Scalability has been a major point of contention in the world of blockchain and cryptocurrency. The notorious Bitcoin block size controversy, eventually resolved with the SegWit upgrade, exemplifies the level of debate surrounding technical aspects of these technologies. Unlike traditional database systems, blockchains face a trade-off between decentralization (censorship resistance) and capacity when scaling, as more transactions lead to higher resource requirements for operating full nodes.
Over time, a multi-layer approach to scaling has emerged as a potential solution. By combining multiple blockchain layers, this approach offers a balance between decentralization and efficiency. Secondary network protocols like sidechains and the Lightning Network provide essential building blocks for this scalable digital cash system.
Through a multi-layer approach, users can make tradeoffs for different types of transactions. For instance, it might not be practical to store every morning coffee purchase on the Bitcoin blockchain forever.
Layer 1 protocols, or base blockchains, provide the foundation for cryptocurrency networks. Since Bitcoin’s launch in 2009, numerous blockchain networks with diverse features have emerged. For example, Litecoin, the second notable blockchain after Bitcoin, made minor modifications to Bitcoin’s codebase, such as reducing the block time and using an alternative proof-of-work algorithm.
Ethereum, on the other hand, introduced more significant changes, like shorter block times and a more versatile programming language for smart contracts.
Layer 2 protocols have evolved from simple transaction platforms to more efficient systems for executing smart contracts. The Lightning Network, for example, enables users to perform countless transactions without constantly interacting with the base blockchain, thus improving scalability.
Other secondary layers on top of the Bitcoin blockchain include Liquid and RSK, both federated sidechains. These platforms offer users access to new features while sacrificing some security. Ethereum’s layer 2 protocols primarily include rollups, which allow off-chain execution of smart contracts with eventual settlement on the base blockchain. Rollups come in two forms: optimistic rollups and zero-knowledge rollups.
It’s crucial to understand that not all layer 2 protocols are created equal, and there’s no one-size-fits-all definition for them. For instance, Lightning Network transactions offer more censorship resistance and security than centralized transaction servers but fall short of on-chain transactions.
Some view centralized exchange transactions as examples of layer 2 networks, while others require more stringent criteria for a true layer-2 crypto system. Regardless, users can choose different systems based on their needs, and a multi-layer approach to scaling remains the essential concept when understanding cryptocurrency networks’ upper layers.
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