Layer-1 And Layer-2 Blockchain Scaling Solutions, Explained

Key Takeaways

• Layer-1 scaling solutions involve enhancing the base protocol of the blockchain to accommodate a higher number of transactions per second.
• Implementing layer-1 solutions often necessitates significant network-wide upgrades or even hard forks, which can lead to community discussions and potential splits in the blockchain.
• While increasing scalability, layer-1 solutions aim to maintain the core security and consensus mechanisms of the blockchain, ensuring the decentralized nature of the network.
• Ethereum’s consensus layer upgrade, incorporating Proof of Stake and shard chains, serves as a prominent example of a layer-1 scaling solution in progress.
• Due to the complexity of implementing changes at the protocol level, layer-1 solutions generally require longer development cycles and thorough testing before deployment.
• Layer-2 scaling solutions focus on processing transactions off the main blockchain, aiming to alleviate congestion and reduce transaction fees.
• The key advantages of layer-2 solutions lie in their ability to offer rapid transaction processing and cost-efficient transactions compared to layer-1 solutions.
• However, achieving scalability through layer-2 solutions can sometimes involve trade-offs between security and scalability, requiring careful consideration and design.
• Prominent layer-2 solutions include the Lightning Network for Bitcoin and Plasma for Ethereum, both of which aim to enhance scalability and improve transaction speed.
• Another interesting aspect of layer-2 solutions is their potential for interoperability, allowing them to function across multiple blockchains and further enhancing the overall scalability of the ecosystem.

What Are Blockchain Scaling Solutions?

Blockchain scaling solutions are strategies and tactics created to increase the performance and scalability of blockchain networks. They solve the built-in drawbacks of conventional blockchains, such as their inefficient transaction processing, exorbitant fees, and low throughput. With the help of these technologies, blockchain networks should be able to process more transactions per second (TPS) while experiencing less congestion. 

Layer-1 (L1) scaling, which modifies the underlying blockchain protocol, and layer-2 (L2) scaling, which adds additional frameworks or protocols on top of the base layer to offload transactions and increase scalability, are two examples of common scaling solutions. These solutions strive to maintain the security and decentralization of the underlying technology while improving the performance, scalability, and user experience of blockchains.

Sharding, switching to a more effective consensus mechanism like Proof-of-Stake (PoS), or making other architectural changes are examples of L1 solutions. Higher transaction throughput and lower latency are the goals of these changes at the blockchain’s foundation layer.

Layer-2 solutions, like payment channels and sidechains, enable quicker and more scalable transactions while using the security and decentralization of the underlying blockchain.

Furthermore, L1 and L2 solutions are implemented to overcome the trilemma, boost scalability, and preserve security and decentralization. The blockchain trilemma exists as a fundamental challenge in blockchain technology. The inherent trade-offs between scalability, security, and decentralization define the trilemma. These trade-offs result from the underlying architecture and design decisions made when developing blockchain technology.

Scalability Trade-Off

High scalability demands the capacity to handle a huge volume of transactions in a timely and effective manner. However, as more transactions are made, the blockchain gets larger, creating problems with storage and bandwidth. 

Furthermore, it takes more time and resources to reach consensus among a large number of nodes. Trade-offs must be made, such as giving up some security or decentralization, in order to offset these problems.

Security Trade-Off

Blockchain networks use techniques like distributed validation, cryptographic hashing, and consensus methods to maintain security. But when scalability rises, maintaining strong security becomes more difficult. 

For instance, scalability improvements like increasing block size or speeding up block confirmation times may result in weaknesses like a higher likelihood of forks or double-spending attacks. As a result, achieving a high level of security frequently necessitates sacrificing decentralization or scalability.

Decentralization Trade-Off

A fundamental tenet of blockchain technology is decentralization, which makes sure that no single party has control over the network. It encourages distrust and resistance to assaults or restrictions.

However, maintaining decentralization while reaching great scalability can be difficult. Implementing techniques like sharding or off-chain processing (which will be explained at later stages in the article) to increase scalability frequently has an impact on the degree of decentralization. 

Nevertheless, the fundamental idea of decentralization may be undermined if a limited number of businesses control transaction processing or block validation. The intricate problem that the blockchain community faces is highlighted by this fine line between achieving amazing scalability  and maintaining the fundamentals of decentralization.

Bitcoin’s Scalability Challenges And Metrics 

The dominance of Bitcoin in the cryptocurrency realm has brought to light the pressing issue of blockchain scalability. Throughput and latency significantly impact user experience quality (QoE), making them pivotal performance indicators.

Transaction Throughput And Its Constraints

Transaction throughput is a key concern. Bitcoin’s highest transaction throughput is reported at 7 TPS, a big contrast to Visa’s capability of over 4000 TPS. This difference highlights Bitcoin’s limited capacity in accommodating larger trading volume.

In theory, transaction throughput hinges on the block interval and size. While a larger block increases throughput by accommodating more transactions, it simultaneously elongates block propagation time. 

Optimal configuration of block size and average block interval is around 1 MB and takes 10 minutes respectively for the Bitcoin network to confirm. Bitcoin aims to ensure adequate block propagation across the network. Yet, as block sizes increase to enhance throughput, system-wide bandwidth limitations act as a performance bottleneck, influencing blockchain efficiency.

Transaction Confirmation Latency And User Experience

Transaction confirmation latency, representing the time taken for a transaction to be confirmed, is another pivotal metric closely tied to user experience. With the surge in Bitcoin transactions, block size limitations hinder the inclusion of all submitted transactions. Miners, therefore, prioritize high-fee transactions, leading to extended latency for transactions with lower bids. 

Key Lessons: Bitcoin Data Processing Times

In essence, the capacity of Bitcoin to process transactions is contingent upon the size and frequency of transaction blocks. Larger blocks have a higher transaction capacity, albeit with longer confirmation times. To strike a balance, Bitcoin aims for blocks of approximately 1 megabyte in size, with a new block being appended to the blockchain every 10 minutes. This strategy aids in the even distribution of transaction processing.

However, as Bitcoin tries to handle more transactions at once by making the blocks bigger, it hits a limit on how much data can be sent through the Bitcoin network  at once, making transaction confirmation slower and less efficient.

Understanding The Layers Of Blockchain Architecture To Address Scalability

In the context of addressing the scalability challenges of blockchain technology, the existing solutions can be grouped into two distinct layers: layer-1 and layer-2. 

Layer-1 

Layer-1 primarily focuses on improving scalability addressing issues related to consensus mechanisms, network infrastructure, and the fundamental data structure of the blockchain. These improvements are implemented directly within the main on-chain blockchain framework. 

Layer-2 

Layer-2 adopts a different route to scalability by employing off-chain methods. These methods include utilizing off-chain channels, side-chains, and cross-chain protocols to enable the blockchain to scale out more effectively.

Deep Dive On Layer-1: On-Chain Scaling Solutions

On-chain scaling solutions, sometimes referred to as layer-1 scaling solutions, are techniques used to boost the efficiency and capacity of the underlying blockchain network. These solutions concentrate on enhancing the blockchain’s basic layer, which comprises the fundamental protocol and consensus mechanism.

To encourage wider adoption and handle rising transaction volumes, it is necessary to overcome the scalability restrictions of blockchain networks, such as low transaction throughput and high latency. layer-1 solutions attempt to increase the network’s capacity, speed, and overall performance by strengthening the base layer.

1.0 Segregated Witness (SegWit)

Working Principle Of Segregated Witness (SegWit)

Segregated Witness (SegWit) was introduced in August 2017 as a soft fork to enhance Bitcoin’s efficiency by splitting transactions into two parts and removing unnecessary information. This removed information refers to the transaction signatures, also known as witness data, which are a part of Bitcoin transactions.

Benefits of the SegWit

• Improved space efficiency: Transaction signatures can be quite large and occupy significant space in each block. SegWit helps scale the blockchain throughput by separating transaction signatures from the rest of the transaction data, storing them in a distinct structure known as the Witness structure.
• Efficient verification: With SegWit, only essential parts of a transaction are included in the main blockchain, while witness data is stored more efficiently. This streamlined verification process ensures that accidental changes to transactions are prevented.
• Smaller transaction records: By implementing SegWit, the overall size of Bitcoin’s transaction records is reduced. This makes the blockchain’s history of transactions more compact and manageable.

2.0 Case Study On Increasing The Block Size: Hard Fork Of Bitcoin Blockchain To Bitcoin Cash 

Case Study Of Bitcoin Cash

In 2017, due to scalability concerns, Bitcoin encountered a hard fork resulting in a division into two blockchain branches: Bitcoin and Bitcoin-Cash, where Bitcoin-Cash opted to increase its block size to 8MB, a significant jump from Bitcoins 1MB version. 

As Bitcoin Cash increased the block size to 32MB, despite these adjustments, the blockchain still kept the original 10-minute block time. In theory, this enhances transaction capacity, however, issues arise when trying to solve scalability by enlarging the block size. As the block size in MB increases, challenges emerge from both theoretical and practical standpoints.

As the continual expansion inflates block sizes, making transfer challenging due to intra-blockchain bandwidth limitations. These larger blocks trigger centralization concerns. As individual users struggle to efficiently propagate blocks and verify numerous transactions within a set timeframe, this situation may ultimately lead to a scenario where only a centralized entity can function as a full node.

Drawbacks of Bitcoin Cash

The Bitcoin Cash hardfork presented several drawbacks:

• Intra-blockchain bandwidth constraints: As block sizes kept inflating, it made transfers challenging due to intra-blockchain bandwidth limitations. These larger blocks trigger centralization concerns. 
• Centralization concerns: The enlargement of block sizes raised concerns about centralization, as individual users struggled to efficiently propagate larger blocks and validate numerous transactions in a timely manner. 
• Potential full node centralization: The culmination of these challenges could potentially lead to a scenario where only a centralized entity could feasibly function as a full node, contradicting the decentralized ethos of blockchain technology.

3.0 Block Compression: TXID

Working Principle Of Txilm

Txilm, protocol based on BIP-152 employs a unique approach to enhance the efficiency of transactions within the blockchain. BIP-152 compresses transactions in each block to save the network’s bandwidth. It is achieved by utilizing shortened codes to represent individual transactions. This technique not only conserves space but also improves the overall efficiency of data storage within blocks. 

The core idea is to reduce the amount of data required for transmitting transactions across the network.

Benefits Of Txilm

• Significant reduction in data footprint: The reduction in data footprint contributes to more efficient data transmission across the blockchain network.
• Optimized data storage within blocks: The use of shorter codes for transactions allows more transactions to be accommodated in each block.
• Clever “SALT” codes: To prevent potential conflicts arising from identical short codes, Txilm introduces extra information called “SALT” code which ensures that each transaction remains unique and distinguishable.
• Empirical evidence: Txilm’s implementation has showcased the reduction of data usage by up to 80 times improving efficiency gains and highlighting its real-world advantages in terms of data efficiency and network performance.

4.0 Storage Scheme Optimization

CUB

Consensus-unit based (CUB) introduces  an innovative strategy by grouping nodes into Consensus Units. Each unit is responsible for storing specific block data segments. To better understand, one may think of ‘grouping nodes’ as people and ‘Consensus Units’ as teams, where each unit is responsible for storing specific parts of the blockchain data puzzle sections. Each node in the consensus unit or team has a specific section of the blockchain data puzzle to work on. 

Instead of everyone working on the same blockchain puzzle together, which slows down the process, the blockchain puzzle gets divided into smaller parts and each person or node is assigned what to work on. 

CUB optimizes the way data is stored and accessed, which helps reduce storage costs and makes the blockchain system work faster and more effectively.

Layer-1: Scaling Mechanisms

This section discusses different scaling methods of blockchain and some optimizations proposed to improve the scalability of blockchain:

Sharding

Working Principle of Sharding

The primary concept of sharding involves breaking down a large and complex network into smaller, manageable segments called “shards.” Each shard operates independently as a subset of the larger network. This technique, initially designed to enhance the efficiency of extensive business databases, segments data within sizable databases into fragments stored across separate servers. 

By doing so, it alleviates the load on a central server, resulting in improved search speed and expanded storage capability for the entire database system.In the context of blockchains, sharding involves dividing a blockchain network into multiple shards, where each shard functions as its own mini-blockchain. 

Benefits Of Sharding

• Improved scalability: Sharding  enables handling more transactions via parallel processing.
• Faster transaction processing: Transactions can be processed simultaneously in separate shards.
• Enhanced network performance: Sharding reduces congestion and boosts overall speed.
• Horizontal scaling: Sharding allows a network to grow by adding more shards.
• Efficient resource usage: Each shard can work on its transactions without affecting others.

Drawbacks Of Sharding:

• Cross-Shard communication costs: Cross-shard transactions can lead to higher communication costs and slower confirmation times.
• Transaction placement complexity: Properly assigning transactions to shards requires balancing factors like shard distribution and cross-shard transaction volume.
• Protocol limitations: Some sharding protocols, like Elastico, have  specific drawbacks:
  • Frequent identity and committee generation: Frequent operations may affect transaction efficiency.
  • Inefficient transaction execution: Transaction processing might not be optimized.
  • Cross-shard transaction atomicity: Ensuring the consistency of cross-shard transactions can be challenging.

Delegated Proof of Stake (DPoS) 

In DPoS, a small group of elected delegates are responsible for creating and validating blocks unlike traditional proof-of-stake (PoS). Blockchains like Tron and EOS use this method for salability purposes.

DPoS works in two main steps. First, token holders in the network vote for the delegates they trust to create blocks. The top 21 delegates with the most votes then become the block producers. This way, the network lets those who hold tokens choose trustworthy delegates who can help the blockchain work well.

When a delegate creates a block, it’s checked by other delegates. If at least 15 out of the 21 top delegates agree, the block is confirmed. This voting process keeps going, and if a delegate doesn’t do their job (create a block) for a day, they are replaced by someone else. Also, if a delegate doesn’t do well in the past, they have a lower chance of being picked in the future. This whole system helps keep the blockchain secure and efficient.

Benefits of DPoS:

• Speed and scalability: DPoS can process transactions faster compared to other consensus mechanisms like proof-of work (PoW) or PoS. The smaller group of elected delegates can make decisions more quickly.
• Energy efficiency: DPoS is more energy-efficient than Bitcoins PoW, as it doesn’t require the massive computational power needed for solving complex puzzles.
• Decentralization: While DPoS involves a smaller group of delegates, it can still maintain a degree of decentralization, as token holders participate in choosing these delegates.
• Security: The continuous voting and verification process helps ensure that only trustworthy delegates are chosen, making the network more secure against attacks.
• Governance: DPoS systems often allow token holders to have a say in the development and direction of the blockchain by voting for delegates. This can lead to more community involvement and decisions.

Drawbacks of the DPoS:

• Centralization concerns: While DPoS is more decentralized than traditional systems like PoW, the power is still concentrated among a relatively small number of delegates. This can lead to centralization risks if a few powerful delegates collude or control a majority of the network.
• Vulnerability to vote buying: In some cases, delegates may try to buy votes or offer rewards to token holders in exchange for their votes, which could undermine the fairness of the system.
• Reduced security under certain conditions: DPoS systems might be more vulnerable to attacks if a majority of delegates become malicious or compromised, as they control the consensus process.
• Limited participation: Token holders who have a small number of tokens might have less influence in the voting process compared to those with more tokens, leading to potential inequality in decision-making.
• Network reliability: DPoS systems heavily rely on the availability and honesty of elected delegates. If a delegate goes offline or behaves dishonestly, it can impact the overall network performance.

Understanding Layer-2 Scaling Solutions

Now, let’s picture layer-1 as a bustling highway, occasionally bogged down by excessive transactions, akin to too many cars on the road. layer-2, on the other hand, is akin to constructing an exclusive express lane positioned above the highway, designed exclusively for the swiftest vehicles. These vehicles navigate without hindrance, evading congestion and facilitating an expedited journey overall.

Layer-2 offers a shortcut for transactions as it takes some transactions away from the main road (layer-1) and processes them separately. This way, the main road doesn’t get clogged up, and everyone can complete their transactions faster.

As Bitcoins projected limit of 21 million BTC approaches experts are concerned about potential security vulnerabilities. For instance, after the 21 million limit is attained, miners’ validation motivation will shift entirely from newly created coins to transaction fees. This scenario could lead to transaction fees becoming high or security significantly compromised.

Amidst these apprehensions, a set of innovative solutions known as layer-2 technologies” have emerged. These technologies offer a distinct approach to enhance blockchain functionality without altering the core protocol. Rather than modifying the fundamental blockchain protocol at layer-1 level, these technologies will interface with the primary infrastructure. 

Their primary function involves leveraging the underlying blockchain to cryptographically validate entire groups of transactions as a single settlement. An advantage of layer-2 technology is the potential to enhance scalability and preserve the security strengths inherent to the blockchain.  

Layer-2 technology has been proposed as a means to segregate transaction settlement and validation processes, where a promising path may be laid out in maintaining security integrity while significantly boosting blockchain scalability.

Types of Layer-2 Scaling Solutions For The Bitcoin Blockchain

1.0 Payment Channels

Payment channels are like having a tab at your favorite ice cream shop. Instead of paying for each scoop separately, you open a tab, have as many scoops as you want, and settle the bill later. 

Payment channels work similarly by letting people do lots of transactions without putting every single one on the main blockchain. The Lightning Network is a layer-2 scaling solution for the Bitcoin blockchain network, designed to enable faster and more cost-effective transactions by facilitating off-chain microtransactions.

Lightning Network

The Lightning Network is designed to facilitate fast and low-cost transactions by allowing users to create payment channels directly between themselves without the need to broadcast every transaction to the main blockchain. 

These payment channels are like private channels between two parties and can be opened, closed, and maintained without needing to interact with the main blockchain for each transaction. This enables micropayments and increases the transaction throughput of the network.

Benefits of the Lightning Network

• Fast transactions: Transactions within payment channels are virtually instant.
• Low fees: Since transactions occur off-chain, the associated fees are significantly lower.
• Scalability: The Lightning Network helps alleviate congestion on the main blockchain by handling a large number of transactions off-chain.
• Micropayments: The network enables microtransactions that were previously impractical due to high on-chain fees.

Drawbacks of the Lightning Network:

• Wallet complexity: Wallets can be more complex than traditional on-chain wallets, posing a challenge in finding user-friendly options that seamlessly integrate with the network.
• Security concerns: The need for payees to sign a recovery transaction and the requirement for a hot wallet, which could expose private keys in case of security breaches.
• Channel management: Channels require ongoing attention and may involve closing and reopening channels to maintain balance, potentially inconveniencing users who prefer a hands-off approach.
• Limited network coverage: Reliant on a network size and the channel availability. Users might resort to on-chain transactions if recipients lack network access or have limited channel capacity, removing the intended benefits.

2.0 Sidechains

Sidechains serve as innovative solutions that expand functionality and scalability to blockchain systems. Imagine them as parallel tracks running alongside the main blockchain, each acting as a self-contained environment for conducting transactions and executing smart contracts. 

These sidechains are interconnected but separate, allowing users to carry out specific activities without burdening the primary blockchain with every detail. This segregation enables faster and more efficient transactions, enhancing overall network performance. 

When necessary, the sidechains can communicate with the main chain, facilitating interoperability and ensuring that  data can be securely shared between the two layers. This layer-2 architecture introduces flexibility, enabling blockchain networks to manage varying workloads and optimize resource allocation. They maintain integrity and security of the main blockchain.

RootStock (RSK)

RSK is a sidechain project that aims to bring smart contract functionality to the Bitcoin blockchain. It allows developers to build and deploy dApps on the RSK sidechain using Ethereum-compatible smart contracts. 

RSK uses a two-way peg to enable the movement of Bitcoin to the RSK sidechain. Bitcoin is locked on the Bitcoin blockchain, and an equivalent amount of Smart Bitcoin (RSK-BTC) is created on the RSK sidechain. RSK-BTC can be used within the RSK ecosystem for executing smart contracts and dApps.

Pegging-In (Moving Bitcoin to RSK)

Bitcoin holders begin by transferring their Bitcoins to a multisignature (multisig) address on the Bitcoin blockchain, acting as a secured vault for the bitcoins. Once deposited, a cryptographic 

Simplified Payment Verification (SPV) proof is generated to validate the bitcoin deposit on the Bitcoin blockchain. This SPV proof is transmitted to a bridge smart contract on the RSK sidechain, which verifies and acknowledges the deposit. In response, an equivalent amount of RBTC (RSK’s native currency) is minted on the RSK sidechain, representing the pegged-in Bitcoin and becoming available for the user.

Pegging-Out (Moving RBTC back to Bitcoin)

When users wish to move their RBTC back to the Bitcoin blockchain, they initiate a reverse process. They send their RBTC to a bridge smart contract on the RSK sidechain. The bridge smart contract confirms the transaction and produces an SPV proof for the RBTC transaction. This SPV proof is then forwarded to the Bitcoin blockchain, where it is verified to authorize the release of the initially pegged-in bitcoins’ equivalent amount.

RootStock (RSK) Benefits:

• Compatibility with Ethereum’s smart contracts: RSK allows developers to send their Ethereum smart contracts onto its platform, increasing interoperability between the two ecosystems.
• Improved scalability for decentralized applications (dApps): RSK’s sidechain architecture enhances scalability, enabling faster and more efficient execution of dApps compared to the main Bitcoin network.
• Utilizes Bitcoin’s security through merged mining: RSK leverages Bitcoin miners’ computational power, providing a high level of security and protection against potential attacks.
• Supports DeFi solutions and stateful smart contracts: RSK enables the creation of advanced decentralized finance (DeFi) applications and complex smart contracts that retain state, expanding the scope of possibilities.
• Expands Bitcoin’s functionality without altering its core protocol: RSK’s compatibility with Bitcoin allows for the development of new features and functionalities without modifying the underlying Bitcoin network.

RootStock (RSK) Drawbacks:

• Potential centralization due to the federation of functionaries: RSK’s reliance on a federation of functionaries for certain tasks could introduce centralization risks if not well-distributed or managed.
• RSK-BTC lacks the same security level as the Bitcoin network: While RSK benefits from merged mining with Bitcoin, its security may not match the robustness of the original Bitcoin blockchain due to differences in hashing power and network size.

3.0 State Channels 

Imagine you and your friend are playing a game, and you keep track of the score on a piece of paper. You only write down the final score when the game ends, instead of every single point. State channels work similarly by keeping track of lots of transactions off-chain and only record the final result on the main blockchain. 

They allow users to conduct transactions and perform tasks independently, reducing congestion on the main blockchain while maintaining the ability to interact with it when needed. The Lightning Network serves as a real-world illustration of state channels in the Bitcoin network. 

By establishing a multi-signature wallet on the Bitcoin blockchain, two parties open a payment channel, as explained above. The state of the channel can then be updated by them doing several transactions off-chain. Because they are not published on the main blockchain, these transactions are scalable and cost-effective. 

When they are done, the channel is closed, and the last state of the channel is stored on the Bitcoin blockchain. In this approach, many transactions take place off-chain, with only the opening and closing transactions being recorded on the main blockchain.

A summary of the differences between sidechains and state channels can be found in the table below:

4.0 Layer-2 Scaling Solutions For The Ethereum Blockchain

Ethereum and other Ethereum Virtual Machine (EVM)-based blockchains have encountered a challenge with scalability. The limited processing capacity of these networks, coupled with the surging demand for decentralized applications, has resulted in elevated transaction fees and sluggish transaction processing times. 

However, a set of layer-2 scaling solutions has emerged to tackle these issues. In this piece, we will delve into these technologies and their transformative impact on EVM-based blockchains. These solutions leverage techniques such as state channels, sidechains, and rollups to enable swifter and more cost-effective transactions. 

Plasma

Plasma, one of the prominent layer-2 scaling solutions, was initially conceptualized by Vitalik Buterin in 2017. This framework introduces the concept of “child” chains, interconnected with the primary Ethereum blockchain. 

These child chains have the capacity to process a substantial volume of transactions, periodically summarizing their state to the main chain. This approach effectively reduces the data load on the main chain, thereby lowering transaction fees and boosting network performance.

Benefits Of Adopting Plasma As A Layer-2 Scaling Solution:

• Scalability: Plasma chains significantly improve the scalability of Ethereum by enabling the execution of transactions off-chain while maintaining a connection to the Ethereum mainnet. This allows for a larger number of transactions to be processed compared to the Ethereum mainnet.
• Reduced transaction fees: By offloading a significant portion of transactions to the Plasma chains, users can experience lower transaction fees since they are not competing with the congestion on the mainnet.
• Faster transaction processing: Since Plasma chains can process transactions off-chain, they can achieve faster transaction confirmation times compared to the Ethereum mainnet, where network congestion can cause delays.
• Interoperability: Plasma chains can be designed to focus on specific use cases or industries, enabling tailored solutions while still benefiting from the security of the Ethereum mainnet.

Drawbacks Of Adopting Plasma As A Layer-2 Scaling Solution:

• Security and complexity: Plasma chains are more complex to implement and require careful design to ensure the security of the assets locked within them. 
• Limited use cases: While they can offer increased throughput, they might not be optimized for executing more complex smart contracts or interactions.
• Challenges in implementation: Developing and deploying a secure Plasma chain can be challenging and resource-intensive. 
• Limited decentralization: Depending on the design and architecture of the Plasma chain, there may be concerns about the level of decentralization achieved compared to the Ethereum mainnet.

Rollups

Rollups, another noteworthy layer-2 scaling solution, function as smart contracts that bundle multiple transactions into a single transaction, subsequently submitted to the primary chain. This aggregation significantly reduces the data volume on the main chain, leading to swifter transaction processing times. 

Notably, Rollups are categorized into two distinct types: Optimistic Rollups and ZK Rollups.

Optimistic Rollups

Are a type of layer-2 blockchain scaling solution that aims to improve scalability by processing transactions off-chain and then batching them for inclusion on the main Ethereum blockchain. In this approach, validators process transactions off-chain, and witnesses verify them before adding them to the main blockchain. 

Zero Knowledge (ZK) Rollups

Focusing on improving scalability and privacy, ZK Rollups utilize zero-knowledge proofs for secure and private transaction verification. A zero-knowledge proof is a cryptographic method that allows one party (the prover) to prove to another party (the verifier) that a statement is true without revealing any specific information about the statement itself. 

Instead of fully processing transactions off-chain like in Optimistic Rollups, ZK Rollups bundle transactions and then use zero-knowledge proofs to provide cryptographic evidence of their validity. This approach offers enhanced privacy while maintaining security, but it may come at the cost of slightly lower scalability compared to Optimistic Rollups. 

A summary of the differences between optimistic rollups and ZK rollups can be found in the table below:

Benefits Of Adopting Rollups As A Layer-2 Scaling Solution:

• Scalability: Provide a significant scalability boost aggregating multiple transactions into a single transaction that is submitted to the Ethereum mainnet. This reduces congestion on the mainnet and increases the number of transactions that can be processed.
• Reduced gas fees: Help reduce gas fees for users by consolidating multiple transactions into a single one, making transactions more cost-effective and accessible.
• Compatibility with smart contracts: Capable of supporting smart contracts, making them suitable for a wider range of use cases beyond simple token transfers.
• Enhanced speed: Transaction processing times are improved since Rollups can process multiple transactions in a single batch, reducing the time required for individual transactions.

Drawbacks Of Adopting Plasma As A Layer-2 Scaling Solution:

• Data availability: Rollups rely on data availability and require users to monitor and ensure the availability of the necessary data to interact with the smart contracts on the mainnet.
• Latency for data availability: The need for data availability verification can introduce some latency between transaction submission and finality.
• Development complexity: Implementing and integrating Rollup solutions can be complex due to the need for robust data availability mechanisms, compatibility with existing smart contracts, and security considerations.
• Limited decentralization: The degree of decentralization in Rollup solutions can vary, and some trade-offs may be made to achieve scalability and efficiency.

Comparison: Layer-1 Vs. Layer-2 Scaling Solutions

Layer-1 and layer-2 scaling solutions represent two distinct approaches to addressing the scalability challenges of blockchain networks.

Layer-1 Scaling Solutions 

Layer-1 scaling solutions focus on improving the base layer of a blockchain network. They involve making fundamental changes to the blockchain’s protocol, consensus mechanism, or architecture to increase its capacity to handle more transactions per second (TPS).

Advantages Of Layer-1 Scaling

• Security and decentralization: Layer-1 blockchains, like Ethereum, are highly secure and decentralized due to their robust consensus mechanisms.
• Flexibility: Developers have direct access to the base layer, allowing for innovative features and functionalities.
• Self-contained: Layer-1 scaling solutions do not require additional layers or systems for implementation.

Disadvantages Of Layer-1 Scaling

• Upgrade challenges: Implementing changes at the base layer can be complex and may require community consensus.
• Slow development: Major upgrades may take time to develop, test, and deploy, causing delays in addressing scalability issues.
• Risk of centralization: Rapid protocol changes can lead to centralization if a small number of entities control significant portions of the network.

Layer-2 Scaling Solutions

Layer-2 scaling solutions work on top of existing blockchains (layer-1) and aim to increase throughput by moving some of the transaction processing off-chain. They include various techniques like payment & state channels, sidechains, rollups and plasma. 

Advantages Of Layer-2 Scaling:

• Scalability: Layer-2 solutions significantly increase the transaction throughput of the main blockchain.
• Fast transactions: Off-chain processing allows for near-instantaneous transaction confirmation and settlement.
• Cost efficiency: Reduced congestion on the main chain leads to lower transaction fees.

Disadvantages Of Layer-2 Scaling:

• Security considerations: Layer-2 solutions rely on the security of the underlying layer-1 blockchain.
• Interoperability challenges: Interactions between different layer-2 solutions or between layer-2 and layer-1 can be complex.
• Centralization risk: Some layer-2 solutions might require trusted intermediaries, leading to potential centralization.

In summary, layer-1 scaling solutions involve making changes directly to the blockchain’s protocol, while layer-2 solutions build on top of existing blockchains to improve scalability. Layer-1 solutions offer enhanced security and decentralization but may require longer development cycles. 

Layer-2 solutions focus on boosting transaction throughput and reducing fees, but may introduce security and centralization concerns. The choice between these approaches depends on the specific requirements and goals of the blockchain network.

Summary of the differences between layer-1 and layer-2 scaling solutions can be found in the table below:

Popular Blockchain Networks And Their Scaling Solutions 

Solana 

Solana is a high-performance blockchain platform renowned for its scalability and quick transaction processing. It makes use of innovative technologies such as Tower BFT consensus and PoH, which enable thousands of transactions per second at cheap costs. Its objectives are to enable dApps and promote a vibrant development and user ecosystem.

Solana stands apart in the blockchain scene due to its distinctive scaling method, which makes use of a number of cutting-edge technologies to achieve high throughput and low latency. 

Proof Of History (PoH)

PoH is a cryptographic timestamping method that Solana uses to establish a historical record of all transactions on the blockchain. This saves time and resources by allowing nodes to confirm the timing and order of transactions without the need for recurrent consensus.

Tower BFT Consensus

Solana uses a high-performance consensus technique called Tower BFT, which speeds up transaction finality and optimizes the block confirmation process. This guarantees speedy and secure confirmation of transactions.

Parallel Processing

Solana uses a method called “Sealevel” to process several transactions concurrently across various nodes. With thousands of transactions per second (TPS) possible because of its parallel processing capabilities, the network’s transaction throughput greatly rises.

Sharding

Solana employs a technique known as “Proof of Replication” sharding to divide the network into smaller sections, or “shards.” The processing of individual transactions by each shard increases scalability and eases congestion.

Low Transaction Fees

Compared to certain other blockchain networks, Solana can handle a huge number of transactions with efficiency thanks to its high throughput characteristics.

Benefits of Solana’s scalability solutions

Solana’s scalability solutions offer:

• Scalability: Solana is well suited for decentralized applications (dApps) with strict performance requirements because of its novel approach to scaling, which enables it to handle a large number of transactions per second.
• Low latency: Solana offers low transaction confirmation times thanks to its quick block confirmation times and finality, which improves the user experience and permits real-time interactions.
• Cost-effectiveness: Solana is a cost-effective choice for users and developers, especially for applications that demand frequent transactions, because of its cheap transaction costs and high throughput.
• Ecosystem development: Solana’s scalability and efficiency draw developers and projects to its platform, enabling the growth of a robust dApp and DeFi ecosystem.

Cardano 

Scalability is of utmost importance in the dynamic world of blockchain technology. The capacity of a blockchain network to handle an increasing number of transactions becomes crucial as more users and apps enter the market. 

A third-generation blockchain platform called Cardano has adopted a novel strategy for scalability, deliberately positioning itself within the layer-1 vs. layer-2 paradigm. The Ouroboros protocol, a ground-breaking invention created to overcome the shortcomings of current blockchain scalability approaches, is at the core of Cardano’s scalability solution.

Cardano’s Positioning In The Layer-1 vs. Layer-2 Paradigm

Whether to grow a blockchain protocol’s base layer or create other layers that function on top of the base layer is at the center of the argument between layer-1 and layer-2 solutions. Here’s an overview of how Cardano aims to scale without sacrificing security and decentralization :

On-Chain Solutions

• Block size increase: The transaction capacity has been increased by 12.5% (from 64KB to 72KB); further modifications are expected based on network performance.
• Pipelining: Aiming for quicker block dissemination and enabling scalable updates, pipelining improves block propagation time by combining validation and propagation.
• Input endorsers: By grouping transactions into pre-built blocks, enhancing consistency, and allowing for larger transaction rates, input endorsers increase throughput.
• Memory/CPU efficiency: Optimizes the chain’s use of memory for hash representation, stake distribution, live stake distribution, and processing of unspent transaction output (UTXO).
• Plutus script optimizations: Smart contract optimization includes reference inputs (CIP-0031) for input inspection without spending and Plutus Datums (CIP-0032) directly attached to outputs for simplified usage.
• Node enhancements: Improves stake and reward computations distribution, memory usage efficiency, and peak load management, boosting scalability.
• On-disk storage: Storing parts of protocol state on disk reduces memory requirements, easing scalability bottlenecks, enabling greater blockchain state growth.

Off-Chain Solutions

• Sidechains: Sidechains are separate blockchains that are linked to the primary blockchain in a bidirectional manner. This allows for frictionless asset transfer between chains, increases flexibility, and supports a wide range of functions. A single main chain can support a variety of functionally separate, interoperable sidechains.
• Hydra: Hydra introduces a collection of layer 2 protocols, such as isomorphic state channels, to increase throughput, decrease latency, cut costs, and reduce the amount of storage needed. By effectively processing transactions off-chain and using the main-chain ledger for secure settlements, Hydra remains a popular solution.
• Off-chain computing: Asynchronous Contract Execution (ACE), a type of computation that is off-chain, improves the performance of the core network. Through a trust paradigm, transactions can be quick and inexpensive while still taking place off-chain.
• Mithril: It is critical to address the complexities of operations related to participant numbers logarithmically in order to increase scalability. Mithril improves chain synchronization while maintaining trust and bringing about effective multi-signature aggregation without jeopardizing security.

Ethereum

The dApp and smart contract revolution has been led by Ethereum, a ground-breaking blockchain platform. However, due to its quick growth, significant scalability issues with its initial design have come to light, mostly with the layer-1 protocol. 

By creating a more scalable and effective architecture, the Ethereum consensus layer upgrade (The Merge), which took place in September 2022, hoped to overcome these issues. The Ethereum ecosystem has also adopted a number of layer-2 solutions to temporarily address the scaling difficulties while switching to PoS consensus mechanism to address scalability and energy related issues.

Ethereum’s Layer-1 Scaling Challenges

Layer-1, commonly referred to as the basic layer, of Ethereum had significant problems with scalability, transaction throughput, and network congestion.

• Network congestion: When there is a rush in demand, Ethereum’s limited capacity for processing transactions is made clear by an increase in transaction fees, which makes the platform less usable for users and DApps.
• Slow transaction confirmation: Compared to conventional payment systems, Ethereum’s Proof of Work (PoW) consensus process results in slower transaction confirmation times, which limits real-time use cases.
• High gas costs: During network congestion, gas costs, which users pay to perform transactions and deploy smart contracts, can soar to absurdly high levels that they negatively affect the user experience and deter modest transactions.
• Scalability limitations: Due to its low throughput, Ethereum is unable to handle many concurrent transactions without experiencing delays and potential bottlenecks.

Ethereum’s Transition To Proof-Of-Stake Consensus Method 

By adopting the PoS mechanism in 2022, Ethereum undertook a substantial transformation that is credited with improving security, consuming less energy, and being better suited for the incorporation of novel scaling solutions.

Validators are at the center of the proof-of-stake paradigm. Validators are in charge of processing transactions on the Ethereum network, acting similarly to miners in the proof-of-work model and significantly contributing to the network’s security.

By staking (depositing) a minimum of 32 ETH into the designated contract, anyone can join the PoS network and become a validator. The protocol then uses a randomized method to choose participants for making suggestions for and casting votes against adding additional blocks to the chain.

An execution client, a consensus client, and the validator software itself are required to become validators on Ethereum. This extensive collection of tools works together to provide effective transaction validation and strong involvement in the PoS system.

Furthermore, every 32 slots, or around 6.4 minutes, an epoch takes place in the context of Ethereum’s PoS ecosystem. Each of these time slots designates a specific period of time for the committee of validators to carry out important tasks. These committees are made up of teams with at least 128 validators. 

An epoch contains tasks like adding new blocks to the blockchain and voting on them to confirm their legality. The efficiency, consistency, and security of Ethereum’s transaction validation process are optimized by this coordination of validator committees functioning within well specified epochs.

Ethereum’s use of the PoS paradigm, which is intimately linked with the ideas of validators and epochs, underlines its dedication to developing the network’s capabilities while upholding security, energy efficiency, and scalability standards. This change highlights both Ethereum’s adaptability and endurance in the constantly changing world of blockchain and cryptocurrencies. It also represents technological advancement.

Layer-2 Scaling Solutions On The Ethereum Blockchain

The constraints of the Ethereum blockchain’s scalability have been addressed by layer-2 scaling solutions, which have emerged as a game-changing strategy. The ability of Ethereum to process a large number of transactions becomes increasingly important as its popularity grows. While preserving the security and decentralization that Ethereum is renowned for, layer-2 solutions present an inventive way to reduce congestion and improve efficiency.

By adding to the existing Ethereum blockchain, layer-2 scaling solutions essentially create supplementary layers that process a sizable amount of transactions off-chain. This tactic speeds up transaction processing while easing the load on the main Ethereum network. Optimism and Arbitrum are two well-known layer-2 solutions that have attracted attention.

Optimism

The optimistic rollup method is employed by Optimism to increase Ethereum’s scalability. In this approach, transactions are off-chain processed optimistically and combined into a single “rollup” transaction that is regularly published to the Ethereum mainnet. Thus, Optimism drastically lowers the volume of transactions that are handled directly on-chain, resulting in lower fees and quicker confirmation times.

The interoperability of Optimism with current Ethereum smart contracts is one of its main features. With only a few adjustments, developers can migrate their contracts to the Optimism network. This function facilitates optimism’s adoption and hastens its adoption within the Ethereum ecosystem.

Arbitrum

Another layer-2 solution that prioritizes a flawless user experience and improved scalability is Arbitrum. Arbitrum utilizes an optimistic rollup process, much like Optimism. Off-chain transaction processing is done, and it regularly sends compiled data to the Ethereum mainnet for verification. This procedure ensures that transaction integrity is upheld while easing network congestion.

By placing a strong emphasis on usability and interoperability, Arbitrum stands out. Developers can easily move their smart contracts to the Arbitrum network and take advantage of its scalability without making significant code revisions.

A comparison summary table of summary of the differences between Bitcoin scaling solutions and Ethereum scaling solutions can be found in the table below:

Can Bitcoin Scale Without Layer-2? A Future Outlook

The rapid expansion of Bitcoin’s influence, from the emergence of applications for Bitcoin-based exchange-traded funds in the United States to El Salvador’s acceptance of Bitcoin as legal tender, has amplified the demand for enhanced scalability within the cryptocurrency ecosystem. 

As mainstream adoption continues to surge, the need for solutions that can accommodate greater transactional capacity and efficiency becomes paramount. Adam Back, an eminent figure in the Bitcoin development community and the CEO of Blockstream, a prominent blockchain technology company, emphasizes the potential of layer-2 networks to address this challenge.

Layer-2 Networks: Pioneering Scalability

As this article has outlined layer-2 networks represent a groundbreaking approach to scaling the Bitcoin blockchain. As mentioned earlier, the function as secondary protocols built on top of existing blockchains such as Bitcoin and Ethereum, these networks bear resemblance to the evolution of the internet’s protocol stack. Which is a protocol that addresses the implementation of a computer networking protocol suite or protocol family. 

One of the notable figures advocating for layer-2 solutions is Adam Back. As the CEO of Blockstream, a company deeply involved in blockchain technology and development, Back’s insights into layer-2 technology hold significant weight.

In a video  interview with YouTube channel Forkast News. News. Adam Back outlined the role of layer-2 networks in resolving the scalability issues faced by blockchain systems. He compared these networks to segments of transactional capacity optimized for specific use cases. 

Back mentioned that while it might be challenging for all potential Bitcoin users to directly conduct transactions on the main chain, layer-2 networks provide an alternative by enabling different use cases that can leverage Bitcoin in distinct ways. He emphasized that this approach enables the onboarding of more users while reducing the data load on the main chain. Back acknowledged that layer-2 networks involve certain trade-offs, but they offer assurances akin to those of the primary Bitcoin chain, recognizing that a single protocol cannot be universally optimal for all scenarios.

Layer-2: Where Innovation Thrives

The concept of layer-2 networks gains prominence in the context of Bitcoin’s development trajectory. The pace of upgrades to the Bitcoin network has been deliberate, with significant upgrades such as the SegWit soft fork in 2017 and the more recent Taproot upgrade in 2020. Given the measured and occasionally uneven pace of these upgrades, many innovative developments within the Bitcoin blockchain ecosystem have found their home in layer-2 solutions.

Drawing a parallel with the internet’s architecture, Back highlighted that while the core TCP/IP protocol has remained largely unchanged for decades, innovation has flourished in the layers above, particularly at the application layer. This architecture, Back explained, promotes robustness by allowing the best technology to evolve in the most flexible layers, similar to how layer-2 solutions are facilitating innovation while maintaining the integrity of the underlying blockchain.

Insights And Perspectives

Adam Back’s views extend beyond the technical realm, encompassing the societal and economic impacts of Bitcoin’s growing adoption. He envisions a scenario where the widespread adoption of Bitcoin could influence the valuation of traditional assets like stocks, real estate, gold, and artwork. The potential reduction in the monetary premium attached to these assets could have both positive and negative effects. 

While it might lead to more affordable real estate, it could also challenge the conventional methods of preserving value. He notes how El Salvador’s adoption of Bitcoin as legal tender has led to remarkable progress in financial inclusion, with the number of Bitcoin wallet users surpassing the count of individual bank accounts within a short span.

Reflecting on the “block war” of 2017, Back contends that the market ultimately determined the fate of competing blockchain forks, reinforcing the decentralized nature of the decision-making process. 

Ethereum’s Future Strategy

Transitioning to proof-of-stake in 2022 marked a crucial move to prepare the Ethereum platform for the next phase of enhancements as explained by Vitalin Buterin during EthCC 2022, involving four pivotal upgrades known as Surge, Verge, Purge, and Splurge. Here’s a concise overview:

The upcoming Surge upgrade introduces the concept of sharding, specifically Danksharding in Ethereum’s case. Sharding partitions the network into separate sets of validators, simultaneously handling distinct transactions. Notably, Ethereum ensures communication between shards and the base layer, maintaining the network’s unified truth source. This was unfeasible under proof-of-work, which requires every node to process and record each transaction, leading to inefficiencies. Ethereum’s current capacity is around 15-20 transactions per second.

Sharding revolutionizes this scenario, drastically reducing data requirements for node maintenance—from several gigabytes to a manageable level for phones or personal computers. Moreover, sharding facilitates the utilization of roll-ups. Roll-ups enable transactions to be bundled, cryptographically linked, and processed off-chain before being presented as a single entry to the network.

Verkle trees, a commitment scheme similar to Merkle trees but with compact witnesses, will be made available through the Verge upgrade. Smaller node sizes and optimized storage are promised by this. By enabling block validation without keeping a copy of the whole blockchain history, verkle trees open the door for stateless clients. This represents a major step towards improved protocol decentralization.

State expiry will be implemented in relation to the Perge upgrade. After this phase, Ethereum clients will destroy data that is older than a year. The difficulty comes in keeping old data after it has been thrown away. The mechanisms causing this are still unknown. The Perge enhances Ethereum in several ways:

• Reduced hardware needs for nodes (less storage)
• Deletion of the legacy transaction-specific code
• Clients sync less data, reducing the network’s bandwidth use

The Splurge phase completes the blueprint for Ethereum’s upgrading. It includes features that were not included in earlier releases. Timing and implementation specifics are scarce. According to Vitalik Buterin, The Splurge might be unneeded if Ethereum scales effectively with earlier releases.

Conclusion

Blockchain scalability was always going to be a continuous challenge throughout the crypto space and is addressed through layer-1 and layer-2 scaling solutions. layer-1 solutions involve direct changes to blockchain protocols, while layer-2 solutions create parallel networks to offload transactions. In this article we delve in detail into:

• Scaling trilemma: Blockchains facing challenges in achieving scalability without compromising decentralization and security.
• Layer-1 solutions: Improving consensus mechanisms and sharding are examples of enhancing scalability at the protocol level.
• Layer-2 solutions: These solutions build on existing blockchains to handle transactions off-chain, increasing throughput.
• Trade-offs: Implementing solutions requires balancing security, scalability, and decentralization trade-offs.

The importance of layer-1 and layer-2 scaling solutions lies in their potential to drive mass adoption by addressing congestion, enhancing speed, and reducing transaction costs. These solutions contribute to sustainable blockchain ecosystems, enabling a wider range of use cases.

Looking ahead, the future of blockchain scalability involves ongoing research into more efficient consensus algorithms, interoperability solutions, and further layer-2 advancements. As the blockchain landscape evolves, collaboration among developers, stakeholders, and the community will be vital to overcoming challenges and realizing the full potential of scalable blockchain networks.

FAQs

What are the two types of scaling solutions?

Scaling solutions include layer-1, which aims to enhance scalability on the blockchain’s base layer and layer-2, which employs off-chain mechanisms to process transactions outside the main blockchain.

What is the difference between layer-1 and layer-2 scaling solutions?

layer-1 refers to fundamental blockchain protocols (e.g., Ethereum, Bitcoin) and their main networks. It addresses scalability directly on the base layer, whereas layer-2 solutions are built on top of layer-1 and can handle transactions off-chain to enhance scalability. They utilize mechanisms like sidechains and rollups.

What are the disadvantages of layer-2 solutions?

Layer-2 solutions can add complexity to development and require proper synchronization with layer-1. Also, depending on design, layer-2 solutions might introduce new attack vectors.

Is Solana layer-1 or 2?

Solana is a layer-1 blockchain, offering high throughput and performance directly on its main network.

Is Polkadot layer-1 or 2?

Polkadot is a layer-1 solution, facilitating interoperability between multiple blockchains. The platform employs a unique relay chain and parachain structure, where the relay chain coordinates communication between parachains—customizable blockchains that can be specialized for various use cases.

What are the examples of layer-2 scaling solutions?

Examples of layer-2 scaling solutions include roll ups that aggregate transactions off-chain and submitting a summary to layer-1 and state Channels that conduct transactions off-chain between participants while ensuring layer-1 security.

Is sharding a layer-1 solution?

Sharding is a layer-1 scaling solution that divides the blockchain into smaller partitions (shards) to process transactions in parallel.

Can layer-2 solutions solve the blockchain trilemma issue?

Layer-2 solutions can address scalability in the blockchain trilemma by offloading transactions, but their impact on decentralization and security varies based on implementation. A comprehensive solution often requires a balance of strategies.

What are Ethereum layer-2 scaling solutions?

Ethereum layer-2 scaling solutions are off-chain solutions like Optimism and Arbitrum, enhancing Ethereum’s scalability by processing transactions off the mainnet.

Is Cardano a layer-2 solution?

No,  Cardano is also a layer-1 blockchain, designed to improve scalability, security, and sustainability directly on its main network.