Every blockchain is different. Yet all blockchains have similarities. Blockchains are built on the basis of layers. Blockchain layers are different types of blockchains, each with its own function. The different layers ensure that the crypto world can continue to innovate. With the market continuing to develop, cryptocurrencies are becoming more attractive and adoption is only increasing. At the moment there are four different layers of blockchains. To refresh your memory we will briefly recall what a blockchain is, after which each layer will be explained.
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What is a blockchain?
A blockchain is a chain of blocks of information. Cryptocurrencies were created thanks to blockchain technology. A blockchain uses a consensus mechanism, whereby new data is added and with which new coins are brought into circulation. Exactly how this works varies from one cryptocurrency to another. Each new block that is added contains information from the previous block, making it one long chain that goes all the way back to the beginning.
How the blockchain is set up was devised by the founders and, in most cases, is difficult to modify. As a cryptocurrency, you want to pursue security, scalability, and decentralization. Based on these three criteria, the founder of Ethereum, Vitalik Buterin came up with the Blockchain Trilemma. According to him, you cannot develop a blockchain with all three criteria. If you manage to achieve two of the three, the blockchain will have problems with the remaining criterion.
What is a blockchain layer?
The technology behind a blockchain can be very complicated. For many investors, it also means that they understand very little about it. Fortunately, it is also not mandatory to know everything about blockchain technology. The more knowledge you have about the blockchain, the easier it is to discover and understand new blockchains. The layers are built on the blockchain. Currently, there are 4 main layers, each with different functionality. Not all blockchains use all four layers.
Basically, blockchains all work in their own way and cannot simply transfer information to each other. The layer 0 blockchains allow layer 1, 2, and 3 blockchains to communicate with each other. These blockchains were developed with the idea of solving scalability problems. Examples include Polkadot (DOT) and Cosmos (ATOM). These blockchains validate the data between all layer 1, 2 and 3 blockchains. These must then validate their own data again on their own network. For example, Polkadot uses parachains (parallel blockchains), these are layer 1 blockchains that can share information with the main blockchain of Polkadot. Often you can use a layer 0 blockchain to develop your own blockchain as well.
The layer 1 ensures that a blockchain "works". It is the basic layer of the blockchain and is responsible for ensuring that transactions can be made over the network and that smart contracts work. In addition, layer 1 is responsible for checking wallet addresses, public and private keys, and token balances. The layer 1 blockchain works through a consensus mechanism. These are processes in a blockchain by which new data is added to the network. The two main consensus mechanisms are Proof of Work and Proof of Stake. Bitcoin is a layer 1 blockchain and uses the Proof of Work mechanism where miners must solve complicated puzzles to add a new block of information to the blockchain. This process ensures that Bitcoin has an extremely secure network. One drawback of Bitcoin is that the network has a slow transaction speed of only 5 transactions per second (for comparison, Solana claims to be able to handle 65,000 transactions per second).
To increase the speed and scalability of a blockchain, layer 2 blockchains are built on top of an existing blockchain. Layer 2 blockchains take transactions from layer 1, collect them and eventually pass them on to the layer 1 blockchain. What are the benefits of this? Layer 2 allows layer 1 blockchains to achieve greater scalability, get faster transaction speeds and save energy consumption at the same time. All while maintaining the security, decentralization and transparency of the blockchains.
Layer 2 blockchains work with so-called rollups. The two most dominant variants of these are the optimistic rollups and zero-knowledge rollups. Both components collect transactions and eventually send one transaction to the main blockchain. The difference between the two is that the optimistic rollups work through its own consensus mechanism (through smart contracts) and the zero-knowledge rollups work on-chain (transactions on the blockchain) and off-chain (transactions that are not implemented on the blockchain). An example of a zero-knowledge rollup is the Bitcoin Lightning Network. This is an off-chain network and therefore does not use Bitcoin's consensus mechanism. It collects Bitcoin transactions between Bitcoin Lightning Network users. Once they want to settle the transactions, the Bitcoin Lightning Network sends one transaction to the Bitcoin blockchain.
Optimistic rollups allow for low gas fees and greater scalability, but as a result, it also takes longer for the transaction to be recorded.
Zero-knowledge rollups ensure that transactions are executed faster-lower gas fees and are less vulnerable to attack.
Finally, the last blockchain layer (for now), layer 3. At this layer, the user interface of layer 1 or 2 blockchains is formed. It is the visual component through which users can use the dApps of blockchains. Layer 3 works on smart contracts, so as a user you will not notice anything about all the coding in the blockchain. In addition, layer 3 also has cross-chain (a transaction involving more than one blockchain) functionalities, allowing users to use data from different blockchains on one application. This component is somewhat similar to layer 2, where applications collect data and eventually send it to the main blockchain in one transaction.
Blockchain layers are components of the blockchain each with its functionalities. It helps one understand how blockchains are put together.
Layer 0: ensures that different blockchains can still exchange information with each other. All with the aim of increasing scalability and speed. An example of a layer 0 blockchain is Polkadot.
Layer 1: is responsible for validating transactions on the network. This layer can be considered the fundament of the blockchain. Examples of layer 1 blockchains are Bitcoin and Ethereum.
Layer 2: is intended to solve the scalability problems of layer 1 blockchains. The layer 2 blockchains collect multiple transactions and convert them into one transaction. It also improves speed and has lower costs. Examples of layer 2 blockchains are Polygon and the Bitcoin Lightning Network.
Layer 3: is the layer where the user interacts and is what they see. This layer can be used to create all kinds of applications such as dApps, games, and DeFI. Examples of layer 3 blockchains are Uniswap and Aave.