Overview of Existing Layer 1 Networks

Several Layer 1 blockchains have gained prominence, each with unique features and challenges.

Bitcoin: As the first blockchain, it introduced the concept of a decentralized ledger and digital currency. However, it faces issues like limited transaction throughput and high energy consumption due to its PoW consensus mechanism.

Ethereum: Known for its smart contract capabilities, Ethereum has been pivotal in the rise of DApps. Its challenges include network congestion, high gas fees, and scalability issues, although upgrades like Ethereum 2.0 aim to address these.

Cardano: This blockchain offers a more environmentally sustainable PoS consensus mechanism and focuses on security and scalability. However, it has been criticized for its slow development and rollout of features.

Upon examining various existing Layer 1 networks in the industry, several key challenges have been identified:

Scalability Issues

Many Layer 1 blockchains face significant scalability issues. These networks can process only a limited number of transactions per second, leading to network congestion. This limitation results in slower transaction times and increased costs, as users pay higher fees to prioritize their transactions. During peak times, these networks become less efficient and more expensive to use.

The root of this problem lies in the fundamental design of these blockchains. For instance, Bitcoin’s block size and time restrict the number of transactions that can be processed in a given period.

High Transaction Fees

High transaction fees are a direct consequence of network congestion. As more users vie for their transactions to be processed, the cost of transacting increases. This makes microtransactions impractical and raises the barrier to entry for smaller investors or users, potentially limiting the adoption and utility of the blockchain.

These high fees, especially in networks like Ethereum during the periods of 2020 to 2021, often surpass those in traditional financial systems, contradicting one of the fundamental advantages of blockchain technology – lower transaction costs.

Environmental Concerns

Blockchains like Bitcoin use a Proof of Work (PoW) consensus mechanism, which requires substantial computational power and energy consumption. The environmental impact of such energy use has become a significant concern, with some studies equating the energy consumption of these networks to that of small countries. In an increasingly eco-conscious world, the sustainability of such blockchain networks is being questioned, prompting a search for more energy-efficient alternatives.

Limited Interoperability

Many Layer 1 blockchains operate in isolation, with limited ability to interact with other networks. This lack of interoperability creates fragmented ecosystems. The inability to seamlessly transfer assets or data across different blockchain networks hinders the development of sophisticated, multi-chain applications. For users, this means managing multiple wallets and interfaces, complicating the user experience and reducing the overall appeal of blockchain technology.