What Is a Layer 1 Protocol and Why Does It Matter?

What are Layer 1 blockchains, and why is it necessary to differentiate them from Layer 2 options? Within the following, we’ll focus on Layer 1 networks that can assist you differentiate them from different blockchain options. You would discover this handy when analyzing varied blockchain initiatives as investments.

What Is a Layer 1 Blockchain Protocol?

Layer 1 refers back to the basic structure of a blockchain. It has to make sure the decentralization, safety, and scalability of transactions. Nonetheless, it seems that these three components will not be that simple to merge rigidly right into a single construction, which is why older blockchains, together with bitcoin, needed to obtain safety and decentralization on the expense of scalability. Newer variations of blockchain implement Layer 1 options with higher consideration to scalability, though they could lose on the decentralization facet.

All in all, the Layer 1 protocol represents the blockchain itself. The truth is, we solely outlined “Layer 1” after introducing “Layer 2” protocols, that are secondary networks meant to enhance the scalability or safety of an underlying Layer 1 infrastructure. For instance, the Lightning Community is a Layer 2 resolution for bitcoin, which acts as Layer 1.

That being mentioned, listed below are the most well-liked Layer 1 protocols that collectively account for greater than 60% of the crypto market cap:

	Ticker	Market Cap	Complete Worth Locked (TVL)	Consensus Mechanism	BMJ Ranking
Bitcoin	BTC	$401.1 billion	$127.2 million	PoW	4.93
Ethereum	ETH	$144 billion	$47.7 billion	PoW switching to PoS	4.33
Binance Good Chain	BNB	$38.4 billion	$6 billion	PoS	4.17
Avalanche	AVAX	$5.4 billion	$2.8 billion	PoS	4.13
Polkadot	DOT	$7.5 billion	—	NPoS	4.10
Cardano	ADA	$16.2 billion	$124 million	PoS	4.03
Algorand	ALGO	$2.2 billion	$101 million	PPoS	3.80
Solana	SOL	$12.6 billion	$2.6 billion	PoH	3.72

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Bitcoin

Ticker: BTC
Market Cap: $401.1 billion
TVL: $127.2 million
Consensus: Proof of Work

Bitcoin is the oldest and at the moment the biggest cryptocurrency by market cap. Its underlying Layer 1 infrastructure represents a decentralized community of nodes that attain consensus due to the so-called Proof of Work (PoW) algorithm. It ensures a excessive diploma of safety, though it requires large quantities of electrical energy for the mining course of.

On the time of writing, bitcoin accounts for over 40% of the crypto market, down from 72% firstly of 2021. The decline in dominance suggests growing curiosity in additional scalable options, similar to Ethereum, Solana, or Avalanche, all of which might host decentralized purposes (dapps) and help the quickly rising decentralized finance (DeFi) pattern.

The bitcoin community is resilient and has by no means failed throughout all these years. The decentralized PoW-based infrastructure helps a cryptocurrency that’s broadly thought to be a secure haven towards inflation, even though it has failed to offer that haven throughout the present inflationary interval. (BMJ Ranking: 4.93)

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Ethereum

Ticker: ETH
Market Cap: $144 billion
TVL: $47.7 billion
Consensus: Transitioning from Proof of Work to Proof of Stake

The second-largest cryptocurrency by market cap is ETH, the utility token of the Ethereum ecosystem, which might host dapps and an infinite variety of tokens due to its good contract function.

Since its launch in 2015, Ethereum’s Layer 1 community has been backed by a PoW consensus mechanism much like bitcoin. Nonetheless, in an effort to obtain higher scaling, the community is upgrading to undertake a Proof of Stake (PoS) algorithm. The swap to PoS has been gradual and can finalize firstly of 2023 when the present PoW chain turns into a part of a wider PoS-based community fabricated from so-called shard chains. The latter will allow Ethereum to change into extra scalable and provides it higher capability to retailer information.

PoS depends on a unique validation course of, which is named “forging.” The nodes planning to participate within the block creation course of merely have to stake the native token. They don’t should spend on electrical energy or purchase specialised {hardware} as within the case of PoW blockchains. (BMJ Ranking: 4.33)

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Binance Good Chain

Ticker: BNB
Market Cap: $38.4 billion
TVL: $6 billion
Consensus: Proof of Stake

Binance Good Chain (BSC) is a PoS-based blockchain that helps good contracts and may host DeFi purposes. The general public community was launched in 2020 by Binance, the biggest cryptocurrency alternate on this planet by buying and selling quantity. BSC got here three years after Binance’s native Binance Chain (BC), the corporate’s major decentralized blockchain that used to host the Binance Coin (BNB).

Early in 2022, Binance merged the 2 chains to kind the BNB Chain, which incorporates the previous BSC. Because of this, the brand new community hosts the native BNB token in addition to the purposes that had been beforehand constructed on BSC.

Whereas the native token retains its ticker, it modified its identify to “Construct and Construct.” BNB acts as a governance token and fuels transactions on the brand new chain. Binance determined to improve its decentralized community to embrace large-scale apps associated to emergent sectors like Metaverse, GameFi, and SocialFi. The brand new chain borrows the compatibility with the Ethereum Digital Machine (EVM) from BSC.

The BNB Chain has related functionalities to Ethereum, however many argue that it’s not as decentralized as promoted. Particularly, it depends on a PoS consensus that makes use of solely 21 validators chosen from the community. (BMJ Ranking: 4.17)

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Avalanche

Ticker: AVAX
Market Cap: $5.4 billion
TVL: $2.8 billion
Consensus: Proof of Stake

Avalanche is a fast-growing blockchain that helps good contracts and is designed for DeFi wants. Like Algorand, it claims to handle the blockchain trilemma with a singular structure. Particularly, it makes use of three totally different chains as follows:

• The Change Chain (X-Chain) is the default chain the place customers mine and alternate digital belongings. The native token AVAX resides on this chain.
• The Contract Chain (C-Chain) permits builders to construct good contracts. It’s based mostly on the EVM, enabling good contracts to profit from cross-chain interoperability with Ethereum dapps.
• The Platform Chain (P-Chain) is utilized by Avalanche validators to coordinate their effort. Customers also can use the P-Chain to create and handle subnets, that are impartial blockchains hosted by Avalanche.

Customers are in a position to transfer tokens throughout all three networks based mostly on their wants. Avalanche’s multi-chain strategy allows it to help greater than 4,500 tps with nearly immediate finality. (BMJ Ranking: 4.13)

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Polkadot

Ticker: DOT
Market Cap: $7.5 billion
TVL: —
Consensus: Nominated Proof of Stake

Polkadot is a decentralized public community that places an excellent emphasis on interoperability. Its multi-chain framework has attracted many builders, which helped its native cryptocurrency DOT enter the highest 10 checklist in lower than a yr following its launch.

Polkadot is an ecosystem of chains that may talk with one another whereas being impartial. Referred to as parachains, these networks are hosted on the principle chain, which is Polkadot. The opposite chains profit from all of the options of the mainnet, which relate to scalability and excessive transaction pace.

Whereas Ethereum and Solana let builders construct dapps, Polkadot permits them to construct blockchains from scratch and have full management over their decentralized ecosystem. The parachains are extremely customizable and may fulfill a variety of use circumstances. (BMJ Ranking: 4.10)

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Cardano

Ticker: ADA
Market Cap: $16.2 billion
TVL: $124 million
Consensus: Ouroboros (PoS)

If Ethereum got here to resolve the issues of bitcoin, Cardano was launched as a substitute for Ethereum, though it nonetheless hasn’t managed to problem it. Cardano was launched in September 2017 by former Ethereum co-founder Charles Hoskinson and former Ethereum government assistant Jeremy Wooden. The community is supervised by three totally different entities, together with the Cardano Basis, IOG (previously referred to as IOHK), and Emurgo.

The primary purpose of Cardano is to take good contracts to the subsequent degree by making certain increased speeds and higher interoperability.

The Cardano community is split into two distinct layers: the Cardano Settlement Layer (CSL), which is used for ADA transfers, and the Cardano Computation Layer (CCL), which helps the good contract performance that allows builders to construct dapps. On this manner, the ecosystem can forestall congestion and excessive transaction charges. Cardano depends on a singular PoS model known as Ouroboros. (BMJ Ranking: 4.03)

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Algorand

Ticker: ALGO
Market Cap: $2.2 billion
TVL: $101 million
Consensus: Pure Proof of Stake

Algorand launched in 2019 and has managed to construct a various ecosystem. It is among the only a few blockchains that declare to resolve the so-called Blockchain Trilemma by reaching scalability with out compromising the safety and decentralization of the community. That is potential due to its Pure Proof of Stake (PPoS) algorithm – a PoS model invented by MIT Professor Silvio Micali.

The PPoS consensus mechanism allows each ALGO holder to probably change into a block validator. For each new block, the system picks a validator randomly and secretly, giving all customers an equal probability to be chosen. This strategy allows the community to be totally decentralized.

Like Solana, Algorand places an excellent emphasis on scalability and pace, being able to processing over 1,200 tps with immediate finality. The community is at the moment introducing a function known as block pipelining, which is able to increase tps efficiency to over 45,000. (BMJ Ranking: 3.80)

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Solana

Ticker: SOL
Market Cap: $12.6 billion
TVL: $2.6 billion
Consensus: Proof of Historical past

Solana has managed to change into one of many largest blockchain networks in a comparatively quick interval, being launched in 2020. Its native cryptocurrency, SOL, is within the high 10 and has been nearly for the reason that launch of the token.

Solana depends on a PoS algorithm, but it surely merges it with a singular consensus mechanism referred to as Proof of Historical past (PoH), an innovation that allows the chain to maintain an correct document of transactions and settle them based mostly on timestamps moderately than communication with different validating nodes. This strategy allows Solana to realize spectacular speeds, which makes it tremendous scalable.

The Layer 1 community can deal with as much as 50,000 tps with nearly immediate finality, though in apply, Solana manages on common lower than 3,000 tps, which is manner quicker than Ethereum.

Like BSC, Solana has made positive to realize interoperability with Ethereum. It launched its cross-chain bridge referred to as Wormhole shortly after the launch in 2020. Sadly, earlier this yr, the protocol misplaced about $320 million attributable to a hacking assault concentrating on a Wormhole loophole. (BMJ Ranking: 3.72)

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Why we want Layer 1 Protocols

Layer 1 blockchains symbolize the elemental components of all decentralized purposes. The resilience of DeFi, NFTs, and every part “blockchain-based” will depend on Layer 1 networks. For instance, if we spot a serious loophole in Ethereum, we should always fear about your entire DeFi ecosystem, given that almost all of it’s based mostly on Ethereum. For that reason, Layer 1 networks have to be actually decentralized and safe.

Newer blockchains help many operations and options immediately on Layer 1. For instance, blockchains that help good contracts can host dapps that profit from the safety and decentralization of Layer 1, making these dapps a lot safer.

Layer 1 Scaling Issues

Provided that Layer 1 blockchains, particularly the older ones, have been specializing in making certain a excessive diploma of safety and decentralization, they could lose on the scalability facet. When demand on these blockchains will increase rapidly, the scaling issues change into extra seen. Some blockchains implement upgrades immediately on their Layer 1 networks to handle this challenge. Listed here are two most related examples:

• SegWit (Bitcoin) – this refers to an replace in bitcoin applied in 2017. The primary results of the improve was a change within the transaction format of bitcoin to cut back transaction time by growing block capability and defending towards transaction malleability.
• Sharding (Ethereum) – sharding is the ultimate improve applied by Ethereum in a number of phases. Anticipated to be totally launched in 2023 or 2024, it refers to splitting your entire Ethereum community into a number of parts known as shards. They are going to function in parallel and assist the ecosystem change into extra fast and versatile.

What’s the Distinction between Layer 1 and Layer 2 Blockchain Protocols?

The primary distinction between Layer 1 and Layer 2 is that the previous represents the precise blockchain community itself, whereas the latter is a secondary layer constructed on high of the principle chain to handle particular issues and limitations. It’s like including tuning parts to a automotive to enhance its efficiency and obtain higher outcomes.

A Layer 2 resolution is at all times on high of an underlying blockchain. Layer 2 networks can course of transactions extra rapidly and cheaply than Layer 1s, however they don’t profit from the identical degree of safety and decentralization.

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