Layer 1, or L1, refers to “main” chains, e.g., Bitcoin, Ethereum. L1s provide the foundation on top of which dapps, networks, and protocols are created through consensus mechanisms. The two primary consensus mechanisms are PoW (proof of work), and PoS (proof of stake). These consensus mechanisms are differentiated by characteristics such as higher security versus faster transaction processing speed. Layer 2, or L2, chains are secondary systems layered atop the existing main chain that seek to resolve the trade-offs of their L1, without altering the structure of the main chain.

Decentralized finance, or DeFi, has already proven to be a disruptive technology impacting business, financial systems, and overall financial theory as we know it. DeFi now holds a pivotal role even in the traditional market, with JPMorgan Chase & Co. CEO Jamie Dimon stating, “[DeFi] and blockchain are real, new technologies that can be deployed in both public and private fashion, permissioned or not.” DeFi’s merits over traditional finance include its accessibility, anonymous nature, and flexible, rapid transactions, making it one of the fastest growing sectors in the blockchain world.

Nonfungible tokens, or NFTs, are unique, noninterchangeable holders of value. An example of a fungible token, in contrast, would be a dollar bill – every dollar bill that has ever been in circulation has been indistinguishable from each other, from a valuation perspective. Thus, the benefit of NFTs over fungible tokens lies in their distinctiveness, which enables unique value to be ascribed to each NFT. NFTs have disrupted numerous industries, from art, to collectibles (like watches), to sports, and continue to provide a compelling use case for proving and verifying ownership of physical assets.