving a more scalable and efficient blockchain ecosystem.

This was explained in more detail during a recent panel discussion at the London Blockchain Conference. The panel was moderated by Kurt Wuckert Jr. (GorillaPool Founder) and included:

The pros and cons of off-chain and on-chain

The panel offered a deep dive into the pros and cons of both off-chain and on-chain transactions and why each one may be preferred for a particular purpose. On-chain transactions occur directly on the blockchain network. These transactions are typically executed using smart contracts, self-executing contracts with predefined rules and conditions.

Off-chain transactions are typically used to address the limitations of on-chain transactions, such as scalability and transaction speed. They involve the use of secondary protocols or layer-two solutions that leverage the security and finality of the underlying blockchain while enabling faster and more efficient transactions.

The discussion then expanded into the pros and cons of Layer 1 and Layer 2 blockchain transactions. Layer 1 blockchains utilise methods such as changing the consensus mechanism, forking the chain, and sharding. By comparison, Layer 2 scaling solutions exist as state channels, nested blockchains, rollups, and sidechains. Changing the consensus mechanism, forking the chain, and sharding.

Davies elaborated on the shift to Layer 2 solutions, highlighting the transition to a fundamentally distinct set of rules compared to Bitcoin’s Layer 1. According to Davies, when operating on Layer 2, you are essentially engaging with Bitcoin while introducing an additional layer of complexity. This, he argues, expands the scope of potential risks rather than confining everything to Layer 1.

The issues of scalability and anonymity

Murray said that one of the key contentions around level 1 and level 2 scaling comes down to the ‘myth’ that Bitcoin cannot scale. The other issue is that there is a desire for anonymous transactions and the obfuscation of the identities behind those transactions, he said.

‘From a topological perspective, the nodes in the network form a densely connected core, and once you send a transaction to Layer 1, it’s reflected instantaneously,’ said Murray. ‘In Layer 2, it’s a mesh network—to get the transaction from a to b, you have to go from hop to hop. In Bitcoin, you’re talking two hops or less.’

Andrew pointed to the original Bitcoin white paper, which he noted was specifically trying to eliminate the requirement for trusted third parties.

‘One way of looking at all these layers is as a series of trusted third parties introduced into the system. In that sense, rather than eliminating the trusted third party, you’re introducing new trusted third parties, like the lightning network. You have to trust them to do their bit,’ he said.