Layer 1 blockchain network

Blockchains went widespread in 2017 despite Bitcoin's 2009 introduction. Crypto's market cap peaked at $2.9T in November 2021, about 12 years after Bitcoin's creation.

Bitcoin's rise created incalculable wealth and transformed how society views money and its supply. Blockchains fell victim to their own success. Traffic caused slow transaction times and hefty fees.

To understand why, we first understand why blockchain networks are termed layer 1 networks and how they vary from ordinary computer networks.

Computer networks vs. blockchains

Blockchains are computer networks. Nodes relay data and share computing resources in computer networks. Nodes can connect in several ways. Four significant computer networks:

• Mesh — Nodes are connected.
• Bi-directional ring created when a node links to two others.
• Bus – One node connects to another
• A server node links to client nodes
• The star network is fast and affordable. On star networks, the central server node transmits data directly to other nodes so it doesn't have to travel through each.

Because the server node distributes computing resources directly to client nodes, this saves network bandwidth. This performance comes at the cost of high control and single-point failure centralization (SPoF).

P2P networks don't use server nodes to coordinate. Each node works as a client and server, sharing network resources. Such networks solve centralized control and SPoF, making them perfect for Bitcoin.

Peer-to-peer networks are less scalable with decentralization. Blockchain networks are vulnerable because they use P2P consensus techniques. Vitalik Buterin, Ethereum's co-founder, named this the Scalability Trilemma (also known as the Blockchain Trilemma).

Early blockchains could only offer two qualities at once, sacrificing scalability, security, or decentralization.

Layer-1 blockchains

Blockchain networks have adopted several scaling methodologies. Layer 1s are the blockchain network's foundation. Layer 1 blockchains include Bitcoin, Ethereum, and Solana.

Early Layer 1s increased block size to solve the Scalability Trilemma. This increases the amount of transactions the blockchain can process per second.

Increasing the block size would need more powerful computers. They became more expensive, leading to centralization.

Elon Musk recommended expanding Dogecoin's block size by 900%, but Ethereum co-founder Vitalik Buterin said the blockchain wouldn't be decentralized if average people couldn't run a node.

Doge should increase block time, size, and charge 100X. It's clear winner.

16 May 2021. Modern layer 1s use consensus and sharding to solve the Scalability Trilemma.

Protocol consensus

Blockchain uses consensus algorithms. Double-spending and incentivization must be solved for Bitcoin and other cryptocurrencies to have value.

Double spending is using a limited resource twice (like money). Digital files are infinitely replicable, causing this dilemma. Blockchains tackle this problem by time-stamping and hashing each transaction and adding them to blocks. A node must forge a whole block to spoof a transaction.

Consensus algorithms help. Decentralized network coordination. The network must agree on a block's data validity for it to pass. If some network nodes send bogus data, the network can still function if valid nodes manage the processing power (hashrate).

As long as most CPU power is held by nodes that aren't working together to assault the network, they'll outperform attackers.

Bitcoin's creator Satoshi Nakamoto

Byzantine Fault Tolerance is network redundancy (BFT). In a decentralized network, it's crucial that it remain operational even if some nodes fail. It'd stop otherwise.

Consensus techniques address double-spending and encourage nodes to process transactions. Why would somebody forgo computer power and pay a huge electrical cost for free?

Bitcoin miners use computing resources. They receive BTC block rewards. Proof-of-work (PoW).

PoS uses validators as node operators. Instead than using energy-intensive processing power, validators stake tokens to reach consensus. Ethereum validators need 32 ETH. Validators get a portion of transaction fees after staking cash.

Evildoers have many challenges. Given Bitcoin's size, they'd need more CPU power than 51% of the network.

Bitcoin network's annual energy consumption is 204.5 TWh. An attack would require over half of that power. digiconomist.net

With Ethereum, they'd need to be really wealthy. When an attacker processes a fraudulent transaction, the entire network loses value.

Most new L1s use PoS, however scalability isn't necessarily preferable. Solana's traffic load rose during the past year, causing frequent disruptions. When half of its nodes were hosted in five data centers, its staking process was useless.

Solana's mainnet node dispersion. validators.app

Solana offers 50,000 transactions per second (TPS). That's greater than Bitcoin's 5 TPS, but what good is it if it's centralized?

Sharding

Sharding separates a network into little databases called shards. Each shard uses its own nodes and transactions to add blocks. By spreading processing over many shards, the main consensus mechanism is relieved, increasing TPS.

Since each shard is smaller, it's easier for an attacker to overwhelm it. Sharding hasn't been confirmed on a large blockchain because of this.

Ethereum will introduce sharding after switching from PoW to PoS in 2022. In 2023, Ethereum will be sharded into 64 pieces.

The network will randomly assign nodes to shards and reassign them to other shards to address security concerns.

Other sharding experiments try to overcome Scalability Trilemma. Seven Swiss institutions created Unit-e in 2019 as a scalable worldwide payment network. Radix organizes shards partially rather than on a single timeline, like Ethereum.

Layer-1 scalability solutions?

Changing a blockchain network is tricky. Most suspect crypto. Bitcoin's layer-1 updates are more cautious after a decade of addressing these concerns.

Taproot introduced Schnorr digital signatures. They bundle transactions to reduce expenses and boost scalability. Bitcoin prioritizes layer 2 scalability through the Lightning Network.

Ethereum has thousands of layer 2 networks atop layer 1.

Ethereum L2 solutions. L2beat.com/image

In all scenarios, L2 protocols take the L1 chain's workload, process it elsewhere, and feed data back more efficiently. L2s use the technologies in the table above to scale.

A L1-L2 network ecology is complex. Tokens must cross blockchain bridges and be included onto each L2. Developers and users would have it easier with L1 networks.

Cardano, Algorand, Elrond, Fantom, Avalanche, and Harmony have all sought to fix the Scalability Trilemma, but none have Bitcoin or Ethereum's footprint. It's too early to tell if blockchains with operating mainnets have surpassed BTC or ETH.