Layer 1

A layer one network is a network that acts as infrastructure for other applications, protocols, and networks to build on top of. A public decentralized layer one network's primary characteristic is its consensus mechanism. Different consensus mechanisms provide different levels of speed, security, and throughput.

Some examples of layer one networks and their consensus mechanisms are given below. Two common categories of consensus mechanisms are proof of work (PoW) and proof of stake (PoS). Note that these are just two categories and that there are many unique PoS consensus mechanisms.

Bitcoin - Consensus: Proof of Work, Cryptocurrency: BTC

Ethereum - Consensus: Proof of Work (planned move to proof of stake), Cryptocurrency: ETH

Algorand - Consensus: Proof of Stake, Cryptocurrency: ALG

Cardano - Consensus: Proof of Stake, Cryptocurrency: ADA

Hedera - Consensus: Proof of Stake, Cryptocurrency: HBAR

Qualities of Layer one networks

A layer-1 network is ultimately the source of truth and is responsible for the settlement of transactions. For most network’s this means accounting for a user’s account, or wallet, via asymmetric key pairs and its corresponding cryptocurrency or token balances.

All layer one networks have a native token that provides access to the network's resources. You use a network's native token to pay for network services like sending its cryptocurrency, minting a token, or calling a smart contract. Note that not all layer one networks support the same array of services, although all support transactions. When comparing layer one networks, it is essential to learn about its consensus mechanism and the pros or cons that it provides. The consensus mechanisms involved generally have trade-offs between security, speed, and decentralization. There is a lot of innovation in consensus mechanisms and is a field that is constantly evolving and contributing to the array of distributed ledgers known today. Some networks provide security and decentralization at layer one and then delegate speed to layer two solutions.

Layer 2

Layer 2 networks extend the functionality of their layer 1 counterpart. This can be to increase the layer 1 network’s performance, reduce transaction fees, or increase programmability. For example, on Ethereum, where gas fees can be highly variable and transaction times slow, it is increasingly common for application developers to provide its user the ability to interact with a layer 2 network, like Polygon, to decrease their user’s fees and transaction latency.

Qualities of Layer two networks

Similar to how Layer 1 networks have different approaches to consensus, each layer 2 network will implement a scaling solution, or means to map transactions back to its layer 1. For instance, a commonly discussed layer 2 scaling solution is the implementation of zero-knowledge rollups. The idea is that a side-chain performs transaction ordering and processing and submits mathematical proof that they have processed the transactions fairly. Some examples of layer two scaling solutions are the Lightning Network, Polygon, and Starknet. The majority of scaling layer two solutions depend on cryptographic systems. For resources on the cryptography behind zero-knowledge proofs, I recommend this resource. The watered-down version of what is happening is that a mathematical proof is created by a verifier that some knowledge is correct.

Lighting network - Scaling with 2 party multi-signature channels

Starknet - Scaling with Zero-Knowledge Rollups

Polygon - Commit side chains - Optimistic Rollups(coming soon)

Note that only layer 1 with scaling limitations needs scaling solutions. Networks like Hedera with high native speeds for scale don't need to scale with layer-2s because they scale at the network layer.