What Is Layer 1

As the blockchain is an open network system, anyone has the right to act as a node to participate in accounting. To formulate a set of game rules for all nodes to abide by is a very important issue, so that the blockchain can operate smoothly.

Layer 1, also known as the bottom layer, is a rule that all miners must abide by. Its design is to enable the blockchain to maintain the "ledger consistency" and "transaction finality" of the state, so that nodes can peg with data transactions in a non-tamperable manner, and reach a consensus in an encrypted manner without central review. To put it simply, Layer 1 is the protocol of blockchain. The consensus mechanism, blocks, private keys or addresses we often hear about are all Layer 1 categories. In this article, we will illustrate and explore more about Layer 1.

Layer 1 Definition

Layer 1, also known as on-chain scalability, mainly implements the underlying technology of the blockchain protocol. Presently, most public chains operate under Layer 1.

The Layer 1 protocol can process and complete transactions on its own blockchain, and bring its own native token to pay transaction fees. Therefore, the Layer 1 blockchain can usually obtain huge amounts of money from token sales, so as to compete with Ethereum. The Layer 1 blockchain can attract users through token incentives, but as Rollups improve the scalability of Ethereum, the difference between layer 2 and layer 1 becomes smaller and smaller.

Layer 1 Development History

Ten years ago, Bitcoin came into our view as the first cryptocurrency. Satoshi Nakamoto published a white paper entitled "Bitcoin: A Peer-to-Peer Electronic Cash System", which introduces the powerful functions of the Bitcoin blockchain network. This day is an important time point in the development history of Bitcoin, and also opens the way for the subsequent rise of blockchain. Four months later, Satoshi Nakamoto (whose real identity is still a mystery) mined the first block of the Bitcoin network, also called Genesis Block.

On July 30, 2015, Ethereum network was officially launched. As the second largest crypto asset by market value, Ethereum has brought smart contracts and decentralized finance (DeFi) to the cryptocurrency world. These achievements enable Ethereum to run the entire ecosystem on its blockchain and also host its own native currency: Ether (ETH). 

In January 2018, the price of Bitcoin hit a record high, and many emerging crypto assets have emerged since then, including EOS (July 2017), Tron (September 2017) and Cardano (October 2017).

2021 is the year of the public chain explosion beside Ethereum, and various applications based on blockchain have gradually entered the public view. Ethereum and smart contracts have brought DeFi, NFT, GameFi, and even metaverse. However, the explosive growth of Ethereum chain applications also led to the scalability issues on the chain, which posed high gas fees. Any ordinary transaction on Ethereum needs to pay tens of dollars of gas fees, which is unacceptable to most ordinary users.

Ethereum is in the process of technological upgrading from PoW blockchain to PoS blockchain. The upgraded Ethereum 2.0 will greatly improve the scalability and speed. However, the delay in launching Ethereum 2.0 has caused users to bear high gas fees throughout 2021. As a result, a large number of Layer 1 blockchains supporting smart contracts with PoS technology have emerged, including a large number of competitors such as Binance Smart Chain, Solana, Avalanche, Terra, Cardano, Polkadot, etc. Every Layer 1 public chain attracted a lot of funds in 2021. A large number of developers launched various applications such as DeFi, NFT, GameFi and DEX on these smart contract platforms with different characteristics, gradually seizing Ethereum's market share.

With the increasing number of users of the Ethereum network, network congestion and high gas fees have become the primary problems of various applications. The market demand for Ethereum network is gradually increasing, and alleviating this problem has become the top priority. On October 26, Ethereum founder Vitalik Buterin published the "Road to Ethereum Centered on Layer 2" at the conference, which means that Layer 2 is the future of Ethereum expansion.

In the case of increasing data and network congestion, the concept of Layer arises spontaneously by expanding scalability and alleviating the current pressure. Layer 2 is an overall scalable solution to improve the performance of Ethereum network (Layer 1).

Blockchains are independent of each other. Each chain has its own architecture information and does not interact with other chains. For example, ETH on the Ethereum chain cannot be recognized by Solana, because ETH is not a product of Solana's architecture. To transfer it, only cross-chain protocol (IBC) can be used.

This situation was changed by LayerZero. On March 31, 2022, LayerZero Labs received a $135million A + round investment at a valuation of $1 billion. Developed by the Canadian team LayerZero Labs, LayerZero is a versatile interoperability protocol that can connect assets, messages, data and contracts on different blockchains to form an omnichain. The earliest protocol of LayerZero supports seven chains: Ethereum, Arbitrum, Avalanche, BSC, Fantom, Optimism and Polygon, and is compatible with EVM. The development team also plans to include non-EVM chains such as Cosmos Hub, Terra and Cronos into the roadmap.

Source: layerzero.network

Stargate, a cross-chain DEX project developed based on LayerZero, is also a project launched by LayerZero Lab. Presently, it has supported the stablecoin cross chain of Ethereum, Avalanche, BSC, Polygon, Fantom, Arbitrum and Optimism. Stargate cross-chain bridge was developed by the LayerZero Labs team. It is the first application ecosystem officially developed according to LayerZero. TVL has reached more than 3 billion in the last few days, and now it is more than 700 million. The cross-chain assets on Stargate are all native assets. Currently, only stablecoins and ecosystem token STG are supported.

The Scalability Trilemma

At the beginning of the birth of blockchain, there has always been an "Impossible Triangle" problem, namely, security, scalability and decentralization. It is well known that the biggest difference between blockchain technology and the Internet lies in the decentralized nature. It is because the blockchain is safe enough that we can achieve it. In the end, we can only sacrifice scalability to achieve the other two.

With the sweeping of blockchain to the outside world, more and more people are involved. The congestion of the network leads to low transaction speed and high handling fees. In particular, more and more transactions occur on the Bitcoin network, and countless Dapps are deployed on Ethereum, which has triggered increasingly prominent contradictions about handling fees and trading performance. People can only seek better solutions to deal with this problem.

In order to "solve" this impossible triangle problem, people began to explore various possibilities, many solutions emerged, one of which is Layer 2 (Layer two network).

Layer 1 Blockchain Examples

Bitcoin, a technology that has been around for 10 years, although the consensus is the most powerful, it does not keep up with the times in terms of performance; Ethereum, as the Layer 1 blockchain with the strongest consensus and the most innovative at present, has spawned and bred many representative applications. However, as a public chain launched in 2014, it has experienced several upgrades during the period, but it still cannot meet the performance needs of rapid growth. Many teams began to look for and even build alternative solutions. Here are some of the notable Layer 1 blockchain examples you should take into account：

Solana: A High-performance Public Chain that Claims to Process 60,000 Transactions Per Second

Source: solana.com

Solana was founded by former software engineers from major tech companies Qualcomm, Intel and Dropbox at the end of 2017, while its token was officially released to the public in March of 2020.

It is a layer-1 blockchain network where developers can build projects and entire ecosystems through smart contracts. Due to its architecture, Solana is arguably the fastest blockchain platform in crypto. It processes about 65,000 transactions per second (TPS), extremely fast when compared to the other top projects. It is also the most environmentally friendly one, so far. According to research, each transaction in Solana consumes as much energy as merely two Google searches.

Avalanche with Scalability and Interoperability

Source: avax.network

Avalanche ($AVAX) is a smart contract-capable blockchain platform focused on transaction speed, low costs, and eco-friendliness. But what Avalanche truly wants is to deliver the most highly scalable blockchain without sacrificing decentralization or security.

Launched in 2020 by Ava Labs (https://www.avalabs.org/), Avalanche quickly climbed the cryptocurrency rankings and is now one of the most popular coins. Avalanche price is skyrocketing and is now worth nearly $14 billion across Avalanche dapps. Avalanche dapps are decentralized applications and are built on various blockchains inside the Avalanche ecosystem. They are also known as Web3 applications or in short - dapps. If you want to understand Avalanche growth you need to see the following picture which lists the Avalanche ecosystem and all the dapps that were created within just one year.

Source: avaxholic.com

Flow: Public Chain of Top IP Settled 

Source: flow.com

Flow, a new dark horse of NFT public blockchain rising in 2021, intends to be a more applicable public blockchain for next-gen applications, games, and digital assets. It launched a public offering on Coinlist in October 2020.

On February 6, 2022, the NFT transaction volume on the Flow chain surpassed $900 million, an all-time high. Dapper Labs, which developed the Flow public blockchain, is also the developer of CryptoKitties which went viral on Ethereum in 2017. Solana, Avalanche, and other high-performance public blockchains aim to become Ethereum killers', while Flow has been designed at the beginning to be a more applicable public blockchain for the next-generation applications, games, and digital assets.

Cosmos: Building an Internet of Blockchains

Source: cosmos.network

The Cosmos blockchain which was created in 2014 and launched in 2019. Cosmos is a layer-0 blockchain, meaning that layer-1 blockchains can exist on it. As a layer-0 blockchain Cosmos has an infrastructure which layer-1 blockchains can use to create their ecosystems. Currently, there are over 260 blockchains that exist on the Cosmos ecosystem, which is the reason people call it an “an internet of blockchains.” The volume of digital assets transacted on Cosmos protocol now surpasses $150 billion. There is nothing surprising about this development considering that the relevant blockchain hosts many dApps, games, marketplaces and projects. Cosmos enhances quick transaction finality, scalability, security and interoperability among blockchains.

Polygon Compatible with Ethereum Development Language

Source: polygon.technology

Polygon is a framework that can be used to create blockchain networks and scalable solutions compatible with Ethereum. It is more like a protocol than a single solution. A major product in this ecosystem is the Polygon SDK. It can help developers create Ethereum compatible networks. The project was initially called "MATIC Network". With the scalability of the project scope from a single Layer 2 (L2) solution to "network of networks", it was finally renamed "Polygon".

Polygon supports Ethereum virtual machine (EVM), and existing applications can be migrated here relatively easily. In addition to the experience comparable to Ethereum, users can also enjoy the high throughput and low trading cost. Polygon has deployed some of the most popular decentralized finance (DeFi) dDApps, such as Aave, 1INCH, Curve and Sushi. Of course, there are also some native applications unique to Polygon, including QuickSwap and Slingshot.

In the future, the Polygon platform hopes to support a wider range of scalable solutions, including ZK Rollup, Optimistic Rollup and Validum chain. With the advent of scalable solutions, developers will get more tools to continuously develop innovative applications, solutions and products. In addition, all solutions can be compatible with existing Ethereum tools and wallets (such as MetaMask).

Layer 1 — EVM, Layer 2

All Layer 1 networks are competing with each other to attract developers and users, but without tools and infrastructure similar to Ethereum to make it easy to build and use, it will be difficult to attract new projects to settle in and develop the ecosystem. In order to bridge the gap, many Layer 1 networks will use a strategy called EVM compatibility.

EVM refers to Ethereum virtual machine, which is essentially the brain of Ethereum to perform calculations and realize transactions. By making the Layer 1 network compatible with EVM, Ethereum developers can easily deploy existing Ethereum applications to the new Layer 1 network. Users' existing wallets can also easily access EVM compatible Layer 1 networks, making the migration between chains easier.

Taking BSC as an example, after launching EVM compatible network and adjusting the consensus to obtain higher throughput and lower transaction cost, the usage of BSC has increased sharply, and dozens of DeFi protocols have emerged, most of which are similar to the popular protocols (Uniswap, Curve) on Ethereum. Avalanche, Fantom, Tron and Celo all follow the same approach. On the contrary, Terra and Solana are not EVM compatible at present.

Both Layer 1 network and sidechain have an obvious challenge: how to ensure the security of blockchain. In order to achieve their goals, they must pay rewards to miners and validators to ensure and ensure normal transactions. Usually, the rewards are on-chain basic tokens (MATIC of Polygon, AVAX of Avalanche).

However, there are two obvious disadvantages: having basic tokens will naturally make the ecosystem more competitive rather than complementary to Ethereum; Validating and ensuring transactions is a complex and challenging task for which the network will be responsible from beginning to end.

The goal of Layer 2 network is to create a scalable ecosystem and use the security of Ethereum, mainly using "rollups" technology. In short, Layer 2 network is an independent ecosystem located on Ethereum, and generally there is no native token. It is essentially a part of Ethereum. 

How Do the Rollups Work?

Layer 2 networks are usually called Rollups because they "roll up" or "bundle" transactions together and execute them in a new environment, and then send the updated data back to Ethereum. Instead of letting Ethereum handle 1,000 Uniswap transactions alone (more expensive), it is better to stack the calculations on Rollups (cheaper) before submitting the results to Ethereum.

However, when the results are sent back to Ethereum, how does Ethereum know that these data are correct and valid? And how does Ethereum prevent anyone from publishing incorrect information? These are the key issues to distinguish the two types of Rollups: Optimistic rollups and ZK rollups.

Optimistic Rollups

When submitting results back to Ethereum, optimistic rollups optimistically assume that they are valid. In other words, the rollup validator can submit any data (including potentially erroneous / fraudulent data) and assume that it is correct.

But at the same time, there are some ways to combat fraud. There is a time period after any withdrawal, and any challenger can check whether there is fraud (blockchain is transparent, and anyone can observe what is happening on the chain). If these challengers can mathematically prove that fraud has occurred (by submitting proof of fraud), the rollup network will restore to fraudulent transactions, punish bad actors, and reward challengers.

The shortcoming of Optimistic Rollups is that when funds move between rollup and Ethereum, there will be a short delay to wait to see if any challengers find any fraud. In some cases, this may be as long as a week, but these delays are expected to decrease with the development of the project.

Arbitrum and Optimistic

Arbitrum (in the charge of Off-chain Labs) and Optimistic (in the charge of Optimism) are the two main projects that currently adopt optimistic rollups technology. It is worth noting that these two projects are still in the early stages, and both companies maintain centralized operations, but the plan will gradually decentralize with the passage of time.

When the technology is mature, optimistic rollups are estimated to provide 10-100 times the scalability of Ethereum. Even in the early days, DeFi applications on Arbitrum and Optimism have accumulated billions of network value.

Optimism is still in the early stage of development. Presently, it has more than $300 million of TVL on seven DeFi applications, including Uniswap, Synthetix and 1inch.

ZK Rollups

Unlike Optimistic rollups, ZK rollups actually prove to Ethereum that transactions are valid, rather than using hypothetical methods.

Together with the transaction results after bundling, they submit the so-called validity proof to Ethereum smart contracts. As the name suggests, the validity proof allows Ethereum to validate whether the transaction is valid, making it impossible for the relay node to cheat the system. This eliminates the need to validate whether the transaction is a fraud waiting period, so moving funds between Ethereum and ZK rollups networks is actually real-time.

Although instant settlement and no withdrawal time sound attractive, ZK rollups are not without cost. First, generating validity proof is a computationally intensive job, so you need high-power machines to make it work. Secondly, the complexity of validity proof makes it more difficult to support EVM compatibility, which limits the types of smart contracts that can be deployed to ZK rollups. Therefore, Optimistic rollups have taken the lead in entering the market and are more capable of solving the current scalability dilemma of Ethereum, but in the long run, ZK rollups may be a better technical solution.

Source: defillama.com/chains

Ethereum's share of total value locked (TVL) in DeFi increased from 62.43% in Q4 in 2021 to 63.35% in Q2 in 2022.

Ethereum's current time-to-finality is approximately 12-60 seconds, and it can process 15-30 transactions (TPS) per second, but such TPS is far lower than traditional payment systems, such as Visa, which can process 1,700 transactions per second.

The processing efficiency of Ethereum's Layer 2 scalable solution is increased to 2,000-4,000 transactions per second.

In contrast, the Layer 1 protocols Solana, Binance Smart Chain and Avalanche, which took the market share of DeFi from Ethereum in 2021, have reached a higher transaction throughput. Before you consider sharding technology and Layer 2, Avalanche has achieved a time-to-finality of less than 1 second and 4,500 transactions per second.

Solana can process more than 2,000 transactions (TPS) per second, and the time-to-finality is approximately 13 seconds. Binance Smart Chain is 150 TPS, and the block time is 3 seconds.

The following figure shows the total value locked and value of certain blockchains; Ethereum has been the best performer since September 2020.

Source: defillama.com/chains

The chart below shows the total value locked (TVL) of certain chains. Most of TVL are concentrated in Ethereum (ETH), BSC (BNB) and Tron (TRON).

Source: defillama.com/chains

Conclusion

The development of Bitcoin and blockchain marks the potential to completely change global finance. The introduction of Ethereum smart contracts makes the growth of distributed applications (dApps) beyond the control of centralized companies. However, the performance of Bitcoin and Ethereum is limited, leading many people to believe that blockchain is slow, expensive and difficult to expand in nature. 

Fortunately, a series of Layer 1 protocols have emerged to address the relevant shortcomings in different use cases. Mastering relevant concepts can help us better focus on projects of network interoperability, cross-chain solutions and research new projects. Presently, most Layer 1 protocols are close to EVM. After all, it is easier for users who are already Web3 to get started and reduce the threshold for users to enter.