What are Blockchain Layers?

Layer 1 vs Layer 2

According to CoinMarketCap, there are nearly 20,000 cryptocurrencies, and they diverge quite significantly in terms of underlying blockchains and technology. Layer 1 blockchains are full cryptocurrency platforms or networks by themselves, while Layer 2 blockchains, which are often referred to as side-chains, are an extension of their Layer 1 parent chains with the purpose of introducing additional benefits, such as an additional data layer.

Layer 1 is often described as the base layer of a protocol whereas layer 2 is often a 3rd party solution meant to specialize or abstract portions of base layer functionality while adding functionality or features. Those additional features can vary, but can include one or more of the following:

• Increasing the transaction speed
• Increasing the number of transactions per block
• Decreasing the cost of transaction processing
• Introducing alternative consensus mechanisms (such as a Layer 2 Proof-of-Stake sidechain for a Layer 1 Proof-of-Work network)

The predominant Layer 1 solutions include Bitcoin (BTC), Ethereum (ETH), Solana (SOL), Cardana (ADA), and Terra (LUNA) while Layer 2 solutions of note include Lightning Network (LN), Polkadot (DOT), Polygon (MATIC), Arbitrum, and Optimism.

Regardless of layer type, all will have some form of validator mechanism which could be viewed as the hardware layer of the chain, as that is where the transaction computation/mining will take place. Without this hardware infrastructure layer, just like with any computational program, blockchains would not be able to exist. One of the key differences between traditional and decentralized networks is who controls this layer.

One of the more technical reasons for implementing Layer 2s on top of Layer 1s, which we won't dive into detail here is the Scalability Trilemma, or in this case the blockchain trilemma, which is basically you can have two of three things, but forgo the third item to do so. As a blockchain developer, which do you choose? Blockchain scalability is really a balance between all three.

‍Coin vs Token

Coins typically have their own native blockchain solution, while tokens are assets that can run on top of an existing blockchain. A good example of native coins include Bitcoin (BTC), Ethereum (ETH) or Solana (SOL).

With the introduction of Ethereum, and its innovative smart contract capabilities, it became possible to create non-native cryptocurrencies that effectively used the template of ethereum. Specifically, Ethereum introduced the ERC token definition, which allowed other developers to fairly easily launch their own cryptocurrency without building all of the underlying Layer 1 technologies that would normally be required. These ERC tokens ride on top of the Ethereum blockchain, making use of all ETH’s benefits, while providing additional and unique benefits or features.

Newer blockchains such as Solana (SOL) with its SPL tokens, are also introducing this concept in order to drive innovation and network growth factors on its platform.