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Executive Summary
Scaling blockchain solutions are categorised as Layer 1 or Layer 2 by whether they focus on or off the main blockchain. Layer 1 solutions modify the base protocol, while Layer 2 solutions offload transactions from the main chain.
- Block Reparameterisation packs more transactions into a block to increase throughput.
- Sharding divides the blockchain into shards. Each shard is responsible for the transactions within its partition.
- Consensus Mechanisms facilitate swift transaction validation between the network participants.
- A Directed Acyclic Graph (DAG) reshapes the blockchain into a tree-like structure allowing multiple processes to run simultaneously.
- A Payment Channel is a peer-to-peer network enabling quick and inexpensive transactions off the chain.
- Rollups aggregate transactions inside a smart contract, offering scaling benefits up to 100 times. They come in two categories, Optimistic Rollup and ZK Rollup.
- Sidechains are blockchains that exist alongside the main chain and use their own mechanisms.
Key Highlights
- Centralised financial institutions outperform cryptocurrencies in terms of throughput. Visa boasts up to 65,000 transactions per second (TPS), while Bitcoin around seven TPS. The blockchain scalability problem is widely known as the Scalability Trilemma, which illustrates that a blockchain system must make a trade-off between scalability, decentralisation, and security, by picking a maximum of two out of three.
- Layer 1 vs Layer 2 scalability solutions differ in whether they focus on or off the blockchain. Layer 1 solutions upgrade the blockchain architecture, while Layer 2 solutions construct a third-party network on top of the main blockchain to improve it. For example, the Lightning Network is a Layer 2 solution built on top of Bitcoin, which is Layer 1.
- Layer 1 solutions alter the blockchain architecture to improve scalability from the ground up. Popular L1 solutions include block reparameterisation, sharding, consensus mechanisms, and alternative data structures (i.e., DAG). Sharding achieves a remarkable throughput of 1,000,000 TPS, while DAGs reduce finality to one second.
- Blockchains use consensus mechanisms to reach agreements without relying on trust. Thus, consensus mechanisms significantly affect the network’s efficiency. While Proof of Work (PoW) is arguably the most popular, it is outperformed by newer techniques such as Proof of Stake (PoS).
- Layer 2 solutions enhance scalability by building a new computational layer to decongest the main chain. For example, payment channels can handle millions of transactions per second with near-instant finality.
- L2 solutions mainly focus on Rollups and Sidechains. The Optimistic Rollup is currently the most popular solution, with over US$2.71B locked in protocols, but remains an order of magnitude far from Ethereum.
Read the full article: Scaling Blockchains: Layer 1 vs Layer 2 – An Overview of Scaling Solutions
Authors
Crypto.com Research & Insights team
