Improving the scalability of a chain is a key point in making a blockchain more efficient. Why was Bitcoin Cash born? The idea was to make Bitcoin more scalable. BCH has bigger block size so it is cheaper, however it lacks in security. Lightning Network on the other hand is a layer 2 of Bitcoin (even if they are two separate chains with "contact points"). Ethereum has tried similar solutions with mixed layer 2 (like Polygon) or "pure" like Arbitrum and Optimism. Polygon often got saturated, Arbitrum had problems. On the other hand, the scalability solutions that Polkadot offers, see parachains, have limited slots. Polkadot is a layer 0 that allows you to build layer 1 (Astar Network, Moonbeam, Acala, etc) and guarantees scalability and safety because these chains are secured by the Dot staking. Cosmos (layer 0) uses a similar model with Interchain Security (all layer 1 will be secured by Atom). Avalanche instead uses a completely different solution: subnets.
WHAT IS A SUBNET?
Subnets are a feature of Avalanche that allows you to create your own layer 1 blockchain (DAG) which can also function as layer 2. A subnet can be a single custom blockchain or a group of blockchains that are validated together. The "default subnet" is the base level of Avalanche, it includes:
1) P-Chain (for staking and creation of subnets)
2) X-Chain (which is the highly scalable exchange based on UTXO, i.e. sending and receiving funds)
3) C-Chain (based on EVM contracts compatible with Metamask; basic, Avalanche is not EVM)
The Avalanche X-Chain offers around 4500 TPS and the C-Chain around 1000 TPS, values significantly higher than Ethereum and Bitcoin.
Avalanche's subnets offer an improvement in scalability: to avoid network congestion (C-Chain), they "divert" traffic. A subnet works like a layer 2, but is more decentralized. In general, subnets are similar to sharding, as they create new separate instances but remain connected to the main Avalanche blockchain.
It is possible to implement two different subnets with different horizontal partitioning schemes (multiplying the levels of the chain and increasing the TPS) or a single subnet with two different sub-chains each using a horizontal partitioning scheme (so that a common set of validators validates both ).
The second thing the subnets do is allow the creation of unlimited chains - if the second chain runs out, you can just launch another one. Different validators can validate different subnets, while they all validate the default subnet.
One problem could be the decrease in the ability to perform managed cross-chain transfers on the P chain. However, you can continue to create new subnets whenever the scale limit is reached. Security is guaranteed by subnets with their own token that must be staking together with Avax (the native token of the chain), otherwise they are only marginally less secure than the default subnet. Each subnet with a different token offers staking opportunities to validators with more secure nodes.
Horizontal partitioning optimizes scaling at the expense of security, and scaling on the chain optimizes scaling at the expense of decentralization.
FINAL THOUGHTS
Ultimately, through the subnets, Avalanche remains decentralized and there will be subnets for sharding and scaling on the chain. Anyone can start their own subnet and since there can always be another subnet, we will have more and more scalability.
Layers 2 are not needed on Avalanche because subnets are a functionally superior alternative to layer 2 with all the advantages of the case and no centralization. These blockchains will in fact refer to the consensus mechanism of the main network (Avalanche), but carry out transactions with their own network of validators and independently.
For more info: Create A Subnet (Avalanche) and Create A Blockchain Running The Subnet EVM
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