Layer 1, 2, 3, parachain, sidechain – what’s the difference?

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 cryptocurrency ecosystem. Understanding these concepts is important for developers, investors, and users navigating the complex landscape of blockchain technology. However, it is not always clear what type is what and why we need so many types.

Layer 1 blockchains such as Bitcoin, Ethereum, BNB Chain, and Solana form the basic architecture of blockchain networks. These base layer protocols handle the execution, data availability, and consensus aspects of the network, validating and finalizing transactions without relying on other networks. Each layer 1 blockchain has its own native token that is used to pay transaction fees. However, scaling Layer 1 networks is a significant challenge that often requires core protocol changes such as increasing block sizes, adopting new consensus mechanisms, or implementing sharding technologies.

To address the scalability limitations of layer 1 blockchains, layer 2 solutions have emerged as auxiliary frameworks built on top of existing networks. Layer 2 protocols move some of the transaction requirements from the main chain to an adjacent system architecture, processing off-chain transactions and only recording the final state on the Layer 1 blockchain. Examples of layer 2 scaling solutions include Bitcoin Lightning Network, Ethereum Plasma Chain, Optimistic Rollups, ZK-Rollups, sidechains, and state channels. These protocols (mostly) inherit the security of underlying layer 1 blockchains while improving scalability, speed, and cost.

The quest to find the optimal scaling solution for Layer 1 is far from static. For example, the Ethereum Foundation has completely transitioned from Plasma solutions to scaling.

“Plasma was once considered a useful scaling solution for Ethereum, but has since fallen in favor of layer 2 (L2) scaling protocols. “The L2 scaling solution solves several problems in plasma.”

One of Ethereum’s subsequent L2 solutions was sharding, which has now been replaced by “Rollup and Danksharding” in the Ethereum roadmap. Post-Dencun upgrades have continued to advance towards scaling with Layer 2 on top of Layer 2, more commonly known as Layer 3 chains.

Layer 3 blockchains are application-specific chains that anchor layer 2 networks, enabling further scalability, customization, and interoperability. For example, Arbitrum Orbit allows developers to create a layer 3 chain, known as the “Orbit chain”, which anchors on Arbitrum’s layer 2 chains, Arbitrum One and Arbitrum Nova. These Orbit chains can be configured with custom gas tokens, throughput, privacy, and governance through projects such as XAI, Cometh, and Deri protocols already built on Arbitrum Orbit.

Likewise, Optimism’s OP stack supports “superchains” of layer 3 blockchains that share security and communication layers, while Coinbase’s Base is a prominent layer 3 chain in the OP stack. The OP stack aims to make layer 3 chains interoperable. Other layer 3 solutions include hyperchains from zkSync and supernets from Polygon. Key benefits of Layer 3 include hyper-scalability through recursive proof and compression, gas token customization, throughput, privacy and governance, interoperability between Layer 3 chains and with Layer 1/2, low cost, and high performance.

Another solution outside of the EVM ecosystem is parachains. Parachains are a core component of the Polkadot and Kusama networks, and are also application-specific, independent blockchains that run in parallel within these ecosystems. Parachains are connected to the main relay chain and rent security while maintaining their own governance, tokens, and functionality. These chains can use cross-chain communication protocols such as XCMP to process transactions and seamlessly exchange data with each other. Collator nodes maintain the overall state of the parachain and provide proofs to relay chain validators.

Sidechains, another type of scaling solution, are separate blockchains that run in parallel with the main chain, with tokens and other digital assets moving between them through a two-way peg. Sidechains have their own consensus mechanisms and block parameters, making them more flexible and scalable than the main chain. This is considered a sort of layer 2 solution as it takes some of the transaction burden off the main chain. Examples of sidechains include Liquid for Bitcoin and Polygon PoS for Ethereum. The key difference is that chains like Polygon PoS have their own set of security and validators, rather than relying on Layer 1 for network security.

Understanding the roles and differences between layer 1, layer 2, layer 3, parachains, and sidechains can be complicated. Each of these technologies plays an important role in solving the scalability, interoperability, and customization challenges 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 different types of scaling solutions exist. Each has its own pros and cons. Hopefully, this overview will help you navigate some of the most attractive chains by clearing away some of the initial complexity.

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