What is a Layer 1 / Layer 2?
Quick Definition
Layer 1 refers to a base blockchain network like Ethereum or Bitcoin; Layer 2 refers to networks built on top of a Layer 1 to improve scalability, speed, and cost efficiency.
Full Definition
Layer 1 networks are foundational blockchains. They handle their own consensus, security, and data storage. Bitcoin and Ethereum are the most prominent examples, joined by networks like Solana and Avalanche. Layer 1s prioritize security and decentralization, but as adoption grows, they often face scalability challenges. Transactions become slow and expensive when demand outpaces capacity.
Layer 2 networks address these challenges by processing transactions off the main chain while still anchoring to the security of the underlying Layer 1. There are several Layer 2 approaches (optimistic rollups, zero-knowledge rollups, state channels, sidechains), but they share a common goal: scale the network without sacrificing the trust model of the underlying Layer 1. Arbitrum, Optimism, Base, and zkSync are leading Ethereum Layer 2s.
Why the distinction matters
For users, the practical difference is performance and cost. Transactions on Layer 1 networks tend to be more expensive and slower, but they settle directly on the most secure layer. Transactions on Layer 2 are typically much faster and cheaper, while still inheriting security from the Layer 1 they're built on. The choice between Layer 1 and Layer 2 often comes down to use case: large institutional transfers occur on Layer 1, while everyday transactions and DeFi activity often happen on Layer 2.
For developers and protocols, the choice involves trade-offs around ecosystem maturity, infrastructure support, and the specific guarantees each layer provides.
Where Steady operates
Steady operates on both Ethereum (Layer 1) and Arbitrum (Layer 2), giving holders flexibility depending on their use case. Larger institutional transactions occur on Ethereum, while more frequent activity might happen on Arbitrum to take advantage of lower fees and faster settlement. Both networks share Ethereum's underlying security model and both are supported by the broadest range of institutional infrastructure.
Related Terms
Arbitrum
ReadArbitrum is a Layer 2 blockchain network built on top of Ethereum, designed to offer faster and cheaper transactions while inheriting Ethereum's security and infrastructure.
Blockchain Network
ReadA blockchain network is the system of connected participants and infrastructure that validates, records, and maintains data on a specific blockchain.
Ethereum
ReadEthereum is the most widely used public blockchain for smart contracts, tokens, and decentralized applications.
Gas Fees
ReadGas fees are the transaction costs paid to a blockchain network to execute transactions and run smart contracts.
Other Glossary Items
Learn about common and essential terms related to Steady and other stablecoin protocols.
Algorithmic Stablecoin
ReadAn algorithmic stablecoin attempts to maintain its value through automated rules that adjust token supply based on market demand, rather than holding equivalent reserve assets.
AML
ReadAML (Anti-Money Laundering) refers to the laws, regulations, and procedures designed to prevent the use of financial systems for laundering the proceeds of crime.
APY
ReadAPY, or Annual Percentage Yield, is the standardized rate of return an asset generates over a year, including the effect of compounding.
Asset Backing
ReadAsset backing refers to the real-world or on-chain assets held by the issuer to support the value of every token in circulation.
Asset Locking
ReadAsset locking refers to restricting access to funds for a defined period or condition, during which they cannot be transferred or used.
Asset Segregation
ReadAsset segregation is the practice of keeping client or backing assets separate from the issuer's operational funds, protecting them from the issuer's other obligations.
Audit
ReadAn audit is an independent examination of a protocol's code, reserves, or operations by qualified third parties to verify accuracy and compliance with stated claims.
Backing
ReadBacking refers to the assets or mechanisms that support a stablecoin's value and help it maintain its intended reference value.
Blockchain
ReadA blockchain is a distributed digital ledger that records transactions across a network of computers in a secure, transparent, and tamper-resistant way.
Bridge
ReadA bridge is a mechanism that enables the transfer of assets or data between different blockchain networks.
Clarity Act
ReadThe Clarity Act is a proposed US legislative framework intended to clarify the regulatory treatment of digital assets, defining when they should be treated as securities versus commodities.
Collateralization / Over-collateralization
ReadCollateralization refers to the ratio between the value of assets held in reserve and the value of tokens issued. Over-collateralization means holding more in reserves than the value of tokens issued.
Composability
ReadComposability refers to the ability of different protocols, contracts, and tokens on a blockchain to interact and combine with each other seamlessly.
Counterparty Exposure
ReadCounterparty exposure refers to the risk that another party, such as a bank, custodian, broker, or service provider fails to fulfill its obligations, potentially affecting the assets or funds it holds.
Custodial vs. Non-Custodial
ReadCustodial means a third party holds the private keys to your assets on your behalf. Non-custodial means you hold your own keys and control your own assets directly.
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