A beginner’s guide to understanding the layers of blockchain technology

If you’ve interacted with DeFi or NFTs on Ethereum, you’ve probably noticed how high gas fees and slow transactions can be.

That’s the cost of decentralization.

Blockchain and other distributed ledger technologies are designed to be slower and more expensive than centralized alternatives. Some of the best minds in the world are currently working on ways to make cryptocurrencies faster and more affordable for everyday users.

This article looks at different ways to make cryptocurrencies work better, by making them handle more transactions per second. We cover some of the most promising approaches and answer common questions about them.

What are cryptocurrency Layer 2 scaling solutions?

Blockchain technology, which was created with the inception of Bitcoin in 2009, offers numerous advantages.

There are many advantages that are discussed when it comes to blockchain technology, such as decentralization, transparent record-keeping, and security. Blockchain technology has given rise to a flourishing cryptocurrency ecosystem that is continually expanding with new applications in areas such as finance and currencies, identity and governance.

Although blockchain networks have been growing, scalability has been a major issue for many of them. If there are more pending transactions than the blockchain can handle at a given moment, we have what are called scaling issues: transactions are slow or may never happen, and you have to pay higher fees.

In an ideal world, any blockchain would be able to accommodate an infinite number of transactions per second. This is a far cry from what is considered an acceptable number for a global currency. The Bitcoin main chain can only handle 3 to 7 transactions per second, which is a very small number compared to what is needed for a global currency. VisaNet, Visa’s centralized electronic payment network, can process up to 20,000 transactions per second.

The main difference between TPS of Bitcoin and other blockchains is decentralization. Decentralization is a key aim of Bitcoin and other blockchains.

A basic centralized system can be replaced with a lot of time and processing power. In a decentralized system, each transaction is accepted, distributed, and validated by a global network of nodes instead of a single database.

Layer 2 scaling solutions look to improve efficiency while keeping the process decentralized. By building on top of the existing blockchain (the Layer 1), Layer 2 solutions aim to:

• Increase the speed of transactions,
• Increase transaction throughput (the number of transactions per second),
• Decrease transaction fees.

There are some potential drawbacks to layer 2 scaling solutions, but they could also help the blockchain community achieve its goal of making cryptocurrencies and blockchain-based systems more accessible to everyone.

What are Layer 2 solutions and what are they for?

Layer two is a network that helps a blockchain protocol to be more efficient and scalable.

Blockchains, such as Ethereum, have become more popular in recent years because they allow businesses and users to create contracts that cannot be censored. This has led to a wide range of businesses and uses for these types of blockchain.

However, Ethereum can only process a maximum of 11 transactions per second, compared to over 20,000 transactions per second on the Visa network.

As the blockchain gets busier, users race to have their transactions processed as soon as possible. space in each block is highly sought after, leading to transaction prices that are sky-high. At one point in 2021, it cost over $80 to send a token to another address on the Ethereum network.

For the system to function properly, a number of different technologies need to be combined under one roof. Blockchain Technology solutions provide this by combining a number of different technologies under one roof. Blockchain technology is powered by a combination of mathematical calculations, cryptography, game theory, peer-to-peer systems, and validation protocols.

Blockchains eliminate the need for a central governing body by securely maintaining data on a distributed ledger and protecting all transactions. The distributed ledger technology (DLT) uses a pre-established protocol to validate transactional data. This protocol requires numerous computers (or nodes) to reach a “consensus”. Every time a node is added, examined, or updated, it does so on its own.

Blockchain technology is a distinctive combination of twentieth-century technologies like cryptography and game theory. This makes blockchain technology versatile and applicable to a wide range of fields, including the current fintech trend of cryptocurrency. Cryptography is the study of encrypting and decrypting data, while game theory is the study of how rational decision-makers interact with each other.

The main benefits of blockchain technology are that it is transparent and has unbreachable security. This is because it enhances efficiency, minimizes operational costs, and eliminates intermediaries.

When discussing Web 3.0 and Decentralized Ledger Technology (DLT) in relation to blockchain, you may have heard people talk about the different layers of blockchain. What are free radicals and why are they important?

This post looks at the importance of layers in IT ecosystems and how Blockchain technology is organized into different layers.

The Layering Architecture

Since blockchains lack a centralized authority, all transactions must be secure and data must be stored securely on a distributed ledger. The technology that underlies blockchain, called distributed ledger technology (DLT), follows a predetermined protocol. In order for a transaction to be considered valid, multiple computers throughout the network, called nodes, must come to a consensus, or agreement, about the transaction. As new entries arrive, each node processes them by adding, examining, and changing them. Blockchains have a layered design to allow for this unique kind of transaction authentication.

According to some blockchain professionals, there are five layers of blockchain technology:

• Infrastructure or hardware layer
• Data layer
• Network layer
• Consensus layer
• Application and presentation layers

However, blockchain technology layers can also be categorized as:

• Layer 0
• Layer 1
• Layer 2
• Layer 3

The term “layers” in this context refers to the different levels of functionality that are built into the blockchain platform. These layers provide different benefits to the users of the blockchain, such as increased security, scalability, and privacy. Let’s have a look.

Infrastructure or hardware layer

A data server securely backups the blockchain data. The computers access the data from the server when we use the internet or any apps that use blockchain technology. Blockchain platforms use P2P, i.e., a peer-to-peer network architecture, where one node connects with other nodes to share data quickly and easily. The client-server architecture allows for data exchange.

A network of devices that exchange data and information with each other. A distributed ledger is constructed in this manner. A node sends and receives data with another device on the network. Each node is allowed to access the data randomly.

The Data Layer

A blockchain is a digital ledger of transactions that is organized into blocks. Each block is chained to the previous block and contains a cryptographic hash of the data in the block. The first block of the blockchain is known as the Genesis block. After a new block is added to the blockchain, it is linked to the Genesis block through an iterative process. The blockchain continues to grow in this manner.

Every transaction is verified using the sender’s wallet private key. The only person who can access this key is the sender, which guarantees that no one else can view or modify the data. This text is saying that the digital signature protects the owner’s identity by encrypting it, ensuring that it is secure. In blockchain terminology, this is referred to as ‘finality.’

The data encryption makes it inaccessible. It is very difficult to tamper with data once it has been accessed. A digital signature helps hide the sender’s or owner’s identity. A signature is legally binding and cannot be ignored.

The Network Layer

In a P2P network, nodes communicate with each other to verify transactions. This helps to ensure that each transaction is legitimate. This means that every computer on the network must be able to find other computers in order to communicate quickly. Communication between nodes is made possible by the network layer. The Propagation Layer is responsible for managing node detection, block generation, and block addition.

The Consensus Layer

The blockchain authentication layer is responsible for verifying transactions. If this layer is not present, transaction validation will not occur, causing the system to fail. This layer of the protocol requires a specific number of nodes to validate a single transaction. Since every transaction must be approved by numerous computers, also known as nodes, in order to be considered legitimate, this process can take a while.

Since there is no one node that has exclusive control over any transactional data, and the role is spread out. A consensus mechanism is a system used to maintain the decentralized characteristic of a blockchain.

Several blocks can be created at the same time, which can cause the blockchain to branch off because of the large number of nodes that are processing transactions, putting them together, and then adding them to the blockchain. A chain block addition is always required, and the consensus layer guarantees that this dispute is addressed.

Application and presentation layer

The application layer is the layer of programs that end-users use to communicate with the blockchain network. The application layer consists of smart contracts, Dapps, chaincode, scripts, UIs, APIs, and frameworks.

The applications layer is divided into the application layer and the execution layer. The application layer contains the protocols that define how the application will run. The blockchain network provides the back-end infrastructure for applications that communicate with each other using APIs. The execution layer of a blockchain is made up of smart contracts, chaincode, and the protocols that they run on.

The applications that make up the blockchain platform provide instructions to the execution layer on how to carry out transactions while ensuring that the platform is deterministic.

This is a summary of the five layers of a blockchain that support the system. However, if you’ve been reading about blockchains, you’ve probably noticed that there are three different types of blockchain technology: layer-0, layer-1, and layer-2. So, let’s take a closer look at what these layers are.

Layer-0

Layer-0 is the underlying network architecture for a blockchain ecosystem. It comprises hardware, protocols, connections, and other components that form the foundation of the ecosystem. The Lightning Network is a decentralized network of “smart contracts” that is built on top of a blockchain. This layer may be thought of as a “network of blockchains.” The Lightning Network allows for near-instant, high-volume micropayments that are scalable and mobile-friendly.

This operability allows different blockchains to interact and share data with each other. It is essential for addressing future layer scalability difficulties. Layer 0 typically uses a native token to allow people to take part and improve things.

5 and 1 protocols. Layer 0.5 and 1 protocols include Polkadot, Avalanche, Cardano, and Cosmos.

Layer-1

Layer-1 is the part of the blockchain network that is responsible for the most important tasks, such as resolving disputes, maintaining the consensus mechanism, programming languages, protocols, and restrictions. Layer-1 symbolizes the actual blockchain.

The sheer amount of work that this level has to do on a regular basis often leads to scaling issues. As more individuals enter a blockchain, the processing times for adding blocks to the chain become longer, and the fees associated with doing so increase.

The issue of scalability is partially alleviated by the use of improved consensus methods such as proof-of-stake, and by sharding (dividing computational operations into smaller parts). However, history has shown that they are insufficient.

There are four examples of Layer 1 given which are Ethereum, Binance Smart Chain, Bitcoin, and Solana.

Layer-2

In order to improve the efficiency of the blockchain, more processing power is needed. However, this means that extra nodes need to be included, which clogs the network. While it is necessary to add nodes to maintain a blockchain’s decentralized nature, changing scalability, decentralization, or throughput will impact the others on layer 1.

This means that layer 1 can’t be made bigger without also creating a second layer on top of the first one. This means that third-party solutions can be integrated with the basic infrastructure of the system.

A new network called Layer-2 has been created that improves upon the design of Layer-1 and will be responsible for managing all transactional validations. Layer-2 always exchanges information with Layer-1 which is situated directly above it in the blockchain ecosystem. However, Layer-1 is only responsible for managing the addition and creation of new blocks to the blockchain. Layer-2 is responsible for managing the transactions that occur between these blocks.

Layer 2 blockchains are deployed on top of an existing blockchain in order to improve scalability. The Lightning Network is an example of a layer 2 blockchain that has been deployed on the Bitcoin blockchain.

Layer-3

The last layer of the blockchain ecosystem and the one visible to the human eye. Layer-3 is the level where participants will interact with user interfaces. The goal of this layer is to make working with L1 and L2 simpler and more straightforward.

The L3 network not only provides a user interface, but also utility in the form of intra- and inter-chain operability, such as decentralized exchanges, liquidity provisioning, and staking applications. dApps are a type of interface that utilize blockchain technology to provide real-world applications.

Other examples include:

• Decentralized crypto exchanges like Pancake Swap and Uniswap.
• Wallet providers like Binance and Coinbase.
• Liquidity management protocols like Compound and Aave.
• Payments mechanisms like Tornado Cash.

Conclusion

A lack of scalability is one reason why blockchain technology has not yet been widely adopted. As the demand for cryptocurrencies increases, so will the desire to construct blockchain technology. The only way to make a blockchain system scalable is to build it so that each level has its own restrictions.

The first layer is crucial for the blockchain ecosystem because it serves as the foundation for all decentralized systems. Layer two protocols solve the underlying blockchain’s scalability difficulties. Although a majority of layer three protocols (DApps) currently operate on layer one, layer two is disregarded. It is reasonable that these systems are not living up to our expectations.

Layer three apps are vital for the creation of real-world blockchain use cases. This means that they will not make as much money as the blockchain technology that they are based on.

Blockchains are becoming increasingly sophisticated, and are still in their early stages of development. Therefore, it will take years to complete blockchain development. Breaking down the concept of blockchain into its component parts might help to improve understanding of the concept.

The Blockchain Council provides an online platform for individuals who want to learn about blockchain technology. The Council offers courses on topics such as blockchain fundamentals, decentralized applications, and smart contracts. The Blockchain Council offers excellent blockchain certification courses that are in line with current industry trends. There are many different blockchain technology courses available, so find the one that best meets your needs and enroll in it.