Cryptocurrencies, NFTs, Smart contracts, dApps––some of the hottest buzzwords today––have captured much attention, not to mention cash; but what value do they offer that renders so much capital? The answer is in the common denominator among all of them: the blockchain. As a sovereign data framework, the blockchain is independent of any singular, centralized authority. The blockchain’s unique, public structure is providing countless new opportunities in every industry. 

Popular blockchains like Bitcoin, Ethereum, Binance Smart Chain and Solana are considered “Layer 1” blockchains because they only have one data framework, known as a protocol, that their operations run on. When these blockchains first came out, the technology was not as saturated with users as they are now. However, as the number of users have grown, these Layer 1 blockchain monoliths have been unable to scale properly. 

For example, a cryptocurrency’s blockchain has to intake and verify every one of its transactions in the market. With many more transactions occurring each year as crypto’s popularity grows, having only a Layer 1 protocol means slow transaction speeds and slow block-add times. Currently it can take anywhere from ten minutes to over an hour to verify a single Bitcoin transaction, depending on the amount.

To solve this problem, developers are building Layer 2 on top of Layer 1 as scaling solutions. This allows for different technologies to run off of Layer 1 without straining its bandwidth. For instance, a developer may want to utilize Bitcoin’s security protocol to develop a dApp, but to build a dApp on Bitcoin directly would not be realistic since its transaction times are so slow. 

The solution for Bitcoin scaling is to build on top of it with a Layer 2, such as the Lightning Network. Lightning allows for batch-processing of transactions, allowing users to make fast payments on Layer 2. Lightning will then bundle a number of transactions together and verify them at a later time on Layer 1.

Ethereum developers have been working to release the long awaited Ethereum 2.0, but the release date continues to be delayed. 

In the meantime, Polygon is a scaling solution that acts like a Layer 2.

One way to think of the Layer protocols is to use the analogy of a railroad. A train has many railcars coupled together and runs on a single railroad track. In order to run multiple trains at the same time, or have one high priority train pass a low priority train, other tracks need to be built. Lights, signals and processes are implemented to make sure trains don’t get blocked or worse, crash into each other. To that end, a railroad will have multiple tracks built on and around one main line.

Layer 1

Layer 2

Knowing the basic concepts around blockchain architecture is crucial for developing faster transaction times, block-adds and increased security. Furthermore, it is good to understand the basic concepts to understand which projects and tokens make for a good investment. As blockchain technology continues to mature and improve, it will be able to meet market demand for the innovative solutions it can provide.