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Blockchain technology has been around for over a decade, and this innovation has introduced massive transformations in various industries, such as finance.
Blockchain technology has evolved over the years, and although it may seem like a complex discourse to beginners, especially regarding the different blockchain layers, you must understand how blockchain operations work.
Blockchain technology blends several current technologies like game theory, cryptography, etc. Blockchains eliminate the need for intermediaries, reduce costs, and enhance overall efficiency through transparency and security.
Blockchain technology isn’t limited to using digital currencies alone; its layers facilitate increased scalability and functionality. Each blockchain has unique characteristics and purposes; these differences are called “layers.”
These layers are called Layer 0, Layer 1, Layer 2, and Layer 3. Investors and businesses who wish to utilize this technology to its full capacity must have a complete understanding of blockchain layers.
What are Blockchain Layers?
The value of a cryptocurrency isn’t based solely on its market capitalization, which is a misleading factor; rather, its value is influenced by the problem being solved. The underlying technology, coupled with the layer of blockchain ecosystem it occupies, is a solid determiner of a project’s value.
Blockchain layers consist of the different infrastructures that work together to fuel the operations of blockchain-based systems. Each blockchain layer builds on the previous one, leveraging the architecture of the previous layer.
Structure of Blockchain Technology
Blockchain consists of five layers, each of which plays a distinct role. The collective operations of these layers make the blockchain a unique solution for everything from front-end to back-end administration and development.
These structures include;
- The hardware infrastructure layer
- The data layer
- The network layer
- The consensus layer
- The application layer.
1. Hardware layer
The primary function of a blockchain is the peer-to-peer sharing of data. This layer powers the physical components that support the blockchain networks, like computers and servers. Blockchain is the sum of all computers or networks of computers that decrypt transactions.
2. Data layer
After the hardware layer is the data layer, where transaction details are stored, the transaction information recorded on a block (the primary unit of a blockchain) includes detailed information about the sent crypto, the receiver’s public key, and the sender’s
3. Network layer
This layer fosters communication between blockchain nodes. It connects nodes, fosters transactions, and distributes data throughout the network. Since blockchain is open source, each node must be aware of the transactions being validated by other nodes. This is the role the network layer plays.
4. Consensus layer
The Consensus layer guarantees that all nodes in the network match the validity of each transaction. It uses either a Proof of Work (PoW) or Proof of Stake (PoS) consensus mechanism to validate and add transactions to the blockchain.
5. Application layer
The Application layer is where decentralized apps are built. This layer allows developers to create new applications by leveraging the transparency and security of the blockchain. This layer consists of smart contracts, decentralized applications (dApps), and other software that run on the blockchain network. Applications implemented on this layer may consist of social media apps, wallets, Defi Apps, NFT platforms, and browsers, to name a few.
Layers of the Blockchain Ecosystem
The layers of the blockchain ecosystem consist of the following;
- Layer 0: Blockchain ideation and security
- Layer 1: The Foundation layer
- Layer 2: The Abstraction layer
- Layer 3: The Application layer
Layer 0
Layer 0 blockchain is the initial stage of blockchain technology that enables projects like Bitcoin (BTC) and Ethereum (ETH) in their functions. The blockchain is called layer 0, which facilitates cross-chain interoperability and communication.
This layer fuels the fundamental infrastructure of blockchain technology, including protocols and standards that regulate the blockchain network.
The goal of Layer 0 is to improve the functionality, accessibility and interoperability of blockchain networks.
This operation allows you to discover more innovative opportunities, thereby creating more utility for you. Layer 0 protocols foster better communications between blockchains so they synergize and leverage each other’s DApp ecosystem.
Layer 1
The Layer 1 blockchain is an improvement over Layer 0. The blockchain network’s functionality is maintained in this layer due to its unique modifications. However, the layer 1 blockchain faces scalability challenges, and this is a major limitation.
Layer 1 is also called the implementation layer, and any new modification or problems with protocols on Layer 0 also affect Layer 1. Examples of Layer 1 blockchains include;
- Bitcoin (BTC)
- Ethereum (ETH)
- Cardano (ADA)
- Ripple (XRP)
- Monero
- Binance
Layer 2
Layer 2 blockchains are blockchains that developers use to build other blockchains. They are more scalable and efficient because they use infrastructure from Layer 1 blockchains. For instance, L2 blockchains like Polygon, Arbitrum, and Optimism are built on Ethereum, and these L2 blockchains are faster and cheaper.
However, they are more centralized because of their smaller size. This also means that Layer 2s cannot run when Layer 1s are down. Inversely, many Layer 2s are experimental blockchains, so there’s no guarantee they’ll be as secure as Layer 1 blockchains.
Layer 3
Layer 3 is also called the “application layer.” Layer 3 primarily hosts DAapps and numerous other protocols that facilitate other apps. These DApps are software applications that leverage the blockchain network and provide a decentralized user experience. These apps include simple applications like cryptocurrency wallets.
This application layer is divided into two significant sub-layers,
- Application
- Execution
The layer 3 blockchain is the best solution for separating blockchains, and with its cross-chain capabilities, it achieves the goal of genuine interoperability.
How Do Layers 0, 1, 2 and 3 work together
Layer 0 acts as the skeleton to the whole operation; without it, blockchain networks will have no basis for operating. The data centres, hardware devices, protocols, security measures and cloud services all serve the vital purpose of supporting the network.
Layer 1 is the site where blocks are created and added, and transactions are executed and finalized on this layer. But layer 1 is plagued by issues of the “blockchain trilemma” where it can only provide two benefits of decentralization, security and scalability at a given time to its users.
While many blockchains opt for security and decentralization instead of scalability in the first layer, the network may experience low transaction speed on the main chains slowing down the time taken to process multiple transactions this is where layer 2 comes in.
Layer 2 addresses the scalability issue of the blockchain trilemma, here off-chain solutions are offered. This means that the traffic of transactions to be professed on the main chain are offloaded to a side chain thus allowing multiple transactions to be executed immediately and be broadcasted to the main chain.
The final third layer is built on layer 2 that includes dApps, smart contracts and other applications. Layer 3 offers interoperability between layers as it interacts with layer 1 through APIs and middleware, facilitating communication and data exchange with the underlying blockchain network.
They are also created with high customizability to address developers needs on issues like privacy but still maintains the security of Layer 1 despite developers having access to them.
