The role of layer 1 chains in blockchain

Blockchain technology is often described as a stack of layers, each serving a unique purpose. Layer 0, usually referred to as the blockchain of blockchains, serves as the base hardware infrastructure of the blockchain hierarchy. Just above Layer 0 are Layers 1, 2, and 3.

In this guide, we will explore the core functionalities and utility of Layer 1 chains. Let’s get started.

What is a layer 1 blockchain?

The definition of layer 1

A Layer 1 chain (or “L1”) is the foundational network of a blockchain ecosystem that independently manages transaction execution, data validation, and consensus mechanisms. L1s operate independently from other blockchains and contain several components working together to provide decentralization, security, and usability.

• Network nodes – Computers worldwide that store blockchain copies and communicate with each other
• Consensus layer – Rules for how nodes agree on what’s valid (like Bitcoin mining or Ethereum staking)
• Data layer – Stores the entire blockchain history so that past transactions cannot be changed or tampered with.
• Transaction layer—This layer handles token transfers and smart contracts to ensure they can only run according to the network’s rules. 
• Application layer – This layer is the interface for decentralized apps (dApps), DeFi platforms, and other blockchain services. 
• Native Tokens – These are the currencies that power the blockchain. Tokens are used to pay transaction fees, reward validators, and facilitate governance participation. 

Ethereum, Solana, and Bitcoin are examples of Layer 1 chains, all with their security architecture, native tokens, and consensus mechanisms.

How layer 1 differs from layer 2

Layer 1 networks form the foundation, while Layer 2 builds on this foundation to fix limitations such as speed, cost, and efficiency. Here’s how the two compare:

Feature	Layer 1 (L1)	Layer 2 (L2)
Dependency	Operates independently as the main blockchain	Built on top of a Layer 1 network
Transaction processing	All transactions are processed directly on the main blockchain	Transactions are handled off-chain, then batched* and finalized on L1
Speed	Slower because all nodes must validate each transaction	Much faster with reduced validation requirements
Cost	Higher fees, especially during peak demand	Lower fees due to off-chain processing and efficient batching*
Security	Secures itself through its own consensus	Inherits security from the underlying Layer 1 network
Scaling	Base protocol changes, such as increased block size or a change in consensus mechanism, can improve scalability	Involve the use of off-chain networks or services to improve scalability

*Batching means combining many small transactions into one and sending them to the main blockchain as a single entry rather than processing them individually.

Why are layer 1s called the base layer

Layer 1 chains are called the “base layer” because they serve as the foundational layer for the blockchain ecosystem, upon which other layers and applications are built. L1 chains provide core services such as transaction validation, consensus, and security, and typically do not rely on another underlying network. 

Core functions of layer 1 chains

Transaction validation and security

Layer 1 blockchains are the fundamental mechanism for validating and recording transactions directly on the blockchain. Each transaction is rigorously examined for authenticity and legitimacy before it is permanently added to the distributed ledger. 

This process is essential for preventing fraudulent activities, such as double-spending or manipulating transaction history. Layer 1 blockchains thus establish a secure and trustworthy foundation for decentralized systems.

Consensus mechanisms (PoW vs PoS)

Every L1 has a consensus mechanism at its core. These mechanisms, such as Proof of Work (PoW) or Proof of Stake (PoS), define how transactions are validated and agreed upon. For example, Bitcoin uses the Proof of Work (PoW) consensus mechanism; miners must attempt to solve a cryptographic problem (mathematical puzzle) to validate a transaction. Ethereum, on the other hand, uses the Proof of Stake (PoS) consensus mechanism; validators will lock up tokens to validate transactions and secure the network.

Native token economics (e.g., ETH, BTC, SOL)

Each Layer 1 has a native token that powers its ecosystem. Bitcoin (BTC), Ethereum (ETH), and Solana (SOL) are prime examples. These tokens are used to pay transaction fees, incentivize validators or miners, and maintain network security. They also form the economic foundation for applications built on the blockchain.

Smart contract deployment (Ethereum, Solana, Avalanche)

Blockchains like Ethereum, Avalanche, and Solana aren’t just built for handling transactions. They support smart contract deployment, which means developers can launch decentralized apps (dApps), DeFi protocols, NFT projects, and other Web3 services right on-chain. These networks have evolved into comprehensive development environments rather than just transaction ledgers.

*A smart contract? Think of it as an automated program that executes specific actions on the blockchain when certain conditions are met.

Examples of leading layer 1 blockchains

Bitcoin – The original layer 1 for payments

Bitcoin, launched in 2009, is the first and most widely used Layer 1 blockchain. It was designed as a decentralized digital currency and peer-to-peer payment system without banks or intermediaries. Transactions are recorded on a public ledger and validated by miners using Proof of Work, where miners compete to solve complex puzzles and earn Bitcoin rewards for securing the network.

Ethereum – The smart contract pioneer

Ethereum revolutionized blockchain by introducing smart contracts, which made it possible to build dApps on-chain. Launched in 2015, Ethereum has become the foundation for DeFi, NFTs, DAOs, and Web3 ecosystems. Ethereum also has its own cryptocurrency, Ether, and has become the world’s second-largest blockchain platform by market capitalization.

Solana – High-performance L1 for speed and dApps

Solana is designed for high throughput and low-cost transactions, capable of processing thousands of transactions per second. It achieves this using a hybrid model of Proof of Stake (PoS) and Proof of History (PoH), which provides precise transaction time-ordering. 

Avalanche – Subnets and custom chains

Through its subnet architecture, Avalanche provides a Layer 0 framework, which allows developers and enterprises to launch customizable blockchains tailored for specific use cases. These subnets can have their own governance models and tokens, making Avalanche especially attractive for businesses that need flexibility. 

With its fast transaction finality (within a few seconds) and low fees, Avalanche has positioned itself as a competitor to Ethereum for both DeFi and enterprise blockchain adoption.

Polkadot & Cosmos – Interoperability-focused layer 1s

Polkadot and Cosmos have interoperability as their main feature. Polkadot connects specialized blockchains, called parachains, to its main relay chain, allowing them to share security and communicate. 

Conversely, Cosmos uses the Inter-Blockchain Communication (IBC) protocol to link independent blockchains together. Both aim to solve the “silo problem” in blockchain by creating an ecosystem where multiple blockchains can seamlessly interact, trade assets, and share data.

The challenges of layer 1 blockchains

Scalability and throughput limitations

Layer 1 blockchains often struggle to process a high volume of transactions per second (TPS). For example, Bitcoin handles approximately 7 TPS, and Ethereum handles 15–30 TPS on its base layer. Compare this to traditional payment systems like Visa, which processes around 1,700 TPS in regular operations with a peak capacity of 65,000 TPS, and those numbers for L1s are far from what’s needed for global-scale payment systems or mass adoption. 

Several interventions have emerged to address this challenge, including on-chain (L1) solutions like sharding, hard forks, and consensus mechanism upgrades (like Ethereum’s move from proof-of-work to proof-of-stake), as well as off-chain (L2) solutions like rollups, batching, and the Lightning Network.

High gas fees and network congestion

When network demand increases, transaction costs can become prohibitively expensive. Ethereum users experienced this firsthand during DeFi Summer in 2020 and the NFTs boom of 2021, when simple actions like swapping tokens or buying an NFT could cost $50-200 in gas fees. These high costs effectively locked out smaller users and drove many to seek alternatives like Binance Smart Chain or newer Layer 2 solutions like Arbitrum and Polygon, which process transactions more cheaply by building on Ethereum.

Security vs decentralization trade-offs

Bitcoin and Ethereum maintain security and trust by involving thousands of decentralized participants in consensus, but this slows down transaction speeds. 

In contrast, Binance Smart Chain offers faster and cheaper transactions but relies on a much smaller validator set (around 21), raising questions about centralization and censorship risk. This small group of validators could collude or be pressured to block specific transactions, making the network vulnerable to centralized control.

Energy efficiency and sustainability concerns

Bitcoin’s Proof-of-Work mining now consumes about 187 TWh of electricity per year, roughly equivalent to Thailand’s annual power usage and around 0.6% of global electricity consumption. This has drawn growing criticism from environmental groups and regulators.

In response to these concerns, Ethereum completed “The Merge” in 2022, switching from Proof-of-Work to Proof-of-Stake and reducing its energy consumption by over 99%. However, this shift has sparked new debates about whether the network is predisposed to increased centralization as a tradeoff for sustainability. With a Proof-of-Stake consensus mechanism, large staking pools could potentially concentrate network control.

Layer 1 vs layer 2: Key differences

Settlement, security, and finality

• Layer 1: The base blockchain (e.g., Bitcoin, Ethereum) is responsible for validating transactions, maintaining the ledger, and ensuring consensus. Settlement and finality happen directly on-chain, meaning transactions recorded here are considered the ultimate “source of truth.”
• Layer 2: Built on top of Layer 1, Layer 2 inherits the security and settlement guarantees of the base layer but processes transactions off-chain in small batches. The results are later bundled together and returned to Layer 1 for final settlement.

Arbitrum and Optimism execute thousands of transactions off-chain, but results are periodically settled on the Ethereum mainnet.

Cost and speed of transactions

• Layer 1: Limited block space means high demand leads to higher fees and slower confirmations. For instance, gas fees soar during NFTs or DeFi activity spikes on Ethereum, making small transactions impractical.
• Layer 2: By handling transactions off-chain or batching them together, L2s reduce costs dramatically and speed up processing. Instead of competing directly for L1 block space, users benefit from aggregated settlements.

A swap that might cost $30 in gas on Ethereum Layer 1 can cost under $1 on Arbitrum. Similarly, Bitcoin’s Lightning Network enables instant, near-zero-fee payments compared to the slower, more expensive base Bitcoin chain.

Examples of L1/L2 pairings (Ethereum Arbitrum/Optimism, Bitcoin Lightning Network)

• Ethereum Arbitrum/Optimism: Ethereum is providing security and settlement. Arbitrum and Optimism (rollups) provide scalability by executing the transactions off of the chain and then settling back to Ethereum. 
• Bitcoin Lightning Network: Bitcoin offers secure, immutable settlement, and the Lightning Network enables fast, off-chain micropayments, which can be used for day-to-day things like tipping or a retail payment.
• Polygon (PoS Chain) Ethereum: Polygon offers faster, cheaper transactions with bridges to Ethereum, making it a hybrid Layer 2/sidechain scaling solution.

The future of layer 1 chains

Ethereum’s roadmap and sharding

Ethereum initially planned to use sharding, splitting the blockchain into smaller parallel chains to boost transaction speed. However, this approach was dropped when Layer 2 rollups (solutions that process transactions off-chain) proved more effective for scaling.

Instead, Ethereum adopted a rollup-centric strategy. The goal is to make Ethereum the most secure base layer while providing cheap data storage for rollups. This new approach is called danksharding – it doesn’t split Ethereum into transaction-processing shards, but increases how much rollup data the network can handle efficiently.

The first step, proto-danksharding (EIP-4844), launched on March 13, 2024, with the Dencun upgrade. It introduced “blobs” – a cheaper way to store rollup data, which has already cut Layer 2 fees by 10-100x.

Over time, Ethereum will expand blob capacity and fully implement danksharding, targeting over 100,000 transactions per second through rollups while maintaining decentralization and security.

Growth of multi-chain ecosystems

The blockchain space is shifting toward specialized networks instead of relying on one chain to do everything. Bitcoin acts as digital gold for institutions. Ethereum leads DeFi with over $90 billion total value locked (TVL), Solana powers fast-paced gaming and NFTs, and Avalanche attracts enterprises with customizable subnets.

Major protocols such as Aave and Uniswap are no longer limited to a single blockchain. Instead, they run on several networks simultaneously, allowing users to choose where to interact. On Polygon, they benefit from low fees; on Solana, they get faster execution; and on Ethereum, they gain maximum security and decentralization. In practice, a user might store wealth on Bitcoin, earn yields on Ethereum, and play games on Solana, all within the same ecosystem.

This creates a stronger, more efficient blockchain economy rather than forcing one network to simultaneously handle security, scalability, and low cost.

Role of interoperability (Cross-chain bridges, IBC)

As various blockchains specialize in various functions, users need methods of moving their assets and data across blockchains. Cross-chain bridges serve as digital highways connecting multiple blockchain networks. With a cross-chain bridge, users can transfer tokens from a more expensive blockchain like Ethereum to cheaper blockchains like Polygon or faster blockchains like Solana and back when desired. 

Some of the popular bridges are Polygon’s PoS Bridge which provides Ethereum to Polygon transfers, while protocols like Cosmos’s Inter-Blockchain Communication (IBC) connect dozens of blockchains and create an ecosystem with a primary focus. There are also services like LayerZero and Wormhole which provide cross-chain bridge services across a variety of networks.

However, these bridges have a major problem: they’re prime targets for hackers because they hold large amounts of cryptocurrency. Major attacks like the Ronin Bridge ($625M stolen) and Wormhole ($320M stolen) show that bridge security is still developing. Despite these risks, bridges remain essential for users who want to utilize different blockchain strengths.

Institutional adoption of layer 1 networks

Bitcoin remains the most deeply adopted Layer 1 among institutions. Corporations like Strategy (formerly MicroStrategy), Metaplanet, and MARA Holdings hold significant amounts of Bitcoin in their treasuries, treating it as “digital gold” and a hedge against inflation.

Ethereum has also shown strong institutional momentum. Public companies hold nearly 966,000 ETH, valued at approximately $3.5 billion. The Ether Machine, Bitmine Immersion Technologies, and others have taken strong positions in Ethereum as an alternate store of value and a decentralized finance platform.

Significant institutional utilization could continually allow Layer 1s to develop into a stronger, more secure, globally integrated infrastructure for digital finance, with Layer 2s and interoperability protocols expanding their capabilities.