Layer 1 Blockchain and The Current Crypto Landscape

Blockchain has emerged as a leading technology in the present age. 84% of companies in a survey admitted active involvement with blockchain. Research firm Gartner predicts the technology will be worth USD 3 trillion by 2030. The merits have been lauded as setbacks get worked upon. Layer 1 Blockchain technology, one of the possible solutions addressing the limitations of a blockchain is rising in popularity.

Layer 1 Blockchain

A Layer 1 blockchain refers to a host of implemented solutions at a base protocol level of the blockchain network. The solutions improve functionality and scalability. Cryptocurrency blockchain networks like Bitcoin, Etherium, and Litecoin are notable proponents of Layer 1 blockchains. 

How does Layer 1 Blockchain work?

Layer 1 solutions do not warrant additional architecture. Scaling solutions with a Layer 1 label function at the blockchain protocol’s base level. Therefore, they change protocol rules to enhance transactional capacity and speed. Moreover, internal adjustments allow the addition of further participants within the network. 

A layer 1 solution can do the following:

• Increase the data capacity of each block.
• Accelerate the speed of block confirmation.
• Enhance overall network throughput.

Types of Layer 1 Blockchain Solutions

Different methodologies aiming to increase the overall scalability are in development stages throughout the world. Foundational layer 1 solutions include:

Consensus Protocol

There has been a lot of talk for a change in blockchain consensus mechanisms. Some are better in terms of efficiency. 

Proof of Work(PoW)

PoW is the traditional consensus mechanism for popular crypto networks Bitcoin and Ethereum. PoW aims to achieve both consensus and security using miners to decode complex cryptographic algorithms. The main problem- PoW is slow and resource-intensive. 

Proof of Stake(PoS)

Ethereum revealed their intention to transition from PoW to PoS. The PoS mechanism features a distributed consensus over the blockchain network. This means a user can authenticate block transactions on the basis of their stake. PoS wins over PoW in terms of transaction speed but loses in terms of security.

Sharding

The sharding mechanism comes from distributed databases. Moreover, it is in use scaling solution for Layer 1 blockchains. 

The whole blockchain network is broken down into unique datasets, or shards. Thereafter, it is a more feasible solution than using all available nodes to main the blockchain. The smaller network shards are processed concurrently, parallel. Therefore, this raises transaction speed significantly. 

A node is required to maintain records of its assigned shard and not the entire blockchain. Moreover, cross-shard communication protocols permit shard interaction and sharing of relevant data(addresses, balances, etc.)

Challenges by Blockchain

High transaction charges are among the main challenges faced by the DeFi, or Decentralized Finance sector. Moreover, at 46%, of financial services are perceived as the largest sector for blockchain implementation. 

De-Fi transactions from global blockchain firms like HashCash Consultants take seconds to complete, at fractional costs compared to traditional legacy services.

Lack of proper scalability equates to delays in setting up blockchain networks worldwide. DeFi becomes a training field for the wealthy- a sharp contrast to the initially envisioned mission of banking the unbanked. 

Also Read: Game-Changing DeFi Trends for 2021

Scalability 

Scalability refers to the network’s capacity to support and withstand high transaction volume over a period of time. Good scalability is usually achieved by modifying existing consensus mechanisms or system parameters. 

Scalability is significant as it represents a blockchain’s chance of competing with popular legacy services. Centralized platform-based legacy services have swift transaction settlement time. VISA for example regularly handles 1700 transactions per second(TPS). On the other hand, Bitcoin operates at 4-7 TPS. At present, Ethereum begins to limit block generation at 7-15 TPS(though higher values have been recorded). Without an effective alternative, mass-scale implementation of blockchains will not be possible.

Also Read: Crypto Staking: Are Banking Giants Pinning Higher On ETH to BTC?

The Scalability Trilemma

Vitalik Buterin termed the Scalability Trilemma term. The trilemma declares that a compromise is mandatory for improving the architecture of existing blockchains. There are three properties to work on:

• Decentralization.
• Security.
• Scalability.

According to the trilemma, a trade-off takes between the aforementioned three properties. Bitcoin chose to optimize decentralization along with security. Thereafter, they let go and compromise on scalability.

Pure Proof of Stake: A Potential Solution?

Turing Award Winner Silvio Macali is building the Algorand project to tackle scalability head-on. Starting from scratch, the project will feature several inbuilt solutions, including the Pure Proof of Stake(PPoS).

The proposed PPoS consensus mechanism looks out for leaders and selected verifiers(SV) through the Byzantine Agreement. Therefore, computation costs decrease drastically as PPoS only needs to generate signatures and simple mathematical operations.

Operational costs do not depend on the number of members in each block. An increase in computing power enhances performance directly. This makes the Algorand a scalable proposition. With an increase in size, it can withstand and deliver high TPS without extra expenditure.

Final Thoughts

Scalability is the only way blockchain networks can successfully compete with legacy finance systems. Networks must be able to accommodate exponential growth in terms of users, transactions, and other related parameters. 

Layer 1 solutions work on further improvement within a native blockchain and performance optimization. Further analysis and improvements are necessary for the present crypto ecosystem to grow.

Meanwhile, DeFi has definitely pulled Layer 1 solutions to their limits. Moreover, options of 3rd-party Layer 2 integration within an existing architecture is the way forward.