What is a Layer 1 network? – Defendant
Although Bitcoin was launched in early 2009, it took until 2017 for the blockchain to become mainstream. And it was only in November 2021 – almost 12 years after Bitcoin was launched – that Crypto’s market cap peaked at $ 2.9T.
The rise of Bitcoin has created immense wealth and changed the way society perceives money – and who controls its issues. But along the way, the blockchain became the victim of their own success. They could not handle all the traffic, resulting in long transaction times and high fees.
To understand why, we must understand why blockchain networks are also called Layer 1 networks and what separates blockchains from regular computer networks.
Blockchain vs. computer network
At a basic level, all blockchains are computer networks. Computer networks consist of a group of network participants, known as nodes, which relay data and share computing resources. These nodes can connect to each other in very different ways. There are four main types of computer networks:
- Mesh – A node connects to each other node
- Ring – A node connects two other nodes, creating a two-way ring
- Bus – A node only connects to another node
- STAR – A server node connects to a client node
Star is the most common computer network because it is fast and cheap. In Star networks, the central server node feeds data directly to other nodes, so data does not have to go through each node on its way to another node.
It saves network bandwidth and, because the server node provides computing resources directly to the client nodes, it is highly efficient. However, the price for this performance is high concentration, both in terms of control and the single point of failure (SPoF).
In contrast, peer-to-peer (P2P) networks do not use server nodes to coordinate networks. Instead, each node acts as both client and server, sharing computing resources across the network. Such networks solve the problem of centralized control and SPOF, making it ideal for P2P money like Bitcoin.
The cost of decentralization is that peer-to-peer networks tend to be less scalable. This problem applies to blockchain networks because they are protected by P2P network consensual mechanisms. Vitalic Buterin, co-founder of Etherium, called the balancing act the scalability trilema (also known as blockchain trilema).
Early blockchains were limited to offering only two features at a time, which meant sacrificing their scalability, security or decentralization.
What is Layer-1 Blockchain?
To address the scalability trilogy, blockchain networks began to adopt a variety of approaches. These methods are called Layer 1s – the base layer of a blockchain network. Bitcoin, Ethereum and Solana are examples of Layer 1 blockchain.
An obvious way to deal with the Level 1s scalability trilogy early on was by increasing the size of the block. In this way, the blockchain can process more transactions within each data block, increasing the number of transactions it can process every second.
However, increasing the size of the block will require node operators to maintain more powerful computers. Fewer people can afford them, which leads to greater concentration.
When billionaire Elon Musk proposed a 900% increase in Dogecoin block size, Ethereum co-founder Vitalik Buterin noted that the blockchain would not be decentralized if regular users, including consumer-grade PCs, could not run the node.
Modern Level 1s addresses the scalability trilogy through the consent process and sharding.
Consensus Protocol
Consensus algorithms underpin blockchain technology. In order for Bitcoin and other cryptocurrencies to have value, P2P networks need to address two key issues: double costs and incentives.
Twice the cost is when someone uses the same scarce resource twice (e.g. money). This is a problem inherent in digital technology because digital files are infinitely reproducible. To address this, blockchain makes each transaction unique with time-stamps and hashes and adds them to a batch of transactions known as blocks. To forge a transaction, a node must prove an entire block to be false.
This is where the consensus algorithm comes in. They coordinate all the nodes of the network in a decentralized manner. In order to pass through a block, the network must agree on the validity of the data contained in them. Importantly, if some network nodes submit fake information, the network can still function until most valid nodes control the processing power (hashrate) of the network.
“Unless most CPUs are controlled by power nodes that are not cooperating to attack the network, they will create the longest chain and outpace attacker.”
– Satoshi Nakamoto, inventor of Bitcoin
This type of network redundancy is called Byzantine Fault Tolerance (BFT). In a decentralized network, it is important for some nodes in the network to be functional even if they are not working properly. Otherwise, it will stagnate.
In addition to tackling the double-cost problem, compliance protocols provide incentives for nodes to hold processing transactions. This is equally important: why would anyone sacrifice their computing power and pay a hefty electricity bill for free?
In the case of Bitcoin, node operators who are called miners spend computational resources. For their problems, they get block rewards as BTC. This is known as proof-of-work (PoW).
Other blockchains, such as Proof-of-Stack (PoS), use validators as node operators. Instead of expending energy-hungry computing power, validators rely on stack (lock-up) resources – coins – to achieve the same compliance adjustment goal. Ethereum, for example, requires a 32 ETH partnership to become a validator. After the verifiers deposit the funds, they receive a deduction from the fee for each transaction.
There are various obstacles to overcome the corrupt actors. With Bitcoin, they must have more than 51% CPU power in their network, which is virtually impossible to achieve by its size.
The annual power consumption of the Bitcoin network is equal to that of Thailand, 204.5 TWh. Attackers need to collect more than half of that power to perform an integrated hack. Image Credit: digiconomist.net
With Ethereum, they need to have the largest ETH stock – in other words, the richest. However, the attacker must be prepared to lose those assets; The whole network will lose its value as soon as the fraudulent transaction is processed.
Although most new L1s use PoS, they are not always good at scalability. Solana, a PoS blockchain, has suffered multiple setbacks in the last 12 months after increasing its traffic load. Its stacking protocol did not work very well when about half of its nodes were hosted in only five data centers.
Solana network (mainnet) node (stacking) distribution. Image Credits: validators.app
Solana offers theoretical network throughput (TPS) of 50,000 transactions per second. That’s a lot more than Bitcoin’s ~ 5 TPS – but what’s the point if it’s not decentralized?
Sharing
Another Layer 1 scalability solution is sharding, which divides a network into smaller databases called shards. Each shard carries out its own transaction and adds blocks with its own nodes. By distributing the processing across lots of small shards, the load is removed from the main consensus process, resulting in higher TPS.
However, since each shard is small, it is easy for the attacker to raise the necessary funds or counting power to overcome it. For this reason, sharding in a large blockchain has not yet been proven.
Ethereum is leading the way and plans to implement sharding after the transition from PoW to PoS compliance in 2022. Ethereum Sharing, scheduled for 2023, will divide Ethereum into 64 shards.
The network will try to address the security concerns of sharding by randomly allocating nodes to other shards as well as allocating nodes to shards.
The goal of other sharding tests is to completely solve the scalability trilogy. The Swiss-based Distributed Technology Research Foundation (DTR), comprising seven universities, launched the Unit-e project in 2019 as a measurable global payment network. Another project, Radix, partially orders shards instead of framing them into a single timeline, as does Ethereum.
What is the solution to Layer-1 scalability?
Tempering with a blockchain network is a delicate matter. Most people are already skeptical of crypto. Bitcoin has managed to allay those concerns for a decade, so its level-1 upgrades are more conservative.
The latest Bitcoin upgrade, Taproot, has launched Schnorr Digital Signature. They allow the network to conduct multiple transactions simultaneously to reduce fees and increase scalability. However, Bitcoin still prefers Level 2 solutions for true scalability through the Lightning network.
The same is true of Ethereum, which has built dozens of Layer 2 networks on top of Layer 1.
Top 10 L2 Solutions for Ethereum. Image Credit: L2beat.com
In both cases, the L2 protocols remove the workload of the main L1 chain, process it elsewhere, and feed data to L1 in a much more efficient manner. As mentioned in the table above, L2s use a variety of scalability technologies to accomplish this.
However, an ecosystem of L1 and L2 networks is complex. Tokens must be transported across the blockchain bridge, and each dApp must be integrated into each L2. Conversely, only engaging with the L1 network will make life easier for developers and users.
L1s such as Cardano, Algorand, Elrond, Fantom, Avalanche and Harmony have all tried to fix the scalability trilogy, but there is no trace of approaching Bitcoin or Etherium. Still in their infancy, it is too early to conclude whether even blockchains, including Operational Mainnet, have greatly improved over BTC or ETH.
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