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I am currently reading about the scalability of Ethereum but I cannot really understand the difference between some terms that occur often.

What is the relation between the terms:

  • Layer 1
  • Layer 2
  • on-chain
  • off-chain
  • Plama
  • Sharding
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Just to quote this very good article about Ethereum scalability:

At the moment we have in general two ways which might solve this problem:

  1. We build a blockchain where every node doesn’t have to process every operation. → called Layer 1 solutions (or On-Chain solutions) e.g. Sharding

  2. we squeeze more useful operations out of Ethereum’s existing capacity → called Layer 2 solutions (or Off-Chain solutions) e.g. State Channels, Plasma

Layer 1 solutions typically require a hard fork of the blockchain, on the other hand Layer 2 solutions typically do not require a hard fork, because they can be implemented as smart contracts.

So layer 1 means built-in functionalities while layer 2 means top level protocols.

On-chain operations are made inside the Ethereum network. Off-chain operations are made outside the network, and rely on the blockchain to ground their security.

Ethereum Plasma introduced a novel scaling solution that could enable Ethereum to reach many more transactions per second than currently possible. Like payment channels in the Bitcoin Lightning Network, Plasma is a technique for conducting off-chain transactions while relying on the underlying Ethereum blockchain to ground its security. 

Essentially, sharding is a particular method for horizontally partitioning data within a database. More generally, the database is broken into little pieces called “shards”, that when aggregated together form the original database.

I hope this is helpful.

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