Layer 1 vs Layer 2

Blockchain technology has evolved to address the growing demand for faster, more scalable, and cost-efficient transactions. Two of the most discussed concepts brought by this tech are Layer 1 and Layer 2. They represent different approaches to building and enhancing blockchain networks. Understanding these two layers is essential for anyone involved in blockchain development, usage, or investment.

Key Takeaways:

• Layer 1 is the base blockchain that ensures security, decentralization, and protocol rules but can be slower and more costly.
• Layer 2 is built on top of Layer 1 to improve speed, scalability, and cost efficiency, relying on Layer 1 for security while enabling mass adoption.
• Both layers are essential to blockchain growth. Layer 1 ensures trust while Layer 2 enables mass adoption.

What is Layer 1?

Layer 1 refers to the base blockchain network. It is the core infrastructure that processes transactions, maintains the ledger, and ensures security through its consensus mechanism. This layer defines the protocol rules, such as how blocks are created, validated, and added to the chain. Popular examples of Layer 1 blockchains include Bitcoin, Ethereum, Solana, and Cardano. These networks operate independently and do not require another blockchain to function.

Layer 1 blockchains work by having a distributed network of nodes that validate and record transactions on the ledger. They achieve consensus through mechanisms such as Proof of Work or Proof of Stake. For example, Ethereum processes smart contracts and decentralized applications directly on its base layer, while Bitcoin focuses on secure peer-to-peer transactions. Companies like OpenSea operate directly on Ethereum’s Layer 1, and many decentralized finance (DeFi) protocols also rely on the main chain for security and settlement.

What is Layer 2?

Layer 2 refers to secondary networks or protocols built on top of a Layer 1 blockchain to improve its speed, scalability, and cost efficiency. Instead of replacing the base blockchain, Layer 2 enhances it by processing transactions off-chain or in bundled batches before finalizing them on Layer 1. This approach reduces congestion and lowers transaction fees for users. Examples include the Lightning Network for Bitcoin and Polygon, Arbitrum, and Optimism for Ethereum.

Layer 2 works by taking transaction activity away from the main chain, processing it more efficiently, and then settling the results back on Layer 1. This setup allows for higher throughput without sacrificing the security benefits of the base blockchain. For instance, the Lightning Network enables near-instant Bitcoin payments, making microtransactions viable, while Polygon offers cheaper Ethereum-based transactions for gaming and DeFi applications.

How Layer 1 and Layer 2 Work Together

Layer 1 and Layer 2 complement each other by combining security and scalability. The base chain acts as the settlement layer, ensuring that all transactions are final and secure. Layer 2 handles high-volume activity, reduces costs, and speeds up user interactions. This partnership allows blockchains to maintain decentralization while meeting the demands of mass adoption.

A practical example is Ethereum with Polygon. Ethereum provides security and decentralization, while Polygon processes transactions quickly and sends the final data back to Ethereum for settlement. Similarly, Bitcoin benefits from the Lightning Network’s speed for payments while keeping the final record on its secure Layer 1.

Key Differences Between Layer 1 and Layer 2

Although both layers work together, they have distinct roles in the blockchain ecosystem. Layer 1 forms the foundation, while Layer 2 focuses on improving its performance. The table below highlights the main differences.

Pros and Cons of Each Layer

Both Layer 1 and Layer 2 have advantages and limitations. Their strengths depend on the intended use case, and their drawbacks often reflect the trade-offs in blockchain design.

Pros of Layer 1

• High level of decentralization
• Strong and independent security model
• No dependency on another blockchain for operation

Cons of Layer 1

• Slower transaction speeds
  
• Higher transaction costs
• Limited scalability without protocol changes

Pros of Layer 2

• Faster transaction processing
  
• Lower fees for users
  
• Greater scalability without altering the base chain

Cons of Layer 2

• Security depends on the Layer 1 blockchain
  
• Added complexity for users and developers
  
• Possible reliance on third-party infrastructure

Choosing Between Layer 1 and Layer 2

The decision to use or build on Layer 1 or Layer 2 depends on specific goals, priorities, and constraints. Developers, users, and investors each evaluate these options differently.

For Developers

Developers may choose Layer 1 when security and decentralization are the top priorities or when they want full control over protocol rules. Building directly on the base chain can also offer more long-term stability due to an established consensus and ecosystem. Layer 2 is a better choice for applications requiring fast and inexpensive transactions, such as gaming platforms or micropayment systems. It allows developers to tap into existing Layer 1 ecosystems while delivering a better user experience. Many projects adopt a hybrid approach, integrating both layers for different parts of their infrastructure.

For Users

Users may prefer direct Layer 1 transactions when dealing with high-value transfers that require maximum security. Layer 1 is also useful for storing assets long-term. Layer 2 becomes the better option for everyday transactions, frequent trades, or interactions with decentralized applications that demand speed and affordability. In many cases, users move assets between layers to balance cost, convenience, and security.

For Investors

Investors assess Layer 1 and Layer 2 based on risk, adoption, and utility. Layer 1 projects often represent the core infrastructure of the blockchain space, with value tied to long-term network growth and adoption. They typically carry lower technical dependency risk but may face scaling challenges that impact competitiveness. Layer 2 investments depend heavily on the health and popularity of their underlying Layer 1 blockchain. They can grow rapidly if they solve major pain points like transaction fees and latency. However, their reliance on another network adds an extra layer of dependency. In a balanced portfolio, both Layer 1 and Layer 2 projects can offer growth potential, but they serve different roles in the overall market. If you’re looking to invest in Layer 1 and Layer 2 private markets, you may check out the listings on Acquire.Fi’s OTC & Secondaries page.

Frequently Asked Questions

Can a blockchain use only Layer 1?

A blockchain can operate entirely on Layer 1 without any Layer 2 solutions.

Can Layer 1 blockchain scale on its own?

It can, but scaling requires major protocol changes such as sharding, consensus upgrades, or block size increases. These changes are often complex, time-consuming, and may involve trade-offs in decentralization or security.

Why is Layer 2 faster in transaction speed?

Layer 2 processes transactions off the main chain (or in batches) and only settles final results on Layer 1. This reduces congestion and avoids the slower, full on-chain validation process for every transaction.

Why is Layer 2 not good in security?

Layer 2 security ultimately depends on the underlying Layer 1 blockchain. If Layer 1 is compromised, then Layer 2 is affected.