Blockchains have proven themselves to be the next revolutionary technology for storing and managing data cryptographically. By offering security and transparency, blockchain technology has removed the need for intermediaries and many different sectors such as healthcare and real estate are implementing the digital ledger. However, in order for blockchains to gain widespread adoption, it has to scale for the ever-growing demand. This has led to the infamous blockchain scalability issues and the creation of different solutions in the form of blockchain layers.
You’ve probably heard of layer 1 and layer 2 being used widely. If you are confused about what these terms mean, this article will explain the different blockchain layers, structures, and the need for layers as a response to scalability problems.
The Need for Blockchain Layers
Blockchain is a distributed ledger technology (DLT) that is based on cryptography and runs on a peer-to-peer network. This decentralized digital database offers users security, the immutability of data, and full trust without the need to rely on third parties or intermediaries. This means, that users can conduct transactions without the need of central authorities like the bank, which gives the power back to their hands.
However, blockchain is relatively new, and thus, it has its fair share of issues. The blockchain trilemma is a problem facing the digital ledger which states that the blockchain cannot achieve decentralization, security, and scalability simultaneously. This is a huge issue since the three elements are crucial for the blockchain to gain widespread adoption. Since what makes the blockchain special is its ultimate security and decentralization, the network often sacrifice scalability.
Blockchain scalability refers to how much a blockchain’s protocol can handle high demand and increase transaction speed rate accordingly. The inability to scale to high demands puts a strain on the overall efficiency of blockchain technology.
Here is where blockchain layers come into play. Some scalability solutions don’t fundamentally change the blockchain network. These solutions are known as layer 2 or off-chain solutions. Layer-2 solutions are protocols that build on top of the mainnet of a blockchain. These off-chain options can help navigate network congestion and latency issues.
The Different Layered Structures of a Blockchain
Blockchain’s architecture consists mainly of a five-layered structure. Each layer in the blockchain system plays a crucial role in ensuring the efficiency of the network.
- Data layer.
- Hardware/Infrastructure layer.
- Network layer.
- Consensus layer.
- Application and Presentation layer.
Let’s take a look at what these layers represent in a blockchain.
This blockchain layer refers to the actual data that is being transferred and stored in the distributed database. The blockchain data structure is mainly blocks of information linked together to form a chain. Each block contains two elements: a pointer that refers to the previous block and a list of blocks that refers to the whole chain.
Each block thus holds information about the preceding block such as the block’s hash, nonce, timestamp, etc. Blockchain data is cryptographically secured, which means that each transaction needs to be digitally signed to protect the security and integrity of the blockchain.
The data layer cannot be tampered with or discovered because of its encryption. Users’ identities are also protected by a digital signature. This layer thus determines the structure of a block on a blockchain.
The blockchain operates on a peer-to-peer (P2P) network, this means that a network of nodes is needed to run the database. This blockchain layer includes the physical devices that operate the blockchain network. These devices are hardware such as computers and servers as well as mining equipment that verify transactions and add them to the blockchain.
The blockchain records transactions in a peer-to-peer model that eliminates the need for intermediaries. Meaning, there is no central authority that manages the blockchain, and only participants, in this case, called miners, can validate transactions through interconnected nodes.
Since the blockchain is a P2P network, the hardware devices have to be connected for internode communication. This blockchain layer makes sure that the communication between nodes is clear where nodes can find each other, handle transactions, and discover new blocks of data.
In addition, this layer ensures that the communication between nodes is synchronized in order not to fall under the Byzantine Generals Fault, where miscommunication can lead to double spending and other network failures.
The blockchain, or any decentralized network, cannot function without a consensus layer. This is because, after having clear communication in the network layer, nodes has to reach a consensus in order to create a sequence of blocks.
Reaching a consensus means that the network reaches a settlement that decides which node gets to verify a specific block. There are many types of consensus mechanisms such as Bitcoin’s Proof-of-Work consensus and Ethereum’s Proof-of-Stake consensus.
This blockchain layer ensures the proper sequence of blocks is valid and makes sure that the network is in agreement.
The application layer is the final layer of a blockchain. It includes smart contracts, decentralized apps (dApps), and chain code. All the previous layers make up the back end of a blockchain, which users cannot access or see. The application layer is the softwares that lets users communicate with the blockchain network. This includes APIs, frameworks, scripts, and user interfaces.
Categorization of Blockchain Layers
We’ve seen how the structure of a blockchain takes the shape of different layers. However, blockchain layers can fall into additional layers that are more common. These are:
- Layer 0
- Layer 1
- Layer 2
- Layer 3
Layer 0 is the foundational layer of the blockchain. It consists of the hardware that operates the blockchain such as the internet, devices (nodes), and connections (P2P network) that allow the blockchain to exist. It also includes the different protocols that make up the blockchain ecosystem.
In addition, layer 0 also allows inter-chain operability. However, layer 0 protocols cannot process transactions by themselves. Layer 0 protocols examples can be found in Polkadot, Avalanche, and Cardano.
The first layer of the blockchain is the blockchain itself. This means the main network that operates the digital ledger’s core functions such as consensus, protocols, and programming languages.
The tremendous work needed to operate this layer, like verifying transactions and adding them to the blockchain, causes the infamous scalability issues. It also causes higher transaction fees due to the excessive computational power needed in some blockchains.
This problem is fixable by many layer 1 solutions that target the main chain such as sharding, change of consensus, and segregated witness update. L1 solutions don’t require a side chain, instead, the solution targets the main blockchain’s way of operation and facilitates the verification process.
Layer 1 blockchain examples are Ethereum, Bitcoin, Binance Smart Chain, and Solana.
This blockchain layer consists of networks that overlap over the base layer. These are Layer 2 or L2 solutions. This means that L2 solutions transfer the load from the main chain to off-chain processing. This increases the main network’s overall scalability. Still confused? Let’s see the difference between layer 1 and layer 2 blockchains.
Layer 1 blockchains are the main network in the blockchain ecosystem. However, layer 2 is a third-party integration that exists alongside layer 1 to enhance the main network’s performance, improve scalability and increase system throughput.
L2 scalability solutions include:
- Side Chains: Side chains are independent chains that are linked to the main blockchain that enable token and asset transfer between the two.
- State Channels: State channels provide the process in which transactions are executed between parties outside the blockchain, or off-chain, which decreases the on-chain operations.
- Rollups: Blockchain rollups bundle up transactions off-chain on a different network, turn them into one single transaction and then submit them back to the mainnet, which decreases the load on the main network.
Layer 3 is the application layer of the blockchain. This blockchain layer is what gives the network real-world applicability. Applications connect users via user interfaces that hide the technical aspects of the blockchain. This layer also functions as inter-chain operability like decentralized exchanges, liquidity pools, and staking applications.
Blockchain layer 3 applications examples can be decentralized cryptocurrency exchange platforms such as Uniswap and Pancake Swap as well as wallet providers such as Coinbase and Binance.
Blockchain Scalability, Again
Categorizing the blockchain into layers can be done either for the sake of structuring the network or to provide scalability solutions. The most important thing to understand in the blockchain world is the difference between layer 1 and layer 2 solutions and how they can fix the critical scalability issue.
Layer 1 is crucial as it serves as the foundation of the blockchain network with added layer 2 solutions that act as a facilitator to the main chain. Layer 2 solutions have managed to solve some of the blockchain scalability problems to some degree. However, we are still far from the blockchain’s widespread adoption.
This problem will only increase as more users get into blockchain transactions. Nevertheless, the blockchain is still in its infancy stage and we will surely see many advancements regarding scalability solutions.