Blockchain is a revolutionary technology that allows for the secure and transparent exchange of data. It utilizes a series of layers to store and process information, which is referred to as Layers 0-3. Each layer has its own purpose and function, allowing for a comprehensive system that can handle a wide variety of transactions.
Blockchain is defined as a distributed ledger technology (DLT) that facilitates the secure and trusted exchange of digital assets between two or more parties. It is a unique system that functions as an open, decentralized network for storing data on multiple computers at once.
In order to validate and finalize transactions, Layer 1 is the base blockchain on which multiple other layers may be built. They can work independently from other blockchains.
The layer1 can be broken down into three segments:
- Data Layer- responsible for storing all data related to transactions within the network. This includes things like transaction history, balances, addresses, etc. This layer also helps validate each transaction by using cryptographic algorithms (hashing) to ensure accuracy and security.
- Network Layer- responsible for handling communications between users on the blockchain network. It is responsible for broadcasting transactions and other messages across the network, as well as verifying the accuracy and legitimacy of these messages.
- Consensus Layer- allows the blockchain to reach an agreement on a set of rules that all users must follow when conducting transactions. It ensures that all transactions are valid and up-to-date by utilizing consensus algorithms such as Proof of Work, Proof of Stake, or Byzantine Fault Tolerance.
- The Application/Smart Contract Layer is where most of the functionality takes place within a blockchain network. This layer contains code (or smart contracts) that can be used to construct applications that run on top of the blockchain ecosystem. These applications are able to execute transactions and store data in a secure, distributed manner. Not all layer1 protocols have smart contract functionality.
Examples of such networks are Bitcoin, Solana, Ethereum, and Cardano—all of which have their own native token. This token is used in lieu of transaction fees and serves as an incentive for network participants to join a network.
While these coins have different denominations based on the underlying project, their purpose remains unchanged: providing an economic support mechanism for the blockchain’s functionality.
Layer 1 networks have issues with scaling, as the blockchain struggles to process the number of transactions that the network requires. This results in transaction fees increasing drastically.
The Blockchain Trilemma, a term coined by Vitalik Buterin, is often invoked while discussing potential solutions to this problem; essentially needing to balance decentralization, security, and scalability.
Many of these approaches have their own tradeoffs; such as funding supernodes – thereby purchasing supercomputers and big servers – in order to increase scalability but creating an inherently centralized blockchain.
Approaches to solving the blockchain trilemma:
Increase block size
Increasing the block size of a Layer 1 network can effectively process more transactions. However, it is not feasible to maintain an infinitely large block since larger blocks mean slower transaction speeds due to the increased data requirements and decreased decentralization. This acts as a limit to scalability through block size increases, limiting performance boosts at the potential cost of decreased security.
Change consensus mechanism
While proof-of-work (POW) mechanisms still exist, they are less sustainable and scalable than their proof-of-stake (POS) counterparts. This is why Ethereum transitioned from POW to POS; the intent is to provide a more secure and reliable consensus algorithm that produces better results in terms of scalability.
Sharding is a database partitioning technique employed to scale the performance of distributed databases. By segmenting and distributing a blockchain ledger across multiple nodes, sharding offers enhanced scalability which increases transaction throughput as multiple shards can process transactions in parallel. This results in improved performance and significantly reduced processing time when compared to the traditional serial approach.
Similar to eating a cake divided into slices. In this manner, even with an increase in data volume or any network congestion, sharded networks are much more efficient as all participating nodes work together synchronously on processing transactions.
Layer 2 protocols are built on top of the Layer 1 blockchain to address its scalability issues without overburdening the base layer.
This is done by creating a secondary framework, referred to as “off the chain”, that allows for better communication throughput and faster transaction times than Layer 1 can support.
Using Layer 2 protocols, transaction speeds are improved and transaction throughput is increased, meaning more transactions can be processed at once within a defined time period. This can be incredibly beneficial when the primary network becomes congested and slows down, as it helps to reduce transaction fee costs and improve overall performance.
Here are several ways that Layer2s solves the scalability trillema:
Channels provide a Layer 2 solution that allows users to enter into multiple transactions off-chain before it is reported on the base layer. This allows for quicker and more efficient transactions. There are two types of channels: payment channels and state channels. Payment channels enable just payments, whereas state channels enable much broader activities like those that would normally take place on the blockchain, such as dealing with smart contracts.
The downside is that participating users must be known to the network, thus open participation is out of the question. As well, all users will have to lock up their tokens in a multi-sig smart contract prior to engaging with the channel.
Created by Joseph Poon and Vitalik Buterin, the Plasma framework utilizes smart contracts and numerical trees to create “child chains”, which are copies of the original blockchain — also known as the “parent chain”.
This method allows for transactions to be transferred away from the primary chain onto the child chain, thereby improving transaction speed and reducing transaction fees, and works well with specific cases such as digital wallets.
The developers of Plasma have designed it specifically to make sure that no user can transact before a particular waiting period is over.
However, this system cannot be used to help scale general-purpose smart contracts.
Sidechains, which are blockchains operating in parallel to the main blockchain or Layer 1, have several distinct features that set them apart from classical blockchains. Sidechains come with their own independent blockchains, often using different consensus mechanisms and having different block size requirements from Layer 1.
However, despite the fact that sidechains have their own independent chains, they still connect to Layer 1 by using a shared virtual machine. This means that any contracts or transactions that can be used on Layer 1 networks are also available for use on sidechains, creating an expansive infrastructure of interoperability between the two types of chains.
Rollups accomplish scaling by grouping multiple transactions on the sidechain into a single transaction on the base layer and using SNARKs (succinct non-interactive argument of knowledge) as cryptographic proofs.
While there are two types of rollups – ZK rollups and Optimistic rollups – differences lie in their ability to move between layers.
Optimistic rollups utilize a virtual machine which allows for easier migration from Layer1 to Layer2, while ZK rollups forego this feature for greater efficiency and speed.
Layer 0 protocols play a pivotal role in enabling the movement of assets, perfecting the user experience, and reducing the obstacles associated with cross-chain interoperability. These protocols provide blockchain projects at Layer 1 with an efficient solution to counter major issues, such as the difficulty to move between Layer1 ecosystems.
There is not just one design for a set of Layer0 protocols; distinct consensus mechanisms and block parameters can be adopted for differentiation purposes. Some Layer0 tokens serve as an effective anti-spam filter, in that users must stake these tokens before they can access associated ecosystems.
Cosmos is a Layer 0 protocol, renowned for its open-source tool suite, comprised of Tendermint, Cosmos SDK and IBC. These offerings allow developers to seamlessly construct their own blockchain solutions within an interoperable environment; the mutualistic architecture enables components to interact with one another freely. This collaborative vision of a virtual world has come to pass in Cosmoshood, as it was lovingly coined by its devoted adherents – allowing blockchain networks to thrive independently yet exist collectively, embodying the ‘Internet of Blockchain’.
Another common example is Polkadot.
Layer 3 is the protocol that powers blockchain-based solutions. Typically referred to as the “application layer”, it provides instructions for Layer 1 protocols to process. This enables dapps, games, distributed storage, and other applications built on top of a blockchain platform to function properly.
Without these applications, Layer 1 protocols alone would be quite limited in usefulness; Layer 3 is essential for unlocking their power.
Layer4 does not exist, the layers discussed are referred to as the four layers of blockchain, but this is because we start counting from 0 in the programming world.
The scalability of blockchain networks is highly dependent on their architecture and the technology stack they employ. Each layer of a network serves an important purpose in allowing for greater throughput and interoperability with other blockchains. Layer 1 protocols form the base layer or main blockchain, while sidechains, rollups, and Layer 0 protocols provide additional support for scaling.
Layer 3 protocols provide instructions that allow users to access applications built on top of the entire system. Together, these elements all contribute to creating a powerful trustless infrastructure capable of handling large-scale transactions securely.