Layer-1 vs. Layer-2 Blockchains: What You Must Know

Bitcoin did the heavy lifting of creating a peer-to-peer decentralized and tokenized financial network. One person can send another person halfway around the world $1,000,000 in BTC for a paltry $20, sometimes even as low as a dollar and change. 

The problem is that microtransactions, such as sending a friend $4 for a cup of coffee, cost the same. 

Similarly, Ethereum created an entire galaxy of possibilities for DeFi, NFTs, and other decentralized applications. However, the breadth of its value has also been one of its detractions– as network gas fees skyrocket in times of extremely high traffic, making using the network ludicrously expensive for users and developers alike. 

CryptoKitties, an early sensational NFT game, nearly ground Ethereum’s network activity to a halt in 2018 due to the throng of transactions. Even today, gas fees can be hundreds or thousands of dollars to mint a new Ethereum-based NFT. 

However, problems are usually followed by problem solvers. Hundreds of developers have dedicated their professional lives of late to either building decentralized apps to help scale projects like Bitcoin or Ethereum or creating more scalable networks from the ground up. 

Layer-1: The underlying blockchain architecture. For example, Bitcoin and Ethereum.

Layer-2: A network that sits on top of Layer-1, which facilities network activity. For example, the Lightning Network and Raiden Network.

The following Layer-1 vs. Layer-2 blockchain guide explores both approaches and how they contrast. 

Layer-1 vs. Layer-2 Blockchains: The Basics

Layer-1 updates usually involve consensus protocol changes or sharding

As you may know, Bitcoin and Ethereum use a gawky but effective consensus protocol called Proof-of-Work (PoW). It’s good at what it does because it works. However, as network activity grows, its limitations become unbearable for many. 

PoW requires miners to solve cryptographically-difficult equations via computational power– hence Bitcoin mining facilities that are just warehouses with specifically designed computers running 24/7/365

At times, transactions can take way too long for convenience’s sake and become very expensive. Bitcoin can manage about seven transactions per second, whereas Ethereum can do 15-20. 

Proof-of-Stake (PoS) is a relatively newer protocol; rather than computation power, it relies on people (validators) staking a certain quantity of holdings to validate transactions.

Changing consensus algorithms can be a divisive ordeal, and switching from PoW to PoS on a network as large as that of Bitcoin or Ethereum would require achieving agreement among the majority of participants, which can be extremely difficult. 

Sharding is another Layer-1 scaling strategy. Sharding breaks transaction sets into smaller chunks called shards, which the network can process at a much faster rate. Think of cutting a PBJ sandwich into small pieces (shards) versus eating it bite by bite. Each small piece you eat is a finalized transaction, whereas the latter approach would require the whole sandwich to be eaten before the transactions are final. 

Attempting to implement scalability measures on a Layer-1 blockchain would require a full or partial network update, which is a slow and contentious process; if things go sideways, the entire network could face enormous damages. 

Many projects have been launched to provide users the scalability that the more legacy cryptocurrency projects have struggled to do. 

For example, chains like Solana, Cosmos, and Cardano (yet to launch anything) have emerged in attempts to unseat Ethereum as the most popular blockchain network for dApps, primarily targeting its scalability issues and low-hanging fruit. 

The user experience tends to be much faster and cheaper on the newer Layer-1s– transactions on Osmosis, a decentralized exchange built on Cosmos, cost around a penny. In contrast, the Ethereum DEX UniSwap can cost dozens or hundreds of dollars. 

However, the opportunity to scale the world’s most popular Layer-1s instead of launch new ones from the ground up is an admirable and lucrative challenge accepted by many. 

They do so through Layer-2 blockchain innovation

Layer-2: Attempts at Scalability

Layer-2s are essentially sandboxes for creativity with minimal or zero disruption to the underlying network.

There are two types of Layer-2 blockchains: state channels and nested blockchains.

A state channel allows for two participants who would otherwise interact on the blockchain to interact off the blockchain, limiting the congestion of the network. 

Imagine Bitcoin’s or Ethereum’s blockchain as a 10-lane superhighway with bumper-to-bumper traffic. A state channel would be the back-road approach you could take to avoid driving into a slow, expensive network and get to your end destination at a fraction of the time and cost. 

Here’s how state channels work: 

  1. A blockchain segment is sealed off through a smart contract or multi-signature means, where all participants agree on the conditions. Lightning Network and Raiden Network used Hashed Timelock Contracts (HTLCs) for their state channels. 
  2. The transaction participants can then directly interact without needing to submit their request to the miners on the Layer-1. 
  3. When all the transaction sets on the state channel are complete, the final state is added to the blockchain. 

So, while a transaction is technically not “final” until added to the blockchain, state channel projects like Bitcoin’s Lightning Network and Ethereum’s Raiden Network effectively carry out the role of policing and verifying transactions. 

The idea is that these “batched” transaction blocks can effectively internally settle; when they do, the entire batch is added to the blockchain. As such, Lightning Network enables fast microtransactions (low fees, fast settlement), and Raiden does the same thing for Ethereum’s broader functionality. 

However, state channels have some limitations. 

Nested blockchains aim to increase scalability exponentially, whereas state channels are more linear. 

Ethereum is a popular breeding ground for decentralized apps to solve scalability issues. OmiseGO, for example, is experimenting with a nested blockchain scaling solution called Plasma. 

In Plasma, multiple levels of specific-use blockchains sit on top of the leading blockchains in parent-child connections. The parent chain then dedicates specific work to child chains, such as a social network or decentralized exchange.

The root chain still calls all the shots and sets the ground rules, but nested blockchains relieve some load. 

Final Thoughts: What You Should Know About Blockchain Scalability

While the differences between Layer-1 and Layer-2 solutions might seem exclusively technical, it’s worth considering that by collecting NFTs, holding tokens, and using dApps, you’re the direct stakeholder in the whole ordeal. 

While Ethereum enjoys a considerable first-mover advantage for NFTs (and DeFi), boasting multi-billion-dollar dApps like OpenSea, competitors are gaining on its tail. 

As an NFT investor or creator, being aware of broader industry trends like scalability is an excellent way to keep your ear to the ground, whether that be for the purpose of finding the next BAYC (on another chain) or creating the next homerun NFT brand for a diehard layer-1 alternative. 

Pastel SuperNode Founder Program

We are pleased to announce the SuperNode Founder Program — become one of the first SuperNodes activated on the network, gain increased credibility in the validator community, and earn additional exclusive rewards from the foundation.

Existing SuperNode Use-Cases and Incentives

Pastel has made every effort to permeate decentralization and democratization across all aspects of our ecosystem. Having a network of reliable, redundant SuperNodes is key to powering NFT capabilities — such as registration, activation, and validation — along with providing enhanced security, reliability, and governance. By staking 5 million PSL and dedicating computational resources to the network, SuperNodes are instrumental in running both Sense and Cascade protocols, and ensuring such functionality is easily accessible in a trustless fashion via open Web APIs.

The SuperNode Founder Program was created to reward early network participants for their contribution and activity in the ecosystem as well as encourage long-term decentralization. As it stands, the SuperNode Network receives 1,250.00 PSL of each Block Reward, which is randomly distributed to any given SuperNode per block (assuming the SuperNode is in good standing with the network and is not slashed for failure to act or malicious behavior).

At the time of writing, the implied Block Reward APR for simply operating a SuperNode is ~49.58% based on a current block time of 2.5 minutes, 106 active SuperNodes, and 5 million PSL collateral required.

Additionally,  SuperNode operators are able to earn additional Transactional Rewards for performing various network functions such as registering NFTs or performing Sense requests. As more partners like Nervos and TomoChain integrate with Pastel, SuperNodes should expect to see dramatic growth in overall transaction throughput on the network and thereby healthy growth in Transactional Rewards.

Please see documentation on how to run a SuperNode here.

Read about our SuperNodes and the operator rewards in the “About SuperNodes” section below

Founder Program and Other Incentives

The Founder Program is intended to incentivize early SuperNode operators with additional rewards for participating in the network, providing enhanced performance, ensure network security, and encourage long-term decentralization. The first 250 SuperNodes activated on the Pastel Network will become members of the Founder Program, tracked by their unique PastelID and Address. In addition to receiving Block and Transactional Rewards, Founder SuperNode operators will also become eligible for random PSL or NFT airdrops.

In the future, we will be devising a leaderboard system that tracks various transaction activity per Founder SuperNode — such as the number of NFTs registered or the amount of Sense and Cascade requests processed. Each month, we intend on rewarding the top 10% of SuperNodes with additional awards like fresh NFT mints or other perks from new network partners.

Note that Founder Program rewards are not, nor will ever be, the main incentive to running a SuperNode. They are a bonus reward from the foundation as a ‘thank you’ for becoming an integral part of our ecosystem. Founder Rewards are separate from the Pastel Protocol and administered by the Pastel Foundation on a best-effort basis. While this administration adds a small degree of centralization to the Founder Program, this is mitigated by the fact that it is optional and has no impact at the protocol level.

About SuperNodes

To handle the requirements of running an application-specific blockchain while preserving maximal decentralization and ensuring that the system is scalable over the long term, we leverage the concept of a SuperNode. Rather than having every full network node in the Pastel system independently verify and handle all the functionality of the system, we have a class of special SuperNodes which are dedicated, high-performance machines that can handle the demanding storage and computational requirements of verifying and serving digital NFT files.

SuperNodes are powerful servers operating at static IP addresses with 24/7/365 expected uptime, backed by collateral held in PSL and are designed to provide advanced transactional services, verification, and governance on the Pastel blockchain. Anyone around the world can launch their own SuperNode — all they need is a fast, internet-connected computer, a modest level of technical knowledge for set-up, and 5 million PSL to serve as collateral. This structure ensures that the system remains fundamentally permissionless: the user does not need to ask anyone’s permission to run a SuperNode. The network can continue to achieve decentralization, with the capability of performing more work and being much more flexible.

The other benefit of SuperNodes is that they create a healthy financial alignment between the custodians of the machines that operate the network and the owners of PSL coins, which creates a virtuous cycle of incentives. SuperNode operators are provided with 20% of the block reward and are also given the opportunity to vote on up to 10% of the remaining block reward to fund community initiatives to support the Pastel ecosystem. Key PSL stakeholders have a direct incentive to make sure their SuperNode is operating properly and not damaging the system.

We have also designed various mechanisms such as Storage Challenges to detect, prevent, and harden against attack vectors or malicious SuperNode operators. Furthermore, the system tracks the reputation of nodes over time in a decentralized way so that nodes observed manipulating or damaging the network can be voluntarily banned or ignored.

Founder SuperNodes are by no means different from other SuperNodes in the way they interact with the network; they are not trusted more than other SuperNodes, and they earn the same economic returns from the Pastel Network as any other SuperNode in good standing.

About Pastel Network

Pastel is the world’s preeminent protocol standard for NFT technology. Pastel also allows for the development of third-party applications to sit on top of its Network, enabling developers to enjoy the scalable registration features, storage processes and security of the broader ecosystem. Lightweight protocols such as Sense — which was built to assess the relative rareness of a given NFT against near-duplicate metadata — and Cascade — which conducts permanent, distributed storage of underlying NFT data — can be integrated across any native L1 blockchains or L2 marketplaces.

Pastel is an entirely native blockchain supported by SuperNodes, which provides computational resources to the network to support asset registration, distribution, and permanent storage. Pastel is managed by world-class developers, cryptographers, and technologists, supported alongside an experienced and extensive network of marketers, influencers, and third-party agencies. Pastel is backed by key stakeholders including Innovating Capital, a prominent venture fund.

This article was first published by our team here.