Blockchain Scaling: How Layer 1 and Layer 2 Solve Network Capacity Issues

Cryptocurrency networks are forced to solve a trilemma: simultaneously achieving security, decentralization, and scalability. This phenomenon, known as the “Blockchain Trilemma,” was first described by Ethereum developer Vitalik Buterin. The essence of the problem is that no blockchain can perfectly optimize all three parameters at once. Instead, developers choose compromise solutions that enhance one or two aspects at the expense of the third.

Solutions to this dilemma are divided into two main directions: modification of the core protocol (Layer 1) and building overlays on existing networks (Layer 2). Each approach has its advantages and limitations, which deserve detailed consideration.

How Layer 1 Works: The Foundation of Cryptocurrency Networks

Bitcoin and Ethereum are the two most prominent representatives of Layer 1 networks. They operate as standalone blockchains containing all necessary components: consensus layers, execution, and data availability.

Enhancing Layer 1 capabilities is achieved through several methods:

Sharding divides the network into smaller subnets (shards), each processing transactions in parallel. This approach, inspired by distributed databases, significantly increases throughput. For example, Zilliqa implements “transaction sharding,” where different groups of operations are processed simultaneously.

Changing the consensus mechanism from Proof-of-Work (PoW) to Proof-of-Stake (PoS) reduces energy consumption and accelerates validation. Ethereum 2.0 transitioned to PoS, enabling it to process up to 100,000 transactions per second compared to current ~30 TPS. Cardano, Algorand, and Fantom also utilize innovative consensus mechanisms to optimize speed.

SegWit in Bitcoin addresses block size issues by separating digital signatures from transaction data. Since signatures occupy about 65% of space, moving them to a separate structure reduces transaction weight by three-quarters, freeing space for new operations.

The main advantage of Layer 1 solutions is that they do not require separate infrastructure. By modifying the core protocol, networks achieve long-term scalability improvements while maintaining decentralization under user control, not a small group of validators.

However, these solutions have limitations. Storage and bandwidth of individual nodes remain critical factors. Cross-shard transactions are still under development and require significant capacity. Additionally, validators may lose income due to transitioning to more efficient mechanisms.

Layer 2: Accelerating Without Reworking the Main Protocol

Unlike Layer 1, second-layer networks are built on top of existing blockchains, leveraging their security and decentralization. They perform transactions off the main chain and then anchor the results onto the base blockchain.

Rollups are the most innovative class of Layer 2 solutions. They process thousands of transactions off-chain, bundle them into (batches), and post a single record on the blockchain. This reduces load on the base network, which only needs to verify proofs and store raw data. The result is higher throughput and significantly lower fees.

Arbitrum uses optimistic rollups based on Ethereum. As of December 2025, the ARB price is $0.19. The platform supports a decentralized autonomous organization (DAO) structure and offers better throughput compared to the main network.

State channels enable users to conduct numerous operations off-chain without broadcasting each one individually. Lightning Network for Bitcoin exemplifies this approach: users can perform microtransactions, transfers, and gaming operations almost instantly and nearly free. Platforms like Nostr, Strike, and OpenNode are already integrating this technology into daily operations.

Sidechains are independent blockchains connected to the main network via a two-way peg system. Polygon promotes this concept, aiming to create an “internet of blockchains” where different networks easily exchange value. As of June 2023, the total locked value in Polygon’s DeFi sector was approximately $1.3 billion. The platform works with Compound, Aave, and other leading protocols.

Optimism is another Layer 2 based on Ethereum, supporting 97 protocols, including Synthetix, Uniswap, and Velodrome. To access, users need to add the network to MetaMask and transfer tokens, making this environment accessible to a broad audience.

The advantages of Layer 2 are clear: faster transactions, lower fees, and preservation of the security of the base blockchain. However, they have drawbacks. Fragmented liquidity reduces trading depth on each platform. Interaction between different Layer 2 solutions remains limited; for example, a dApp on Arbitrum cannot directly interact with a dApp on Optimism. Adding multiple layers increases the complexity of user onboarding.

Practical Applications: Where Real Money Is Located

DeFi and lending benefit most from both types of scaling. MakerDAO uses Ethereum smart contracts to issue DAI, a stablecoin pegged to $1. On Layer 2 solutions, transaction fees for such operations drop by orders of magnitude.

NFT marketplaces rely on Polygon for scaling. The platform offers minimal fees for buying and selling digital assets, attracting artists and musicians.

GameFi has experienced a renaissance thanks to Polygon and Lightning Network. Polygon Studios, founded in July 2021, helps developers transition from Web 2.0 to Web 3.0 by providing marketing support and investments. Polygon’s Commit Chain technology addresses slow throughput issues in gaming applications.

Payments and transfers are revolutionized by Lightning Network. OpenNode enables retailers to accept Bitcoin payments with nearly zero fees, making cryptocurrency a practical alternative to traditional systems.

Comparison: When to Choose Layer 1 or Layer 2

Layer 1 is a reliable foundation. They do not require intermediaries and provide maximum decentralization. However, upgrades to the core protocol require network consensus and can take years. Ethereum 2.0 exemplifies this process.

Layer 2 offers speed without compromising security. They target users who value speed and low cost. However, they depend on the underlying blockchain and carry their own security risks.

The reality is that both levels have specialized roles. Layer 1 — the “gold” (Bitcoin with a price of $87.05K) and the foundation (Ethereum with a price of $2.92K). Layer 2 — the “cash for shopping,” convenient and fast for daily operations.

Hybrid Approaches and the Future

Some projects, like LayerZero, develop solutions that combine the advantages of both worlds. Hybrid architectures allow blockchains to compensate for each other’s shortcomings.

The future of cryptocurrencies depends on the ability of networks to scale without sacrificing decentralization or security. Layer 1 — reaching (Ethereum 2.0) with potentially 100,000 TPS(, and Layer 2 innovations )rollups, state channels demonstrate that the Blockchain Trilemma is not unsolvable but requires a creative approach.

As blockchain networks become more scalable, they will better handle the growing demand for decentralized finance, gaming, and payments. This opens the door for mass adoption of cryptocurrencies, making them accessible to billions who need a secure, fast, and inexpensive currency.

Blockchain technology paves the way to a digital world where trust, security, and transparency are no longer luxuries but fundamental rights. We are witnessing the evolution of finance, and it is an exciting time to participate in this transformation.