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. 

Are NFTs Truly Decentralized Art?

There are quite a bit of misunderstandings around NFTs. Many people think NFTs are minted on the Ethereum blockchain through a platform like Rarible and — voila! — the art is non-fungible and lives forever in a decentralized manner on the blockchain. But that’s not entirely the case. NFTs, or “non-fungible tokens” are really only non-fungible to the extent that it refers to the actual token, not the underlying artwork or rare asset itself. As such, the token and the “asset” it represents are two completely different things.

Huh?

Okay, let’s rewind a bit here. Although NFTs are often associated with digital art or GIFs these days, the reality is that they are better understood as a class of assets that are non-fungible. The $10 bill you used to pay for the coffee this morning? Fungible. The fingerprint you left on the bill when paying? Non-fungible. But is your fingerprint an asset? Debatable, depending on how much fingerprints go for on the black market these days (a joke, relax). But a key thing to remember is that non-fungible does not classify an object as rare, nor does it ensure that it is ‘rare’ or even decentralized.

This concept was probably best illustrated with a recent “rug pull” stunt conducted by one clever sculptor on the OpenSea platform. The artist exchanged the original JPEG images that the collectors thought they were purchasing with random pictures of rugs after the sale concluded. The intent of the stunt was to highlight the inherent problem of the current NFT infrastructure — which is mostly built on the Ethereum blockchain. By purchasing the NFT, the buyer would simply own the token to authenticate the JPEG listed on OpenSea, which at the time of purchase was a dope piece of art. But because the underlying digital asset itself is not decentralized, and might be stored on a central server somewhere such as on AWS or GCS, the buyer has no control in terms of what the NFT itself represents.

In other words, the non-fungibility is currently applied to the token representing the transaction of the purchase — not necessarily the owner of the physical (or digital) piece of art.

This is a common problem in the NFT sphere, as buyers often misunderstand the underlying infrastructure of the art they are buying, which can be problematic when there isn’t a physical equivalent of the purchase, ie: a digital GIF.

With most NFT marketplaces being built on Ethereum, another key problem is raised. The Ethereum network is often congested by other sectors such as DeFi, which eat up the majority of the bandwidth and exponentially raises the prices for minting and transacting NFTs. When compounded with the previously outlined problem, it is easy to see why the NFT art space is not the perfect picture it is painted to be after all.

This is where a platform like Pastel can paint a brighter future. Unlike Rarible or OpenSea, Pastel has built its own layer 1 blockchain to compete with Ethereum based platforms. This brings with it an innate advantage because the underlying architecture is designed to be perfectly outfitted and purpose-built for the sole use case for digital art and other rare digital assets, rather than being a do-it-all blockchain like Ethereum. With fewer projects demanding bandwidth, minting and trading NFTs on Pastel is significantly lighter on your (digital) wallet as well due to very low gas costs

In regards to the main problem of preventing “rug pulls”, Pastel ensures that the art (or other NFT) itself is uploaded, verified, and registered on the Pastel blockchain — rather than just the token it is minted with. Through a series of smart tickets living on the Pastel ledger, artists can store their masterpieces in a distributed fashion across a variety of Supernodes as opposed to just ensuring the token is non-fungible. This sophisticated storage layer, leveraging the RaptorQ fountain code algorithm, ensures that each asset is broken up and stored in a series of redundant, fungible chunks. These sets of chunks ar ethen distributed across the network using the Kademlia DHT algorithm. So what does this really mean? In short, even if over 90% of hosted instances suddenly go down, the remaining information can be reconstructed quickly and there is no possibility of the artwork disappearing.

So the next time you purchase an NFT, make sure you understand how and where your rare digital asset is stored — so that you won’t have the rug pulled out from underneath you.

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Pastel Mainnet Launch

Today, Pastel has announced that it has open-sourced its mainnet to the community for public release. Pastel is an open-source, decentralized system allowing artists to register “provably rare” assets on a Bitcoin-like blockchain, while also allowing art collectors to purchase these artworks and “trustlessly”  trade them among themselves without reliance on a central authority. After months of extensive development and testing, the Pastel Network mainnet is fully developed and live.

The network allows art collectors to purchase these artworks and “trustlessly” trade them among themselves without reliance on a central authority. Over two years ago, the team set out to develop the underlying infrastructure for a fully decentralized digital art platform, to better democratize the digital art world.

The core of the network is built on top of Z-Cash, leveraging EquiHash, a 2.5 minute block time, and an emission schedule relatively aligned with that of Bitcoin. Furthermore, the platform allows for shielded transactions by employing a Z-SNARKS Trusted Setup. 

However unlike Z-Cash, there is no hardcoded mining reward and instead, compensation and promotion of the pastel Network is conducted using a decentralized voting system controlled by Masternodes, the cornerstone of the Pastel architecture. Pastel implements essential elements from DASH, making it a novel masternode based cryptocurrency with full support for Z-SNARKS. On top of underpinning the overall security and validity of the network, Masternodes serve a key operational use case of the platform as they are critical for registering artwork and facilitating trading between users. 

With the attributes of Z-Cash and Dash, Pastel has built a secure system able to identify network participants – artists, collectors, and Masternode operators – across all interactions. This attribute is essential for having a functional reputation tracking system and for detecting and mitigating hostile behavior by malicious users.

Perhaps most importantly, compute intensive applications and operations are enabled by processing capabilities provided by the network’s Masternodes. To be specific, the application’s artwork registration flow lends itself to a sophisticated system that combines near-duplicate image detection and testing for inappropriate content – each with their own novel and innovative framework which leverage advances in machine learning technology as well as the creative application of classical statistical techniques. Pastel also introduces a novel method to increase the capacity of the blockchain for storing the required ticket data through the use of the innovative Z-Standard lossless compression algorithm developed as an open-source project by Facebook.

Currently, the network’s emission schedule matches that of Z-Cash, which is closely modeled off of Bitcoin. Bitcoin’s block reward began at 50 BTC per block, with a new block every 10 minutes. Conversely, Pastel has a max supply of 1,000x the size of the Bitcoin max supply, with a new block every 2.5 minutes (vs. every 10 minutes for Bitcoin). As such, the initial block reward is 6,250 PSL / Block, and is reduced by 50% every ~ 4 years (similar to halvening events in the Bitcoin network).

The Pastel Growth Fund receives 5% of the total block reward. These are funds that can be directed, in a decentralized way, by a vote of the Masternode owners as a group, using an integrated voting system. The ultimate goal of the Growth Fund is to promote the network through early adoption and public relations efforts. This might include the development of new functionality through updated software, the promotion of the project by getting the coin listed on a new exchange, or the promotion of the project through the enlistment of well-known or respected digital artists who could register their original works on the system. 

To date, the project has largely been funded by a handful of developers and early adopters. With the launch of a fully functional mainnet and platform (in comparison with many other blockchain projects which market nothing short of vaporware), the network has been able to raise financing from Innovating Capital, a technology fund out of New York, to further the project’s development and product adoption. 

CEO Jeff Emanuel Interviewed by CGTN America

Jeff Emanuel, Founder & CEO of the digital art network Pastel Network, was recently interviewed by CGTN America! During the interview, Jeff shared his ideas about the future of digital art and Pastel Network. We wanted to write an article about the interview for our readers, and provide more insight on the founder’s long-term vision of the platform.

During the interview, Jeff summarized the vision of Pastel in the following- “The art world has a lot of gatekeepers, dealers, agents, and gallerists that keep the little guy out. The beauty of this (Pastel) is that no one is running the network. No one is in charge. You are in this official ledger where you can clearly show an unbroken link beginning with the artist, to anyone that artist sold the work to, to you.” For artists, he mentioned that “Any artist can create an original digital artwork, register it on the system, say how many copies of it exist, and sell it, list it for sale in pastel coins. Then people, collectors, fans of the artist, can purchase these rare copies and then hold on to them, and hopefully, they’ll appreciate and value, or they can turn around and resell them.”

The art market, as well as the rare collectibles market (e.g., comic books, baseball cards, etc.), is rife with inefficiencies for both consumers and producers. By inefficiency, we mean that market participants (buyers and sellers) as a whole can be better off if only they could identify and transact directly with one another. Current market constructors result in collectors who are forced to transact through intermediaries, each of which end up extracting most of the “economic rent”. The people who are making the art are getting a fraction of the final value created, and those end buyers are forced to give up an enormous share of the potential profit through the various layers of fees and the lack of liquidity. The reason why collectors put up with this untenable situation is because the art market has always worked in this way, and until now, there have been no good alternatives that retain the “reputation backed security” offered by the traditional gallery or retail model.

While the inefficiencies that exist in the market for physical artwork are not going to change anytime soon, there is no reason why the new world of digital artwork has to be shackled to this inefficient and inequitable system. But before that can happen, the world needs a decentralized, trustless mechanism to fulfill these same core functions of the art market that are currently provided by galleries and experts. Why must it be decentralized? In short, no one is going to trust a centralized network with something as important as high-end (or even low-end) artwork or valuable rare collectibles.

In a fully decentralized peer-to-peer system such as Pastel, where all of the software is open-source and anyone can freely purchase the coins required to “host” the network (i.e., to run a Masternode) so that it can serve users, the community is never faced with this problem. And Pastel believes this is the future of digital art. Since the art exists in digital form (i.e., as information), the costs to create it and distribute it are much lower than with physical Artwork. Also, the use of secure cryptographic methods provided by Pastel allows rare digital art to solve the problem of establishing the authorship and provenance of a given artwork, which has plagued the art market for centuries. From a financial side, by integrating the payment and trading aspects of art collecting into the very same blockchain that acts as its registry, Pastel can greatly reduce the need for extensive intermediation in the form of galleries, dealers, and payment processors. Because of the intrinsically public nature of a Bitcoin-like blockchain, digital art of the form Pastel proposes would dramatically improve the transparency of the art market, with buyers able to see the entire history of trades for a given work.

Jeff concluded the interview with an affirmation that Pastel truly represents the future of the digital art market — a fully decentralized platform eliminating the intermediaries in the art trading world. Artists and collectors who can enjoy barrier-free trading — all powered by Pastel with its own, independent blockchain.

How does Pastel position itself from its competitors?

In our previous articles, we covered some of Pastel Network’s key characteristics. Nonetheless, we often get the following question: how does Pastel position itself from its competitors? This is a valid question, especially due to the great number of new crypto projects focusing on digital art and NFTs. Pastel, however, is certainly unique and has several strong competitive advantages over its competitors. As such, this article will focus on Pastel’s product offering, and compare it with that of its competitors.

Pastel is more than just an NFT marketplace.
First, it’s important to note that the term rival is a tad misplaced. Although there are a number of digital art/NFT marketplaces such as Rarible and SuperRare, these are all just side chains built on Ethereum or on top of other blockchains. A key feature of Pastel is that in addition to providing a marketplace for users and creators alike, it operates on a completely native blockchain.

This ensures that Pastel is not beholden to any other blockchain or network, which offers us countless advantages. Just imagine the simple scenario where an artist starts to take off in popularity, driving up network demand for their artwork. Or what if the number of artists joining the network spikes on a new commissioning promotion? On top of it, take into account the scenario where demand for the network increases as a result of totally independent, separate applications as we’ve seen occur on Ethereum. In each of these scenarios, the heightened traffic drives transaction fees up a point in which it becomes economically in-viable to register or purchase a single piece of art

Blockchain architecture is important
Pastel is a standalone blockchain and we recognize that code is important beyond all else. Unlike other NFT marketplaces which rely upon Ethereum and are hampered by network congestion and high gas fees, PSL will always be an affordable option for any artist looking to mint their own series for sale. In addition to this, Pastel is a direct descendant of Bitcoin with attributes from ZCash and Dash. We reward node operators for helping to secure the PSL network and are the best suited NFT blockchain option for users who want a long term stake in the digital art ecosystem. By offering incentives for network participants, we hope to build a core group of supporters who will bootstrap the decentralization of Pastel.

Pastel is truly decentralized
But there are far more differences between Pastel and its “competitors”, one of which is the degree of decentralization. Take Rare Pepe/Pepe Cash for example. Rare Pepe is far from decentralized. Although the details of the artworks and their ownership are stored on the Bitcoin blockchain, the registration process to create a new artwork relies on contacting the creator of the project, who then single-handedly decides whether or not to allow the registration. Subjective and vague criteria such as the perceived uniqueness or originality of the submission determine the outcome. Furthermore, the purportedly decentralized trading of “Rare Pepe” artworks also relies on centralized servers to match orders and to offer “secure” escrow services. In practice, such an approach means that the network and the services it provides are inevitably brittle and easy to attach if the project became a valuable enough target. There are several other blockchain projects, such as Dada and Verisart that attempt to address similar problems. The issue with these projects is that they have critical flaws that make them wholly inappropriate for serving as a storehouse and registry for digital artworks.

Permanent storage
This leads us to Pastel’s unique distributed storage. Many NFT projects on Ethereum store Token URI data in the cloud — in many cases it is just an AWS hosting which needs to be paid or “rented” over the next years, or it is an Interplanetary Hosted File System (IPFS) Directory. This poses a serious dilemma for artists and collectors. Some digital “installations’’ are currently impossible on IPFS, while AWS hosting requires a fee that might one day become a burn to curation service. Besides, who knows what will happen in the future with digital files being stored on third-party providers?

To address this permanent storage challenge, Pastel has built a novel distributed file-storage layer. Pastel distributes “shards” across the network among MasterNodes (MNs), with hundreds of network participants that are incentivized to keep small parts of each artwork and “seed” or share it with the network. On top of this, Pastel implements Luby Transform rules, or LT-codes, to allow for the artworks to be stored in a distributed manner and ultimately reconstructible even in the event of significant network disruption. Each LT chunk is provided a random seed which can be reconstructed by the artwork registration ticket on the Pastel chain. This is one of the most unique and sophisticated features in any blockchain.

Duplicate and NSFW checks
And finally, contrary to other projects in the space, Pastel has one-of-a-kind deep learning-based duplicate and NSFW checks. Pastel uses 5 different deep learning models (VGG19, Xception, InceptionResNetV2, DenseNet 201, and InceptionV3) to create a combined image fingerprint vector for each uploaded artwork. Because each model is built using a different architecture that in turn learns different kinds of features of artwork, this characterization is more reliable than using any individual model. This is important as there are growing works of literature detailing how individual deep-learning models can be easily tricked if given artfully constructed fake inputs. For example, an image that might appear to a human as random noise might be manipulated to fool a single deep-learning algorithm into thinking it is a dog. However, such attacks require extensive knowledge of the model’s architecture, by combining 5 different models with different architecture, Pastel makes such trickery infinitely harder. By implementing a novel “bootstrapped” version of the Hoeffding’s algorithm that is not reported in the literature, each fingerprint vector created is then checked independently by at least 3 MNs, any new registration attempt for an image with sufficiently similar fingerprints will be rejected. This protects artists against a dishonest MN owner who attempts to take credit away by creating fakes.

The NSFW check is relatively straightforward, Pastel uses a pre-trained Tensorflow model from Yahoo’s OpenNSFW project to evaluate each submitted image file. The model assigns a score between 0 (definitely not NSFW) and 1 (definitely NSFW). If the resulting score is above a certain threshold, the MN rejects the submission as being inappropriate. By insisting on a relatively low score, Pastel ensures that the majority of inappropriate content will never be permitted on the network, this NSFW detection establishes a baseline level of confidence in the nature (and legality) of the stored image content on the Pastel network.

These algorithms make it possible to provide complex and reliable duplicate and NSFW detections which set Pastel apart even from other native self-contained platforms such as Wax.

Pastel compared to its competitors

Conclusion
Pastel Network includes several unique features that set it apart from other artwork centered platforms. By building a fully functioning Bitcoin-based blockchain, ensuring permanent digital provenance through the use of distributed storage and ensuring the legitimacy of the artwork with its unique deep-learning based algorithm, Pastel has developed a unique network independent of the Ethereum network for arts and collectors.