What are Layer 1 Blockchains?

Decentralization is the defining feature of virtual currencies like Bitcoin (BTC), but this lack of a central authority doesn't mean crypto is chaotic. In fact, it's quite the contrary—as people look deeper into the technical architecture of crypto networks, they're often amazed at the intricacy and organization of crypto tech. Cryptocurrencies likely wouldn't work without rock-solid and self-sufficient protocols to process secure peer-to-peer (P2P) transfers. For many crypto projects, a layer 1 blockchain (L1) serves as the foundation of their software design, making it the best place to explore this new and complex technology.

What is a Layer 1 Blockchain?

Layer 1 blockchains represent the foundational layer of cryptocurrency architecture. Understanding what is layer 1 blockchain begins with recognizing these decentralized software protocols that serve as both the rule-makers and enforcers for crypto projects. The code behind an L1 protocol establishes the standards that computers, known as nodes, must follow to securely broadcast, verify, and publish new transactions on the public payment ledger. These coding specifications contain all the essential instructions that dictate how a cryptocurrency operates.

Because L1 blockchains are positioned at the "ground floor" of a cryptocurrency's architecture, they are commonly described as the foundation or base layer. When exploring what is layer 1 blockchain, developers often use the terms "mainnet" and L1 interchangeably, as the L1 protocol encompasses all the critical details necessary for a cryptocurrency's operation. This foundational nature makes L1 blockchains the most important component in understanding how cryptocurrencies function at their core.

How do Layer 1 Blockchains Work in Crypto?

While each cryptocurrency employs unique coding standards and protocols to run its network, all L1 blockchains require a consensus mechanism to establish trust between decentralized node operators. These consensus mechanisms use sophisticated algorithms to set and enforce the rules for properly processing crypto payments.

For example, the Bitcoin blockchain utilizes a proof-of-work (PoW) consensus model where computers compete to solve challenging algebraic equations every 10 minutes to post new BTC transfers on the payment ledger. In contrast, L1 blockchains like Ethereum (ETH) and Solana (SOL) employ a proof-of-stake (PoS) consensus mechanism, where nodes lock cryptocurrency on the blockchain to earn the opportunity to validate transactions. To incentivize node operators on these L1 protocols, both PoW and PoS networks reward nodes that publish blocks with the native cryptocurrency.

Beyond the consensus algorithm, L1 blockchains incorporate additional security procedures in their code to promote process integrity and deter malicious actors. Many PoS blockchains implement "slashing" policies that confiscate staked cryptocurrency from node operators who misbehave or fail to meet their duties. Bitcoin, for instance, requires node operators to wait for multiple separate confirmations to ensure the validity of BTC transfers before posting them on the final payment ledger.

L1 blockchains also manage transaction fees (gas fees) and the issuance schedule for a blockchain's native cryptocurrency. Bitcoin's L1 blockchain automatically reduces the amount of BTC entering circulation approximately every four years in an event called "the halving." Conversely, Ethereum's L1 features a dynamic ETH issuance and "burning" mechanism, whereby the blockchain automatically adds and subtracts ETH from circulation based on network activity. Following the EIP-1559 upgrade, Ethereum burns a portion of every fee users pay on the blockchain to manage ETH's inflation rate.

Examples of Layer 1 Blockchains

Bitcoin introduced the framework for a successful L1 blockchain, and hundreds of succeeding cryptocurrencies have followed BTC's lead with their own L1 chains. Today, many of the most widely used cryptocurrencies rely on L1 blockchains to secure their networks, providing clear examples of what is layer 1 blockchain in practice.

Bitcoin stands as the oldest and largest cryptocurrency, launched by pseudonymous cryptographer Satoshi Nakamoto. BTC's L1 blockchain uses an energy-intensive PoW consensus algorithm where nodes compete every 10 minutes to solve mathematical problems and post new transactions.

Ethereum, second to Bitcoin in terms of market capitalization, is a crypto project that enables third-party developers to create decentralized applications (dApps) on top of its L1 protocol. When it launched, Ethereum was a PoW L1 blockchain modeled on Bitcoin's consensus algorithm. However, following an upgrade called the "Merge," the Ethereum L1 transitioned to a PoS consensus, demonstrating the evolution of what is layer 1 blockchain technology.

Litecoin (LTC) was created as a cryptocurrency designed to be a fast and cheap P2P virtual currency. Although Litecoin uses a different algorithm in its L1 design, it maintains a PoW consensus mechanism similar to the Bitcoin Network.

Solana belongs to a category of blockchains called "Ethereum competitors," all of which offer similar services to those on Ethereum with distinctive traits like faster confirmation speeds or cheaper transaction fees. Solana's PoS L1 is well-known for its high transaction throughput, which can process tens of thousands of transactions per second (TPS).

Cardano is another PoS L1 blockchain in the Ethereum competitor category. Founded by ex-Ethereum developer Charles Hoskinson, the Cardano blockchain focuses on peer-reviewed tech research and welcomes third-party developers to build dApps on its L1 blockchain.

What are Some Limitations of Layer 1 Protocols?

Despite their importance for processing safe and efficient crypto transactions, L1 blockchains often lack flexibility. The algorithms on L1 blockchains are deliberately deterministic to ensure everyone on the decentralized network follows the same rules. While the rigidity of an L1's code helps provide crypto networks with predictability and security, it often comes at the expense of innovation and scalability efforts.

Ethereum's co-founder Vitalik Buterin described the scalability issues on L1s as the "blockchain trilemma," which posits that crypto developers always end up sacrificing one of three elements—decentralization, security, or scalability—when designing their protocols. However, developers on L1 chains like Ethereum continue working on new scaling solutions such as "sharding," which breaks the main blockchain into smaller indivisible chunks of data. The goal is to reduce data requirements for each node operator, thereby increasing network speed and efficiency.

Another significant limitation of L1s is their poor communication with other blockchain projects. Since each L1 has a self-contained system with unique coding standards, securely transferring coins between different L1s or interacting with applications on multiple networks is often difficult or impossible. Some crypto enthusiasts refer to this L1 limitation as the "interoperability problem," and a few projects like Cosmos and Polkadot focus most of their efforts on addressing inter-blockchain communication (IBC).

Layer 1 Versus Layer 2 Protocols: The Key Difference Between These Blockchain Layers

In the early history of cryptocurrency, the term L1 didn't exist because each blockchain followed similar procedures and served the same purposes—namely, processing transactions and ensuring network security. However, as new cryptocurrencies started building on top of these base layer chains, developers needed a way to distinguish L1s from emerging protocols, giving rise to the term layer 2 (L2).

L2 refers to any crypto project that leverages an L1 blockchain's security. Often, L2s utilize the decentralization of established L1s like Ethereum to introduce new use cases or enhance the scalability of the base layer protocol. For example, L2 networks like Arbitrum, Optimism, and Polygon operate on top of the Ethereum blockchain to offer users faster transaction speeds and lower average fees. When people use any of these Ethereum-based L2s, they transfer their digital assets to the L2 to use its services before finalizing their transactions on the Ethereum mainnet.

L2s sometimes offer cryptocurrencies, but these digital assets are known as "tokens" rather than the "coins" on L1s. The primary difference between a token and a coin is that the former only exists on top of an L1 blockchain, while the latter is an integral part of an L1's protocol. Think of tokens as add-on features in an L1's ecosystem and coins as the essential payment method for a blockchain. Examples of L2 tokens include Polygon's MATIC, Arbitrum's ARB, and Optimism's OP.

Conclusion

Layer 1 blockchains represent the fundamental infrastructure of the cryptocurrency ecosystem, serving as the foundational protocols that enable secure, decentralized peer-to-peer transactions. Understanding what is layer 1 blockchain is essential for anyone entering the crypto space. From Bitcoin's pioneering proof-of-work mechanism to Ethereum's innovative proof-of-stake consensus and the high-throughput capabilities of Solana, L1 blockchains have demonstrated their critical role in establishing trust and security in decentralized networks.

While L1 blockchains face inherent challenges such as the blockchain trilemma and interoperability issues, ongoing innovations like sharding and inter-blockchain communication protocols continue to push the boundaries of what's possible. The distinction between L1 and L2 protocols highlights the evolving nature of blockchain architecture, where base layers provide security and decentralization while secondary layers enhance scalability and introduce new functionalities. As the cryptocurrency landscape continues to mature, understanding what is layer 1 blockchain remains essential for grasping the technological foundations that power the decentralized future of finance and digital applications.

FAQ

What is layer 1 and Layer 2 in blockchain?

Layer 1 is the main blockchain network like Bitcoin or Ethereum. Layer 2 is a secondary framework built on top of Layer 1 to improve scalability and efficiency.

Is Solana a layer 1 or 2?

Solana is a Layer 1 blockchain. It executes and confirms its own transactions directly on the main chain.

What is layer 3 blockchain?

Layer 3 blockchains are specialized networks built on top of Layer 1 and 2, offering customized solutions for specific applications and enhancing scalability and functionality.

Is XRP a layer 1 or Layer 2?

XRP is a Layer 1 blockchain. It's designed for fast, cost-effective institutional-grade payments, emphasizing scalability and regulatory compliance.