What is Layer 1?
Layer 1 (L1) is a fancy name given to the core workings and base infrastructure of an on-chain blockchain such as Bitcoin. Layer 1, also known as the ‘implementation layer’, refers to the core architecture of a blockchain network. Its first iteration was created by Satoshi Nakamoto in 2008 and named Bitcoin.
L1 coins and blockchains are autonomous and self-sufficient which is why they don’t need a separate network.
But then who needs a separate network? We talk about that in Layer 2 (L2) blockchains. For now, let’s stick to L1 or independent blockchains.
But why L1? 🤔
Lovely question! The blockchain system works in layers because it is essentially and inherently a complex system. No wonder it is called Web 3.0 meaning it is more holistic, complex, and exploratory than Web 2.0. Now, for something as complicated as blockchains, layers come in handy.
By adding layers to a blockchain, developers, innovators, and programmers can improve a blockchain’s functionality and enhance its features without ever compromising on the quality, security, and decentralization of a blockchain.
L1 blockchains have always been there. In fact, the term itself is as old as the early days of cryptocurrency. The term gained traction and popularity when in 2014, Ethereum introduced the concept of multiple layers functioning for the main blockchain, allowing it to scale and expand in less time.
After 2014, Layer 1 became a signifier and a differentiator for main blockchains as their extensions like secondary and tertiary layers which include layer 2 blockchain networks, plasma chains, etc. came forth.
Layering in cryptocurrency also helps with the modular development of a currency. Modular development refers to a modular architecture that allows for the development of individual components of something (blockchain, in this case). Thus, using layers, different areas of a blockchain/coin can be worked on by different developers without affecting the other layers.
In simpler terms, L1 is referred to the core and foundational protocol of mainstream blockchains and whatever is an extension of L1 blockchains falls under secondary or tertiary layers which are layer 2 and layer 3, respectively.
On a conceptual level, Layer 1 forms the foundational base of any blockchain network. It defines a set of rules for operations like transaction throughput, block time, and a consensus algorithm that governs the entire network.
Features of L1
Now that you know how layer 1 is the name of the underlying working mechanism of mainstream blockchains, here is a list of some of their features:
Layer 1 is not dependent on a third party. It is essentially decentralized, adding more to its self-sufficient and self-governing nature. Decentralized in blockchain refers to a network that is not dependent on an all-encompassing central authority. L1 blockchains, thus, are their own controlling authority and are also accountable for their security and transparency.
A blockchain is essentially a network of different blocks managed by different servers and nodes. This network is sustained using a consensus mechanism and there are two main consensus mechanisms – Proof-of-Work (PoW) and Proof-of-Stake (PoS). Layer 1 blockchains can either be following PoW like Bitcoin or PoS like Ethereum.
In cryptocurrencies, there is an important feature called a ledger. An old concept that has been used by centralized systems like banks since time immemorial, a ledger in cryptocurrencies is used to record transaction data. Layer 1 cryptocurrencies’ unique selling point is that they are immutable, meaning once a transaction has been processed and registered in the ledger, it can’t be changed.
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Limits of L1
Now, while there are amazing features to Layer 1 coins, there are some drawbacks and some limitations as well. Guess, you can’t be the jack of all trades. These limitations include:
Scalability – a challenge
Scalability is one of the major issues in Layer 1 blockchains. Take Bitcoin for example. The blockchain supports a PoW consensus system and can only approve 3-7 transactions per second.
That’s awfully low, isn’t it? And this number is not fixed. It varies depending on the size of the transaction. Now, add high transaction costs and low transaction verification speed. The blockchain ends up becoming a big white elephant.
However, to combat this problem, we have Lightning Network – an L2 subsidiary of bitcoin – to help process transactions faster and at low costs.
Layer 1 is not ready for mass adoption.Vitalik Buterin of Ethereum
The scalability problem, specifically in the Layer 1 Ethereum Blockchain, is expected to be solved by the current consensus mechanism – PoS.
Some blockchains like Algroand, Solana, and Avalanche are performing well and have been quite successful in solving the scalability problem.
Flexibility – an illusive dream
Flexibility is difficult in Layer 1 blockchains. Why? Because making decisions like increasing flexibility or functionality in a full-fledged and developed blockchain is tricky. This is because of a concept called hard fork which, in blockchains, refers to a software upgrade that almost always leads to a split in the main blockchain. A split leads to the creation of two blockchains out of one with both of them following different protocols and different rules and entailing different features.
Hacks and attacks
Another super challenge in Layer 1 blockchains is that they are prone to get attacked. Layer 1 blockchains are not just some coin or token manufacturing systems; they are huge networks within themselves. And security in such widely overarching networks can be an issue.
Attacks like the 51% where an entity or a group ends up controlling the blockchain through its hashing power can disrupt the network.
Moreover, when L1 networks get an overwhelming amount of transactions, they can face a big challenge called Denial-of-Service (DoS) attacks. Not being able to process further transactions is not just an attack but also a credibility issue and a big hurdle in the face of user experience.
Websites to find under-valued Layer 1 crypto projects
One of the most asked questions is how to find new Layer 1 crypto projects that are under-valued and can also offer good returns on investment.
Now, as of yet, no hard and fast rule could help measure and decide which Layer 1 blockchain is good for future investments. But here are some resources/websites that you can use.
A good website to fetch data regarding L1 blockchains is Token Terminal. It has, if not the most accurate, a substantial amount of data in the form of token performance and financial metrics that can give you a good price-to-earnings ratio if you happen to invest in a Layer 1 coin.
Yet another website is called Token Metrics. Latest and more advanced in its workings, Token Metrics uses AI and machine learning to deduce, project, and predict the trajectory of various projects including L1 coins.
Yet another website that can come in handy in deciding, with tangible data, facts, and figures, which Layer 1 crypto projects to invest in is called CoinGecko. It uses aggregate data to generate new and useful insights for crypto users and potential investors.
Differences between Layer 1 and Layer 2
Just in case you are still not clear about the differences between L1 and L2, here is a table detailing the main differences between the functionalities, purposes, and features of both layers.
|Layer 1||Layer 2|
|Purpose||The successful creation of an immutable, secure, and decentralized ledger||Assisting the L1 blockchain in verifying more transactions in less time and fewer costs|
|Security||Based and dependent on different consensus mechanisms||Entails additional security measures all while leveraging and enhancing those of L1|
|Number of transactions per second||Limited to single digits and majorly based on block size||Up to a 1000 transactions in a second|
|Upgrades and changes within the network||Requires hard forks and splitting of a blockchain||Existing protocols allow for timely upgrades using soft forks|
|Transaction fees||High transactions fees||Low transaction fee|
|Optimality||Low optimality||High optimality|
|Examples||Ethereum, Bitcoin, etc.||Lightning Network, Plasma, etc.|