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 crypto ecosystem. Understanding these concepts is crucial for developers, investors, and users navigating the complex landscape of blockchain technologies – but it’s not always very 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 foundational architecture of a blockchain network. These base layer protocols handle the execution, data availability, and consensus aspects of the network, validating and finalizing 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 a portion of the transactional requirement from the main chain to an adjacent system architecture, processing transactions off-chain and recording only the final 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 (mostly) inherit the security of the underlying Layer 1 blockchain while improving scalability, speed, and costs.

The quest to find the optimal scaling solution for Layer 1s is far from static. For example, the Ethereum Foundation moved on entirely 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…