Discover the differences between layer one and layer two blockchains so you can understand the best choice for your crypto on NFT investments and navigate the space more easily.
Spend some time in the NFT space, and you’ll come across projects and collectors debating the merits of layer one vs layer two for their projects. But what’s the difference between these technical blockchain standards, and should casual NFT buyers even care?
Layer one basically describes an underlying blockchain. The Bitcoin lightning network and Ethereum main chain are the most common layer one blockchains architectures.
Layer One Advantages
Layer one has a first-mover advantage and more name recognition. Almost every NFT buyer has heard of or knows how to buy cryptocurrency like Ethereum or Bitcoin. Layer one blockchains are also widely adopted and used. Investments on layer one are more secure and less prone to contract risk.
Most NFT projects are deployed, minted, traded, and interacted with on the layer one Ethereum blockchain. If you’ve bought an NFT for the first time, chances are it was on layer one.
Layer One Disadvantages
NFTS on layer one has several significant disadvantages for NFT buyers. Scalability is a huge issue. The Ethereum mainnet blockchain slows down and gets congested during popular NFT mints or when the market is in a bull run. NFT buyers end up paying tens if not hundreds of dollars in gas fees to mint, buy, trade, exchange or interact with an NFT, depending on the price of Gwei.
The layer one blockchain isn’t designed to handle smaller transactions from everyday investors and buyers at scale. It’s more suitable for those moving around large amounts of Eth, for example, whales and investment funds and protocols.
Layer One Scaling Solution: Sharding
Throughput is a vital performance metric for any network that caters to a large customer base. For blockchain technology, the throughput is the number of transactions a blockchain can process in a second.
The throughput of layer one blockchains like the Ethereum and Bitcoin blockchain is negligible compared to the VisaNet. According to a report from Bitcoin.com, VisaNet processes 1700 transactions per second.
Several startups, blockchain developers, and crypto exchange owners started research projects to improve the throughput of layer one blockchains. The experts have found that layer one blockchains can use sharding to address the slow transaction processing issues.
Sharding calls for a horizontal division of large databases into small clusters. Thus, the query engine can quickly complete the search and fetch desired data. Horizontal distribution reduces the database table size by splitting the rows instead of the columns.
The same protocol is applicable for the Ethereum blockchain. Thus, Ethereum developers have distributed the Ethereum mainnet node database horizontally into small shards.
Blockchain nodes consist of the entire distributed ledger of the respective network. Whenever a new block is being mined, each of these nodes needs to come to a consensus (through proof-of-work). Afterward, the block can become a part of the entire blockchain.
However, full blockchain nodes occupy massive storage spaces, like the Bitcoin node needs 350 GB of disk space. Also, processing and validating transactions on such nodes are slower, like Ethereum processes up to 13 and Bitcoin processes up to 4.6 transactions per second.
Eventually, sharding will allow small-scale computers like home desktops or laptops to participate in the Ethereum blockchain as shard nodes. The entire process will create more nodes that can validate transactions of the Ethereum blockchain and increase its throughput. It could reduce the cost of buying and interacting with NFTs on Layer One.
What Is Layer Two?
Layer two describes a protocol, solution or technology built on the layer one blockchain. Layer two solutions essentially take transactions away from the Ethereum chain and roll them into bundles. Later, it sends these bundles back to the Ethereum main chain, where the smart contract is processed in bulk, for less.
Layer two solutions rely on proof-of-stake rather than proof-of-work consensus. Essentially, smart contracts reconcile on the blockchain, based on how much collateral delegators own and not due to raw computational power.
Layer two blockchains work with rather than compete against Ethereum. On the other hand, alternative blockchains like Solana (SOL), Cardano (ADA) and Klatyn (KLAY) are direct layer one competitors.
Immutable X and Polygon are two popular examples of layer two protocols for trading NFTs. They support ERC-721 and ERC-20 tokens, the common NFT standards. I bought several NFTs on both, and it was relatively cheap and quick, but I encountered several issues.
Popular Layer Two Blockchains For NFT Buyers
NFT buyers and those following the web 3.0 space should know about these layer two blockchains or ecosystems.
- Polygon (MATIC): perhaps the most popular layer two blockchain for NFT investors and one supported by OpenSea
- Immutable X (IMX): a carbon-neutral NFT marketplace used by NFT projects like Gods Unchained
Read our guide: What is Immutable X?
The below NFT blockchains are newer or less widely used. They’re also not supported by OpenSea yet. However, all aim to support NFT buyers and traders.
- Avalanche (AVAX): a cheaper, faster layer two blockchains compared to Polygon, although it’s less widely supported
- Optimism: a newer layer two blockchain with some basic NFTs
- Arbritum: another potential Ethereum alternative, again few NFTS exist on it
- zkSync: a blazingly fast layer two, again few NFTS exist on it yet
Layer Two Advantages
The transaction fees on layer two blockchains rarely cost more than a few dollars and in some cases, are almost non-existent.
Transactions also process faster than layer one, most of the time. Layer two is built for processing smaller transactions at scale.
It’s also more environmentally friendly than layer one, as it relies on proof of state and not proof of work. Minting or trading an NFT on layer two costs consumes hardly any electricity.
If you buy an NFT on layer two, you can stake it, interact with it and trade it almost instantaneously, without paying any crazy gas fees.
Layer Two Disadvantages
Layer two is still new tech. Polygon is the most widely used layer two blockchain technology, but the number of transactions can still cause congestion. Transactions also occasionally fail on Polygon.
Other layer two blockchains like Avalanche, Arbritrum, and zkSync don’t have this type of tech issue, but they’re not used by NFTs projects, yet. Arbritrum, zkSync, and Optimism have also yet to release their tokens for using their blockchains.
Using layer two requires more technical know-how. Users need to learn about bridging assets from layer one to layer two and back again. That means using tools like Zapper.fi or decentralized protocols like hop.exchange.
Using these tools and a layer two blockchain exposes users to some smart contract risk. They’re newer and haven’t faced the same rigor and testing as layer one tools and exchanges. The simple fact is casual NFT buyers won’t care for learning the nuts and bolts of complicated scaling solutions and tools built for decentralization.
Finally, it’s harder to find and buy bluechip NFTS on layer two blockchains. The marketplaces aren’t quite as developed yet.
Layer Two Scaling Solution: Sidechains
Layer two blockchain solution offers various scaling options and one of the most popular is sidechains. Sidechains utilize the blockchain mainnet to enhance the blockchain’s throughput. However, a sidechain is a completely different blockchain and can have its own consensus mechanism.
Sidechains connect with the existing blockchain through a 2-way-peg (2WP). A 2-way-peg facilitates the transfer of crypto coins from the secondary blockchain to the mainnet and vice-versa.
Technically, 2WP blocks a crypto coin, for example, BTC on the Bitcoin blockchain, until the equivalent amount of BTC is unlocked in the Sidechains. The process reverts when you need to transfer BTC from the Sidechains to the Bitcoin mainnet.
Since Sidechains can also facilitate blockchain transactions, the throughput of the mainnet blockchain increases as a whole. This concept could also facilitate barrier-free movement of cryptocurrencies, NFT coins, and other digital assets from one blockchain to another.
Yet, all the functional blockchains can remain decentralized, secure, unaltered, and serve their dedicated projects. As of now, sidechains work alongside the mainnet Bitcoin. Sidechains enhance the integrity of the Bitcoin core network. Liquid Network and Rootstock are popular sidechains of the Bitcoin blockchain.
Sidechains have many benefits for the blockchain users, such as:
- Decentralized apps (Dapps) and decentralized finance (DeFi) developers can deploy their own blockchain as sidechains of the mani chain Bitcoin. They can utilize the BTC as a native coin while enjoying fewer transaction fees, which is the major disadvantage for Bitcoin blockchain.
- Blockchain developers can launch new software and consensus protocols on the sidechains without affecting the Bitcoin mainnet.
Therefore, sidechains are one of the most crucial inventions of the crypto space. It’ll address the blockchain technology scalability issues.
Layer One Vs Layer Two For NFTs: The Final Word
The Ethereum blockchain utilization rate, daily volume, and market cap far exceed all layer two blockchains combined. It also supports a much larger network of NFT projects dapps, creators, and collectors.
But the slow nature of the layer one Ethereum blockchain and the prohibitively high cost of gas is off-putting for those considering getting into the NFT space.
It’s difficult to see how NFTs gain mainstream adoption until they become much easier and cheaper to buy, sell, trade and interact with now. It’ll take time for these different projects and NFT creators to build on layer two.
Layer two blockchains will expand the possibility of what NFTs can do. Solutions like Immutable X and Polygon can potentially solve the problem with layer one, but they still require extra technical know-how.
The language and tech jargon surrounding layers one and two are difficult to parse for those who have not invested in blockchain or NFT, or web 3.0 space. A buyer shouldn’t know or care that their NFT is layer one or layer two. Instead, they should be able to pick an NFT, mint, and interact with it, while the technical nuts and bolts of layer one or layer two take place in the background. Anything else is like learning how the server works on Amazon.com before deciding what to buy.