Blockchain Scaling Solutions – Peeling Back the Layers

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  • Blockchain scaling solutions are a hot topic in the crypto space and have been for some time
  • Typically there are two types – Layer 1 and Layer 2
  • What are the advantages and disadvantages of each?

There’s lots of talk at the moment about Layer 1 and Layer 2 scaling solutions to blockchains, and rightly so. Ethereum is about to roll out its most important upgrade since its creation via a hard fork in 2016, of which a Layer 1 scaling solution called ‘sharding’ will play a vital role, while a Layer 2 solution, Lightning Network, is the reason why El Salvador has been able to move forward with its plan to adopt Bitcoin as a legal currency. But what are Layer 1 and Layer 2 scaling solutions, and which is better? Our beginners guide explains all.

Scaling Solutions ‘Speed Up’ a Blockchain

Scaling solutions are simply a way to make a blockchain work faster. For a technology that seeks parity with everyday payment solutions from the likes of Mastercard and Visa, blockchain is always looking to get more of an edge in the speed race. While newer blockchains have enough speed and throughput to challenge mainstream payment processors, older blockchains need to rely on scaling solutions to achieve this. To do this they have two options, Layer 1 scaling solutions or Layer 2 scaling solutions.

Layer 1

Layer 1 scaling solutions involve making changes to the blockchain itself in order to increase its speed and efficiency. Such changes typically include increasing the block size to carry more transactions per block or, less frequently, increasing the speed at which blocks are added to the blockchain.

The chief benefit to Layer 1 scaling solutions is that the gains are wholesale, meaning they will positively impact every project running on that blockchain, and no project has to go through any additional software in order to achieve the increases. It’s a bit like your home internet suddenly being upgraded – every device on the network suddenly runs faster and your experience doesn’t change.

Layer 1 Changes Are a Risky Business

However, the fact that Layer 1 scaling solutions require making changes to the blockchain also represent their biggest risk; any mistake could end in a temporary outage, or worse, a collapse of the blockchain. Imagine if the engineer carrying out the upgrade on your internet accidentally cuts a critical wire. No internet for anyone until it’s fixed. Layer 1 scaling solutions must therefore be planned and carried out carefully, with a great deal of testing required to ensure minimal disruption.

The other issue with Layer 1 solutions is that they require consensus from the community before they can be undertaken. In a closed project this is not that difficult to do, but with genuinely decentralized cryptocurrencies like Bitcoin and Ethereum this means the advantages and risks being discussed, a proposal being put forward, and then a vote, which of course may not pass..

Layer 1 Changes Can Become Political

Layer 1 solutions can become intensely political, as we saw with the Bitcoin/Bitcoin Cash hard fork of 2017 – Bitcoin supporters didn’t want to increase the block size whereas Bitcoin Cash supporters did. This led to a hard fork which saw Bitcoin Cash developers make a Layer 1 scaling change by increasing the block size, which currently stands at 32MB compared to Bitcoin’s 1MB.

Ethereum is also going through a process of major Layer 1 scaling upgrades as part of its Ethereum 2.0 upgrade.

Layer 2 Scaling Solutions

Layer 2 scaling solutions involve building products that sit on top of the blockchain in question rather than making changes to it. Rather than transactions going through the main chain and clogging it up (’on chain’), they are instead routed through side-networks with far faster throughput which conduct the transactions independently (‘off chain’), holding the relevant funds until they are added to the main chain at a later date when there are less demands on the network.

The best known example of a Layer 2 scaling solution is the Bitcoin Lightning Network, which its designers hope will bring the possibility of micropayments back to the Bitcoin network.

Layer 2 Brings More Options

Layer 2 scaling solutions have the advantage of operating at speeds in no way related to the
blockchain on which they operate – they can be as fast as their own technology allows. Transactions are therefore instant and incredibly cheap. Layer 2 scaling solutions are lightweight and use similar methods to the blockchain on which they are based, with competition driving innovation in the Layer 2 space.

The major advantage of Layer 2 scaling solutions is that they require no meddling with the blockchain, reducing the opportunity for error and failure. Also, dApp developers can use whichever scaling solution they prefer rather than waiting and hoping for a Layer 1 solution that may or may not work to be proposed and voted through.

Third Party Interference

The major disadvantage of Layer 2 scaling solutions is that they introduce a third party into a transaction. This increases risk (the scaling solution could be badly designed or hacked) and friction (another hoop to jump through). It also means that users could have to familiarize themselves with numerous front ends, rather than relying on tried and tested methods on the original chain – an experience that wouldn’t change with a Layer 1 solution.

Using the internet analogy again, Layer 2 solutions are like having to connect to your home internet through separate apps depending on what website you wanted to visit rather than just having one connection to cover every site or action.

No Clear Winner in Layer Battle

Clearly, both Layer 1 and Layer 2 scaling solutions have their merits and their faults, and often the decision of how to scale comes down to more than just the technology available. Scaling solutions are only really needed for older proof of work blockchains like Bitcoin, Litecoin, and Ethereum (which is moving to a proof-of-stake consensus mechanism anyway, partly to alleviate the scaling issue).

There will always be a debate about whether Layer 1 or Layer 2 scaling solutions are better, but this debate drives technology to improve what it can bring to the table, which can only be a good thing for the space.