A Layer 1 blockchain is the term used to describe the parent––or base layer––blockchain network. Ethereum and Solana are examples of Layer 1 blockchain networks. To remain competitive within the Decentralized Finance (DeFi) network, infrastructures must demonstrate their ability to balance the Blockchain Trilemma: decentralization, security, and scalability.¹ Of the three, blockchain scalability remains the dominant design concern for existing and emerging platforms.
LAYER 1 BLOCKCHAIN SCALABILITY
Scalability is measured by a Layer 1 blockchain’s ability to support high transactional throughput and future growth.² To resolve scalability issues, blockchain developers have two main routes of implementation: Layer 1 and Layer 2 scaling solutions. A Layer 1 scaling solution is an innovation or change to the underlying parent network protocol. Consensus protocols, like Ethereum’s Proof of Stake (PoS) consensus mechanism and sharding, are the most common Layer 1 solutions.
In contrast to Layer 1 strategies, Layer 2 scaling solutions are secondary layers of protocols that integrate with blockchains to improve network performance. Think of Layer 1 blockchains as the main network and Layer 2 scaling solutions as performance-enhancing attachments. Layer 1 and Layer 2 blockchain scaling solutions are mutually beneficial innovations designed to optimize network performance.
WHY IS SCALABILITY IMPORTANT?
Decentralized blockchains distribute data management duties and computation requirements across nodes. Validator nodes evaluate transactions and secure the network via consensus mechanisms like Proof of Work (PoW) and PoS. A network’s ability to scale these essential blockchain functions is vital to the health, reputation, and survival of a decentralized platform.³
Pioneered on Bitcoin and adopted as the foundation for the Ethereum network, PoW is the original blockchain consensus mechanism. The PoW consensus algorithm provides reliable network security and an ability to maintain reputable decentralization. PoW’s inherent scalability limitations directly contribute to network security––it is prohibitively expensive for hackers to interfere with the consensus mechanism or to manipulate data within blocks containing a linear history of the entire network. Thanks to the PoW consensus mechanism, bitcoin is regarded as a secure store of value due to the blockchain’s renowned security and global trust in the network’s censorship-resistant ‘decentralization’ value proposition.
Though PoW is an asset to ‘store of value’ minded bitcoin investors, the consensus mechanism’s extensive computational demands are a scalability pain point for Ethereum’s popular programmable blockchain. The network experienced rapid adoption by DeFi proponents and decentralized application developers who recognized the value of its smart contract platform. Scalability concerns inherent to PoW became a source of inspiration for Ethereum to innovate away from the onerous consensus mechanism. Ethereum developers are exploring several layer 1 and layer 2 scaling solutions in response to robust network activity.
ETHEREUM AND LAYER 1 SCALING SOLUTIONS
The Proof of Stake consensus mechanism is Ethereum’s hallmark Layer 1 scaling innovation.⁴ It is designed to supplant the need for resource-intensive mining with validators that ‘stake’ the network’s native coin, ETH, to the blockchain. By staking coins like ETH, the PoS consensus mechanism provides a strong incentive for validators on Layer 1 blockchains to contribute to network security or risk losing their staked investment. Ethereum is in the process of fully transitioning from PoW to the ‘Ethereum 2.0’ PoS blockchain.
Sharding is another popular Layer 1 scaling method pioneered on the Ethereum network.⁴ As the busy network moves towards Eth 2.0, this solution helps alleviate congestion by breaking transactions into shards of smaller data sets to expedite processing.
THE FUTURE OF LAYER 1 BLOCKCHAINS
Emerging Layer 1 blockchain developers are positioned to leverage Bitcoin and Ethereum’s pioneering protocols while continuing to jettison elements that hinder scalability. A new generation of Layer 1 blockchains and protocol innovations are emerging to resolve scaling challenges. Emerging blockchains like Solana have incorporated Ethereum’s PoS consensus mechanism and are spinning off with their own L1 scaling solutions.
For DeFi to continue to thrive and compete for longevity alongside traditional financial platforms, Layer 1 blockchain performance must be able to exceed the performance of centralized, mainstream transaction platforms.
Developers are sprouting off of the Ethereum network and designing Layer 1 blockchains with scalability solutions aimed at solving the Blockchain Trilemma.¹ A new generation of Layer 1 blockchains and protocol innovations––like Solana and its promising Proof of History protocol––attract investors and talented developers hoping for association with a truly scalable blockchain. DeFi is likely to be defined by multiple Layer 1 smart contract blockchains with solutions that cater to use cases that have yet to be discovered.⁵
1. “The Blockchain Trilemma: How to Achieve Fast, Secure, and Scalable Networks,” Gemini, last modified September 28, 2021, https://www.gemini.com/cryptopedia/blockchain-trilemma-decentralization-scalability-definition.
2. “Scaling overview,” Ethereum.org, last accessed November 28, 2021, https://ethereum.org/en/developers/docs/scaling/.
3. “Introduction to Smart Contracts” Ethereum.org, last accessed November 28, 2021, https://ethereum.org/en/developers/docs/smart-contracts/.
4. “Layer-1 and Layer-2 Blockchain Scaling Solutions,” Gemini, last modified October 13, 2021, https://www.gemini.com/cryptopedia/blockchain-layer-2-network-layer-1-network#section-layer-2-scaling-solutions.
5. “DeFi, Layer 1 wars & the Supercycle | Predictions with Qiao Wang,” Empire, September 23 2021, https://podcasts.apple.com/za/podcast/defi-layer-1-wars-the-supercycle-predictions-with-qiao-wang/id1554930038?i=1000536381761.
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