What are Layer 1 blockchains, and why is it vital to differentiate them from Layer 2 options? Within the following, we’ll focus on Layer 1 networks that will help you differentiate them from different blockchain options. You possibly can discover this handy when analyzing varied blockchain initiatives as investments.
What Is a Layer 1 Blockchain Protocol?
Layer 1 refers back to the elementary structure of a blockchain. It has to make sure the decentralization, safety, and scalability of transactions. Nonetheless, it seems that these three components will not be that simple to merge rigidly right into a single construction, which is why older blockchains, together with bitcoin, needed to obtain safety and decentralization on the expense of scalability. Newer variations of blockchain implement Layer 1 options with larger consideration to scalability, though they might lose on the decentralization facet.
All in all, the Layer 1 protocol represents the blockchain itself. The truth is, we solely outlined “Layer 1” after introducing “Layer 2” protocols, that are secondary networks meant to enhance the scalability or safety of an underlying Layer 1 infrastructure. For instance, the Lightning Community is a Layer 2 resolution for bitcoin, which acts as Layer 1.
That being mentioned, listed here are the most well-liked Layer 1 protocols that collectively account for greater than 60% of the crypto market cap:
Ticker | Market Cap | Complete Worth Locked (TVL) | Consensus Mechanism | BMJ Score | |
---|---|---|---|---|---|
Bitcoin | BTC | $401.1 billion | $127.2 million | PoW | 4.93 |
Ethereum | ETH | $144 billion | $47.7 billion | PoW switching to PoS | 4.33 |
Binance Good Chain | BNB | $38.4 billion | $6 billion | PoS | 4.17 |
Avalanche | AVAX | $5.4 billion | $2.8 billion | PoS | 4.13 |
Polkadot | DOT | $7.5 billion | — | NPoS | 4.10 |
Cardano | ADA | $16.2 billion | $124 million | PoS | 4.03 |
Algorand | ALGO | $2.2 billion | $101 million | PPoS | 3.80 |
Solana | SOL | $12.6 billion | $2.6 billion | PoH | 3.72 |
Bitcoin
Ticker: BTC
Market Cap: $401.1 billion
TVL: $127.2 million
Consensus: Proof of Work
Bitcoin is the oldest and at present the most important cryptocurrency by market cap. Its underlying Layer 1 infrastructure represents a decentralized community of nodes that attain consensus because of the so-called Proof of Work (PoW) algorithm. It ensures a excessive diploma of safety, though it requires huge quantities of electrical energy for the mining course of.
On the time of writing, bitcoin accounts for over 40% of the crypto market, down from 72% initially of 2021. The decline in dominance suggests rising curiosity in additional scalable options, resembling Ethereum, Solana, or Avalanche, all of which may host decentralized functions (dapps) and help the quickly rising decentralized finance (DeFi) pattern.
The bitcoin community is resilient and has by no means failed throughout all these years. The decentralized PoW-based infrastructure helps a cryptocurrency that’s broadly thought to be a protected haven in opposition to inflation, even though it has failed to offer that haven in the course of the present inflationary interval. (BMJ Score: 4.93)
Ethereum
Ticker: ETH
Market Cap: $144 billion
TVL: $47.7 billion
Consensus: Transitioning from Proof of Work to Proof of Stake
The second-largest cryptocurrency by market cap is ETH, the utility token of the Ethereum ecosystem, which may host dapps and a vast variety of tokens because of its good contract characteristic.
Since its launch in 2015, Ethereum’s Layer 1 community has been backed by a PoW consensus mechanism just like bitcoin. Nonetheless, with the intention to obtain higher scaling, the community is upgrading to undertake a Proof of Stake (PoS) algorithm. The swap to PoS has been gradual and can finalize initially of 2023 when the present PoW chain turns into a part of a wider PoS-based community product of so-called shard chains. The latter will allow Ethereum to turn into extra scalable and provides it larger capability to retailer information.
PoS depends on a special validation course of, which is named “forging.” The nodes planning to participate within the block creation course of merely have to stake the native token. They don’t need to spend on electrical energy or purchase specialised {hardware} as within the case of PoW blockchains. (BMJ Score: 4.33)
Binance Good Chain
Ticker: BNB
Market Cap: $38.4 billion
TVL: $6 billion
Consensus: Proof of Stake
Binance Good Chain (BSC) is a PoS-based blockchain that helps good contracts and might host DeFi functions. The general public community was launched in 2020 by Binance, the most important cryptocurrency trade on the earth by buying and selling quantity. BSC got here three years after Binance’s native Binance Chain (BC), the corporate’s major decentralized blockchain that used to host the Binance Coin (BNB).
Early in 2022, Binance merged the 2 chains to kind the BNB Chain, which incorporates the previous BSC. Consequently, the brand new community hosts the native BNB token in addition to the functions that have been beforehand constructed on BSC.
Whereas the native token retains its ticker, it modified its title to “Construct and Construct.” BNB acts as a governance token and fuels transactions on the brand new chain. Binance determined to improve its decentralized community to embrace large-scale apps associated to emergent sectors like Metaverse, GameFi, and SocialFi. The brand new chain borrows the compatibility with the Ethereum Digital Machine (EVM) from BSC.
The BNB Chain has comparable functionalities to Ethereum, however many argue that it’s not as decentralized as promoted. Particularly, it depends on a PoS consensus that makes use of solely 21 validators chosen from the community. (BMJ Score: 4.17)
Avalanche
Ticker: AVAX
Market Cap: $5.4 billion
TVL: $2.8 billion
Consensus: Proof of Stake
Avalanche is a fast-growing blockchain that helps good contracts and is designed for DeFi wants. Like Algorand, it claims to deal with the blockchain trilemma with a singular structure. Particularly, it makes use of three totally different chains as follows:
- The Alternate Chain (X-Chain) is the default chain the place customers mine and trade digital belongings. The native token AVAX resides on this chain.
- The Contract Chain (C-Chain) permits builders to construct good contracts. It’s based mostly on the EVM, enabling good contracts to profit from cross-chain interoperability with Ethereum dapps.
- The Platform Chain (P-Chain) is utilized by Avalanche validators to coordinate their effort. Customers may also use the P-Chain to create and handle subnets, that are impartial blockchains hosted by Avalanche.
Customers are capable of transfer tokens throughout all three networks based mostly on their wants. Avalanche’s multi-chain method allows it to help greater than 4,500 tps with virtually instantaneous finality. (BMJ Score: 4.13)
Polkadot
Ticker: DOT
Market Cap: $7.5 billion
TVL: —
Consensus: Nominated Proof of Stake
Polkadot is a decentralized public community that places an excellent emphasis on interoperability. Its multi-chain framework has attracted many builders, which helped its native cryptocurrency DOT enter the highest 10 record in lower than a yr following its launch.
Polkadot is an ecosystem of chains that may talk with one another whereas being impartial. Often called parachains, these networks are hosted on the primary chain, which is Polkadot. The opposite chains profit from all of the options of the mainnet, which relate to scalability and excessive transaction pace.
Whereas Ethereum and Solana let builders construct dapps, Polkadot permits them to construct blockchains from scratch and have full management over their decentralized ecosystem. The parachains are extremely customizable and might fulfill a variety of use circumstances. (BMJ Score: 4.10)
Cardano
Ticker: ADA
Market Cap: $16.2 billion
TVL: $124 million
Consensus: Ouroboros (PoS)
If Ethereum got here to unravel the issues of bitcoin, Cardano was launched as an alternative choice to Ethereum, though it nonetheless hasn’t managed to problem it. Cardano was launched in September 2017 by former Ethereum co-founder Charles Hoskinson and former Ethereum government assistant Jeremy Wooden. The community is supervised by three totally different entities, together with the Cardano Basis, IOG (previously often called IOHK), and Emurgo.
The primary aim of Cardano is to take good contracts to the following stage by guaranteeing increased speeds and larger interoperability.
The Cardano community is split into two distinct layers: the Cardano Settlement Layer (CSL), which is used for ADA transfers, and the Cardano Computation Layer (CCL), which helps the good contract performance that allows builders to construct dapps. On this means, the ecosystem can stop congestion and excessive transaction charges. Cardano depends on a singular PoS model referred to as Ouroboros. (BMJ Score: 4.03)
Algorand
Ticker: ALGO
Market Cap: $2.2 billion
TVL: $101 million
Consensus: Pure Proof of Stake
Algorand launched in 2019 and has managed to construct a various ecosystem. It is without doubt one of the only a few blockchains that declare to unravel the so-called Blockchain Trilemma by reaching scalability with out compromising the safety and decentralization of the community. That is doable because of its Pure Proof of Stake (PPoS) algorithm – a PoS model invented by MIT Professor Silvio Micali.
The PPoS consensus mechanism allows each ALGO holder to probably turn into a block validator. For each new block, the system picks a validator randomly and secretly, giving all customers an equal likelihood to be chosen. This method allows the community to be totally decentralized.
Like Solana, Algorand places an excellent emphasis on scalability and pace, being able to processing over 1,200 tps with instantaneous finality. The community is at present introducing a characteristic referred to as block pipelining, which is able to increase tps efficiency to over 45,000. (BMJ Score: 3.80)
Solana
Ticker: SOL
Market Cap: $12.6 billion
TVL: $2.6 billion
Consensus: Proof of Historical past
Solana has managed to turn into one of many largest blockchain networks in a comparatively brief interval, being launched in 2020. Its native cryptocurrency, SOL, is within the high 10 and has been virtually for the reason that launch of the token.
Solana depends on a PoS algorithm, nevertheless it merges it with a singular consensus mechanism often called Proof of Historical past (PoH), an innovation that allows the chain to maintain an correct file of transactions and settle them based mostly on timestamps quite than communication with different validating nodes. This method allows Solana to realize spectacular speeds, which makes it tremendous scalable.
The Layer 1 community can deal with as much as 50,000 tps with virtually instantaneous finality, though in follow, Solana manages on common lower than 3,000 tps, which is means quicker than Ethereum.
Like BSC, Solana has made positive to realize interoperability with Ethereum. It launched its cross-chain bridge often called Wormhole shortly after the launch in 2020. Sadly, earlier this yr, the protocol misplaced about $320 million because of a hacking assault focusing on a Wormhole loophole. (BMJ Score: 3.72)
Why we want Layer 1 Protocols
Layer 1 blockchains symbolize the basic components of all decentralized functions. The resilience of DeFi, NFTs, and every little thing “blockchain-based” relies on Layer 1 networks. For instance, if we spot a serious loophole in Ethereum, we must always fear about your complete DeFi ecosystem, given that almost all of it’s based mostly on Ethereum. Because of this, Layer 1 networks have to be really decentralized and safe.
Newer blockchains help many operations and options straight on Layer 1. For instance, blockchains that help good contracts can host dapps that profit from the safety and decentralization of Layer 1, making these dapps a lot safer.
Layer 1 Scaling Issues
On condition that Layer 1 blockchains, particularly the older ones, have been specializing in guaranteeing a excessive diploma of safety and decentralization, they might lose on the scalability facet. When demand on these blockchains will increase rapidly, the scaling issues turn into extra seen. Some blockchains implement upgrades straight on their Layer 1 networks to deal with this problem. Listed here are two most related examples:
- SegWit (Bitcoin) – this refers to an replace in bitcoin applied in 2017. The primary results of the improve was a change within the transaction format of bitcoin to scale back transaction time by rising block capability and defending in opposition to transaction malleability.
- Sharding (Ethereum) – sharding is the ultimate improve applied by Ethereum in a number of phases. Anticipated to be totally launched in 2023 or 2024, it refers to splitting your complete Ethereum community into a number of parts referred to as shards. They’ll function in parallel and assist the ecosystem turn into extra fast and versatile.
What’s the Distinction between Layer 1 and Layer 2 Blockchain Protocols?
The primary distinction between Layer 1 and Layer 2 is that the previous represents the precise blockchain community itself, whereas the latter is a secondary layer constructed on high of the primary chain to deal with particular issues and limitations. It’s like including tuning elements to a automotive to enhance its efficiency and obtain larger outcomes.
A Layer 2 resolution is at all times on high of an underlying blockchain. Layer 2 networks can course of transactions extra rapidly and cheaply than Layer 1s, however they don’t profit from the identical stage of safety and decentralization.