Layer 1 (L1)

This term is used to distinguish these base-layer blockchains from other networks in the crypto ecosystem. For example, Layer 2 blockchains, which build on top of a Layer 1, relying on it for settlement and security.

The most notable Layer 1 blockchains are bitcoin, Ethereum and Solana. Each has a different design and functionality: bitcoin is a decentralised currency and payments network, while Ethereum and Solana support smart contracts, meaning developers can build applications on top of them.

Layer 1 chains are run by decentralised networks of computers called nodes, each containing a copy of the network’s transaction records. Processing transactions across this decentralised network of nodes requires a consensus mechanism: a set of rules and procedures that ensure each distributed copy of the ledger remains the same.

Bitcoin does this through a system called Proof-of-Work, wherein miners dedicate computational resources to solving complex mathematical puzzles. Ethereum and Solana instead use Proof-of-Stake, requiring node operators to stake tokens to secure the network.

One of the biggest challenges facing Layer 1 blockchains is scalability. Each has a limited processing capacity, which can lead to congestion and fee hikes during periods of high activity. One common solution to this problem is the aforementioned L2 blockchains: networks that operate independently, while settling transactions on an L1. Two noteworthy examples are Base and Arbitrum, both of which are Layer 2 networks built on top of Ethereum.

In short, Layer 1 networks provide the fundamental base layer for the digital asset industry, upon which applications, token issuers and other networks can build.