The emergence of various blockchain scaling solutions has sparked discussions about the differences and roles of Layer 1, Layer 2, Layer 3, parachains and sidechains in the evolving crypto ecosystem. Understanding these concepts is critical for developers, investors and users navigating the complex landscape of blockchain technologies – but it’s not always clear which is which and why we need so many different types.
Layer 1 blockchains, such as Bitcoin, Ethereum, BNB Chain, and Solana, form the fundamental architecture of a blockchain network. These base layer protocols handle the execution, data availability, and consensus aspects of the network, validating and completing transactions without relying on another network. Each Layer 1 blockchain has its own native token used to pay transaction fees. However, scaling Layer 1 networks is a significant challenge, often requiring changes to the core protocol such as increasing block size, adopting new consensus mechanisms, or implementing sharding techniques.
To address the scalability limitations of Layer 1 blockchains, Layer 2 solutions have emerged as a secondary framework built on top of existing networks. Layer 2 protocols shift some of the transaction requirements from the main chain to an adjacent system architecture, processing transactions off-chain and recording only the terminal state on the Layer 1 blockchain. Examples of Layer 2 scaling solutions include the Bitcoin Lightning Network, Ethereum Plasma chains, Optimistic Rollups, ZK-Rollups, sidechains, and state channels. These protocols (largely) inherit the security of the underlying Layer 1 blockchain, while improving scalability, speed and costs.
The search for the optimal scaling solution for Layer 1s is far from static. For example, the Ethereum Foundation has completely transitioned from plasma solutions to scaling, stating:
“While Plasma was once considered a useful scaling solution for Ethereum, it has since been dropped in favor of layer 2 (L2) scaling protocols. L2 scaling solutions address several of Plasma’s problems.”
A subsequent L2 solution for Ethereum was sharding, which has now been replaced on the Ethereum roadmap by ‘rollups and Danksharding’. The evolution has continued after Dencun towards scaling via a Layer 2 on top of a Layer 2 – better known as a Layer 3 chain.
Layer 3 blockchains are application-specific chains that reside on Layer 2 networks, enabling further scalability, customization and interoperability. For example, Arbitrum Orbit allows developers to create Layer 3 chains, also known as “Orbit chains,” that reside on the Layer 2 chains of Arbitrum, Arbitrum One, and Arbitrum Nova. These Orbit chains can be configured with custom gas tokens, throughput, privacy and governance, with projects like XAI, Cometh and Deri Protocol already building on Arbitrum Orbit.
Similarly, Optimism’s OP Stack powers a “Superchain” of Layer 3 blockchains that share security and communication layers, with Coinbase’s Base being a prominent Layer 3 chain on the OP Stack. The OP Stack aims to make Layer 3 chains interoperable. Other Layer 3 solutions include zkSync’s Hyperchains and Polygon’s Supernets. Key benefits of Layer 3s include hyperscalability through recursive proofing and compression, gas token customization, throughput, privacy and governance, interoperability between Layer 3 chains and with Layer 1/2, and low cost and high performance.
Another solution from outside the EVM ecosystem is Parachains. Parachains are a key part of the Polkadot and Kusama networks and are also application-specific, independent blockchains that run in parallel within these ecosystems. Parachains connect to the main relay chain and lease its security, while retaining their own governance, tokens, and functionalities. These chains can seamlessly process transactions with each other and exchange data using cross-chain communication protocols such as XCMP. Collator nodes maintain the full state of a parachain and provide proofs to the Relay Chain validators.
Sidechains, another type of scaling solution, are separate blockchains that run parallel to the main chain, with tokens and other digital assets moving between them via a two-way link. Sidechains have their own consensus mechanism and block parameters, making them more flexible and scalable than the main chain. They are considered a type of Layer 2 solution because they take some of the transaction burden off the main chain. Examples of sidechains include Liquid for Bitcoin and Polygon PoS for Ethereum. The crucial difference is that chains like Polygon PoS have their own security and validator set instead of relying on Layer 1 to secure the network.
Understanding the roles and differences between Layer 1, Layer 2, Layer 3, parachains and sidechains can be complex. Each of these technologies plays a critical role in addressing the scalability, interoperability, and customization issues of blockchain networks. By leveraging these solutions, developers can create more efficient, user-friendly, and interoperable decentralized applications, ultimately driving adoption and growth of the digital asset ecosystem.
There are many more use cases, benefits and reasons why so many different types of scaling solutions exist – each has its own pros and cons. Hopefully this overview will help cut through some of the initial complexity so you can explore the chains that tempt you most.
Disclaimer: Crypto has received a grant from the Polkadot Foundation to produce content about the Polkadot ecosystem. While the Foundation supports our reporting, we maintain full editorial independence and control over the content we publish.
