What Is a Layer 1 Protocol and Why Does It Matter?

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. Nevertheless, it seems that these three parts aren’t 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 higher consideration to scalability, though they might lose on the decentralization facet.

All in all, the Layer 1 protocol represents the blockchain itself. In actual fact, 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 stated, listed here are the most well-liked Layer 1 protocols that collectively account for greater than 60% of the crypto market cap:

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 large 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% firstly of 2021. The decline in dominance suggests growing curiosity in additional scalable options, akin to Ethereum, Solana, or Avalanche, all of which may host decentralized purposes (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 extensively thought to be a secure haven towards inflation, although it has failed to supply that haven through the present inflationary interval. (BMJ Ranking: 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 limiteless variety of tokens because of its sensible contract characteristic.

Since its launch in 2015, Ethereum’s Layer 1 community has been backed by a PoW consensus mechanism just like bitcoin. Nevertheless, so as to obtain higher scaling, the community is upgrading to undertake a Proof of Stake (PoS) algorithm. The change to PoS has been gradual and can finalize firstly of 2023 when the present PoW chain turns into a part of a wider PoS-based community fabricated from so-called shard chains. The latter will allow Ethereum to change into extra scalable and provides it higher capability to retailer information.

PoS depends on a unique validation course of, which is named “forging.” The nodes planning to participate within the block creation course of merely must stake the native token. They don’t must spend on electrical energy or purchase specialised {hardware} as within the case of PoW blockchains. (BMJ Ranking: 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 sensible contracts and might host DeFi purposes. The general public community was launched in 2020 by Binance, the most important cryptocurrency alternate 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. Because of this, the brand new community hosts the native BNB token in addition to the purposes that have been beforehand constructed on BSC.

Whereas the native token retains its ticker, it modified its identify 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 Ranking: 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 sensible contracts and is designed for DeFi wants. Like Algorand, it claims to handle the blockchain trilemma with a novel structure. Particularly, it makes use of three completely different chains as follows:

• The Change Chain (X-Chain) is the default chain the place customers mine and alternate digital belongings. The native token AVAX resides on this chain.
• The Contract Chain (C-Chain) permits builders to construct sensible contracts. It’s primarily based on the EVM, enabling sensible 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 primarily based on their wants. Avalanche’s multi-chain method permits it to help greater than 4,500 tps with virtually immediate finality. (BMJ Ranking: 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 listing in lower than a yr following its launch.

Polkadot is an ecosystem of chains that may talk with one another whereas being impartial. Often known as 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 Ranking: 4.10)

Cardano

Ticker: ADA
Market Cap: $16.2 billion
TVL: $124 million
Consensus: Ouroboros (PoS)

If Ethereum got here to resolve the issues of bitcoin, Cardano was launched as a substitute for 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 completely different entities, together with the Cardano Basis, IOG (previously referred to as IOHK), and Emurgo.

The primary purpose of Cardano is to take sensible contracts to the subsequent degree by guaranteeing larger speeds and higher 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 sensible contract performance that allows builders to construct dapps. On this means, the ecosystem can stop congestion and excessive transaction charges. Cardano depends on a novel PoS model referred to as Ouroboros. (BMJ Ranking: 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 likely one of the only a few blockchains that declare to resolve the so-called Blockchain Trilemma by reaching scalability with out compromising the safety and decentralization of the community. That is attainable because of its Pure Proof of Stake (PPoS) algorithm – a PoS model invented by MIT Professor Silvio Micali.

The PPoS consensus mechanism permits each ALGO holder to doubtlessly change 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 permits 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 immediate 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 Ranking: 3.80)

Solana

Ticker: SOL
Market Cap: $12.6 billion
TVL: $2.6 billion
Consensus: Proof of Historical past

Solana has managed to change into one of many largest blockchain networks in a comparatively brief interval, being launched in 2020. Its native cryptocurrency, SOL, is within the prime 10 and has been virtually for the reason that launch of the token.

Solana depends on a PoS algorithm, but it surely merges it with a novel consensus mechanism referred to as Proof of Historical past (PoH), an innovation that allows the chain to maintain an correct report of transactions and settle them primarily based on timestamps fairly than communication with different validating nodes. This method permits Solana to attain spectacular speeds, which makes it tremendous scalable.

The Layer 1 community can deal with as much as 50,000 tps with virtually immediate finality, though in follow, Solana manages on common lower than 3,000 tps, which is means sooner than Ethereum.

Like BSC, Solana has made certain to attain interoperability with Ethereum. It launched its cross-chain bridge referred to as Wormhole shortly after the launch in 2020. Sadly, earlier this yr, the protocol misplaced about $320 million attributable to a hacking assault focusing on a Wormhole loophole. (BMJ Ranking: 3.72)

Why we want Layer 1 Protocols

Layer 1 blockchains signify the basic parts of all decentralized purposes. The resilience of DeFi, NFTs, and all the things “blockchain-based” relies on Layer 1 networks. For instance, if we spot a serious loophole in Ethereum, we must always fear about all the DeFi ecosystem, given that the majority of it’s primarily based on Ethereum. For that reason, 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 sensible 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 shortly, the scaling issues change into extra seen. Some blockchains implement upgrades straight on their Layer 1 networks to handle this subject. Listed here are two most related examples:

• SegWit (Bitcoin) – this refers to an replace in bitcoin carried out in 2017. The primary results of the improve was a change within the transaction format of bitcoin to cut back transaction time by growing block capability and defending towards transaction malleability.
• Sharding (Ethereum) – sharding is the ultimate improve carried out by Ethereum in a number of phases. Anticipated to be totally launched in 2023 or 2024, it refers to splitting all the Ethereum community into a number of parts referred to as shards. They may function in parallel and assist the ecosystem change into extra speedy 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 prime of the primary chain to handle particular issues and limitations. It’s like including tuning parts to a automotive to enhance its efficiency and obtain higher outcomes.

A Layer 2 resolution is all the time on prime of an underlying blockchain. Layer 2 networks can course of transactions extra shortly and cheaply than Layer 1s, however they don’t profit from the identical degree of safety and decentralization.