Curious Beginner's Guide to L2 and L1 Chains

Feb 17, 2022

Dear subscribers,

You can save thousands of dollars in transaction fees by learning crypto using Layer 2 and other Layer 1 chains instead of the main Ethereum blockchain.

In this post, I’ll explain like I’m five:

What are Layer 2 and Layer 1 chains?
What does the ecosystem look like?
How to get started with a few beginner-friendly chains:
1. Polygon
2. Solana
3. Terra

This isn’t a comprehensive guide. My goal is to help you understand how to use these other chains to learn crypto while saving money on gas. If I didn’t cover your favorite chain, don’t worry - I’m still learning myself 😉

What are Layer 2 and Layer 1 chains?

Let’s start with a few definitions:

Layer 1 is the main blockchain. L1 chains include Ethereum, Solana, and Terra.
Layer 2 is a scaling solution for the main blockchain. In the Ethereum ecosystem, L2 solutions include:
1. Rollups that perform transactions off-chain before adding them to the main chain. Examples include Arbitrum, Optimism, and Loopring.
2. Sidechains that are linked to the main chain through a bridge. Polygon is the most popular sidechain.

If you’re a beginner, all you need to know is that:

Ethereum L2s and other L1s offer faster and cheaper transactions than Ethereum L1 (see blockchain trilemma to understand the trade-offs).

If you use these chains, you’ll spend <$1 per transaction vs. $60+ on Ethereum L1. That makes them perfect for beginners looking to learn web3.

What does the ecosystem look like?

Before we talk about specific chains, let’s look at the overall NFT and DeFi ecosystem:

As you see, Ethereum L1 still dominates NFT sales (88%) and DeFi total value locked (60%). Every other chain competes with Ethereum L1 through the following flywheel:

Attract developers through incentives
Developers build dapps that attract more users
More users attract more developers (back to step 1)

Since Ethereum is so dominant, many chains want to be EVM-compatible. The latter simply means that any Ethereum dapp can be easily ported over to the new chain.

Let’s discuss how you can get started with three beginner-friendly chains - Polygon, Solana, and Terra.

Polygon

Great if you want to stay in the Ethereum ecosystem.

Polygon is an Ethereum scaling solution co-founded in 2017 by Jaynti (white paper). Polygon’s main product is a sidechain compatible with Ethereum using MATIC as its native token. Recently, the protocol raised $450M to create a full suite of Ethereum scaling solutions.

Polygon has 7,000+ dapps in its ecosystem, making it the most mature out of all Ethereum scaling solutions. I think many Ethereum NFT and DeFi projects will extend to Polygon and new projects will emerge (e.g., gaming).

To get started with Polygon:

1. Add Polygon to your Ethereum wallet

If you have Metamask, visit Polygonscan and tap “Add Polygon Network” on the bottom right.

2. Get some Polygon ETH and MATIC

You need Polygon ETH and MATIC (native gas token) to use Polygon. You can get both tokens directly from fiat (e.g., US dollar) or through an ETH bridge. I recommend the fiat path to save on gas fees.

Fiat to Polygon: You can buy Polygon ETH and MATIC with your credit card using platforms and exchanges like Moonpay, Sendwyre, and crypto.com. If you want to buy a Polygon NFT for example, you can tap “Buy with card” directly from an OpenSea Polygon NFT listing using Moonpay. Note that you need to verify your personal information (e.g., upload a driver’s license) to use fiat to buy Polygon.

Buying Polygon ETH with your credit card from an OpenSea Polygon listing

Bridge ETH to Polygon: Bridging is just a fancy word for transferring ETH from Ethereum L1 to the Polygon sidechain. Unfortunately, you need to pay a one-time ETH gas fee (e.g., $60-100) to move your ETH to Polygon. Check out my bridge guide.

3. Browse Polygon NFTs or dapps

Once you have some Polygon ETH and MATIC, you can browse OpenSea’s Polygon NFTs or check out Polygon’s dapp ecosystem.

Solana

Great if you want to use try amazing wallets and explore NFTs.

Solana is an L1 chain co-founded in 2017 by Anatoly and other ex-Qualcomm leaders (whitepaper). Its native token is SOL.

Solana has amazing wallets, the 2nd highest NFT sales behind Ethereum, and a growing DeFi ecosystem. The network did experience several outages in early 2022, but that hasn’t slowed its growth.

To get started with Solana:

1. Get a Solana wallet

Phantom, Solflare, and Glow all have better UX than Metamask.

2. Get some SOL

Use an exchange to buy or swap for SOL (e.g., Coinbase, Uniswap).

3. Explore Solana NFTs and dapps

Visit Magic Eden to browse Solana NFTs or check out Solana’s dapp ecosystem. If you want to explore Solana DeFi, I recommend Step Finance to keep track of transactions.

Terra

Great if you want 20% APY on stablecoins and something a little different.

Terra is an L1 chain co-founded in 2018 by Do Kwon (whitepaper). Its native token is LUNA.

Terra’s mission is to bring DeFi to the masses through a suite of stablecoins. The protocol’s foundation is the relationship between its two main tokens: UST and LUNA:

UST is an algorithmic stablecoin pegged to the US dollar ($1 UST = $1 USD).
LUNA is Terra’s native token used for governance and staking (e.g., letting validators earn fees for processing transactions).

UST and LUNA have a 1:1 relationship with each other:

To create $1 UST, you burn $1 in LUNA
To create $1 in LUNA, you burn $1 in UST

UST is an algorithmic stablecoin because it uses market forces to maintain its 1:1 peg to the US dollar. Consider the following:

UST is trading at $1.05
A user burns $1 LUNA to get 1 UST and then sells UST for $1.05, making $0.05.
More users do step 2, driving down UST’s price to its natural peg of $1.

Terra has the 2nd largest DeFi ecosystem by total value locked (behind only Ethereum) with just 18 dapps. Anchor, Terra’s flagship app, offers 20% APYs on UST stablecoins, making it one of the best choices for a DeFi beginner.

To get started with Terra:

1. Get a Terra wallet

Visit Terra Station and get the Chrome extension.

2. Get some UST or LUNA

You can buy UST directly on Kraken. Alternatively, you can buy LUNA from non-US exchanges like KuCoin and OkCoin. Either way, transfer the asset to your Terra wallet.

3. Explore Terra dapps

A great one to start with is Anchor, which offers 20% APYs on UST stablecoins. If you have LUNA, use your Terra wallet to swap LUNA to UST before using Anchor.

My main goal with this post is to help you:

Save money by learning crypto using L2 and other L1 chains.

Don’t be intimidated by these chains even if you’re a beginner. It’s worth getting familiar with them to save thousands of dollars in gas fees.

To learn more, visit Odyssey’s learnings paths for intro to web3, NFTs, and DeFi.

Creator Economy by Peter Yang