Layer 1 vs Layer 2 blockchains: the key differences explained





Most crypto and on-chain activity takes place on top of Layer 1 (L1) blockchains, powered by Layer 1 (L1) blockchains and Layer 2 (L2) solutions.

Bitcoin, Ethereum, Solana, and BNB Chain are all L1s. They validate and settle every transaction on their own chain. 

L2s are separate networks, but they’re built on top of L1s. They process a majority of the workload (transactions, computing, etc.) off-chain, or in batches. 

In turn, they reduce network congestion, costs, and increase speed.



Key Takeaways

• Layer 1s are the foundational blockchain (Bitcoin, Ethereum, Solana) that settle all transactions.

• Layer 2s are solutions that inherit the security of underlying Layer 1, but transactions are processed either in batches, or off-chain, and then settle them on the L1.

• Sidechains, state channels, and rollups (optimistic and zk) are common L2 approaches. Each handles speed, cost, and decentralization differently.

What is a Layer 1 blockchain?

Layer 1 (L1) blockchains are the base layer, or the settlement layer. This is because they handle transaction validation, final settlement, and data storage, all within their own chain.

Popular Layer 1s include Bitcoin, Ethereum, Solana, and BNB Chain. 

L1 network design struggles with the scalability trilemma, i.e. balancing decentralization, security, and scalability.

Every transaction on an L1 must be recorded and verified by the network's validators. This is why L1s have the high level of security and decentralization as the rules are enforced by a large network of independent nodes.

But, because of this need to reach consensus across thousands of independent computers around the world, they can become incredibly slow during periods of high demand. This can also drive up transaction fees.

Ethereum’s L1 can currently process around 20 transactions per second, and demand often drives fees to several dollars per transaction. This massively impacts crypto users and the many applications running on Ethereum.

What is a Layer 2 blockchain?

A Layer 2 (L2) is a protocol which is built on top of a Layer-1. 

They move most transaction processing away from the L1 whilst retaining its high-level security. Transactions are sent to the L2, which bundles or processes them quickly, and then relays a summary back to the L1 for settlement.

By combining off-chain execution with on-chain settlement, transactions can be made faster and cheaper. In addition, they carry security and data availability of the L1. 

A prominent example of an L2 on Bitcoin is the Lightning Network. For Ethereum, there is Arbitrum and Optimism.

Why Layer 2s exist: the scalability problem

The term was coined by Ethereum founder Vitalik Buterin, who observed that L1 blockchains are unable to optimize all three of those aspects in unison.

By adding more nodes to a network, it becomes more decentralized and secure, but validation speeds slow down.

Layer 1s that focus on increasing network speeds typically centralize validation to fewer nodes, cut security check times, and weaken consensus mechanisms. This makes them less decentralized and therefore, secure. 

However, creating a powerful security mechanism may also require greater centralization, placing control within the hands of a few entities.

By taking a large chunk of the workload away from the base layer, L2s can massively improve speeds and costs for users without compromising on security.

Types of Layer 2: rollups, sidechains, channels

Layer 2s come in several forms with each prioritizing speed, cost, and security in their own way.

Rollups are a common type. They bundle transactions and post a low-weight compressed summary back to the L1. 

Optimistic rollups like Arbitrum and Optimism, assume that transactions are valid. But instead, they allow users to submit fraud proofs if an incorrect state is discovered.

Zero-knowledge rollups (zk-rollups), such as zkSync, Starknet, and Polygon zkEVM, use complex mathematics to generate validity proofs which confirm transactions are correct.

Sidechains run parallel to the L1 and have separate consensus mechanisms. Technically, they are not L2s. Polygon PoS is a sidechain that operates as an independent blockchain that connects to Ethereum.

State Channels allow for two or more parties to transact off-chain, privately, and settle the final balance on the L1. Bitcoin’s Lightning Network is a leading state channel.





Optimistic vs zk rollups: the trade-off

Despite working to solve the scalability trilemma, these solutions offer different approaches which come with certain trade-offs.

Optimistic rollups and zk-rollups are the most popular type of L2 on Ethereum, but are different in how they prove transaction validity.

Optimistic rollups assume transactions are valid by default. If an individual or entity spots and reports an error as a fraud proof during a 7-day challenge period. This makes withdrawals slower, but computation cheap.

Zk-rollups use zero-knowledge proofs, otherwise referred to as validity proofs, to mathematically ensure and prove that each transaction is correct. With no challenge period, withdrawals can be faster. But, computation costs are higher for the L2.

Bottom Line

Layer 1 blockchains offer a secure foundation, but struggle to balance decentralization, speed, and security. Layer 2s are designed to improve scalability by increasing throughput and reducing transaction costs. 

Rollups dominate Ethereum L2 activity, sidechains offer independent scaling, and state channels thrive in delivering instant, low-cost transfers.

FAQ

What is the difference between Layer 1 and Layer 2?

Layer 1 refers to a base blockchain that validates and settles every transaction directly on its on chain. Layer 2s are scaling solutions built on top of Layer 1s. They process activity off-chain to increase speeds and reduce costs, they post a summary back to the Layer 1 for final settlement.

Is Polygon a Layer 2 or a sidechain?

Polygon PoS is technically a sidechain as it operates its own consensus mechanism parallel with Ethereum, and does not entirely inherit Ethereum’s security in a similar way to rollups. Polygon does have a separate zkEVM rollup that functions as a true Layer 2.

Why are Layer 2 transactions cheaper?

Layer 2 transactions take most of the computational workload off-chain and further reduce the data load on the base layer by only sending a compact summary of transactions back to the Layer 1.

Are Layer-2 blockchains safe?

Layer 2 solutions are very safe because they inherit the security of the Layer 1, Bugs in smart contracts and bridge exploits are the main risk, not the Layer 2 itself.

What is the best Layer 2 blockchain?

The best Layer 2 blockchain will depends on the user’s needs. Optimistic rollups boast lower fees and broader app support whilst Zk-rollups offer faster speeds. For Bitcoin users, the Lightning Network has become indispensable as it delivers instant, low-cost transactions.

Is Bitcoin Lightning a Layer 2?

Yes, Bitcoin Lightning is a state channel Layer 2 solution. Users can setup payment channels, transact instantly off-chain, and settle the balance on Bitcoin’s Layer 1. This boosts Bitcoin’s speed and efficiency without sacrificing security.

What is the difference between a rollup and a sidechain?

Rollups process transactions off-chain and post verifiable data back to the foundational Layer 1 and inheriting its security, Sidechains run independent blockchains and consensus mechanisms which often require a bridge to move assets between, they also do not fully inherit the Layer 1s security.



Investing in crypto‑assets is associated with risks, including high volatility and the potential loss of capital. Inform yourself thoroughly about the risks before making an investment decision. The information provided in this article is strictly for educational and informational purposes and should not be construed as financial or investment advice.