Blockchain Layers Explained And How They Work: The Simple Guide To Blockchain Layers
Blockchain technology has made all kinds of cool things possible.
It’s the tech behind cryptocurrency and all the decentralized fun that comes with it. It also gave birth to the new proof of ownership capabilities that spawned the NFT revolution.
Different technologies had to unite for blockchain technology to work as a concept.
Today, we’re going to dive into the different levels of the blockchain and find out how they all work together. You may have heard crypto enthusiasts using terms like Level 1 and Level 2 blockchain – but what exactly do they mean?
You’re about to find out as we break down what each mysterious piece of the blockchain puzzle brings to the table.
What’s The Purpose Of Blockchain Layers?
Before we delve into the blockchain’s various levels, let’s first establish why layers are required.
It all goes back to the dream of the ideal blockchain. In a perfect world, a single blockchain would be capable of nailing three functions:
What is Blockchain Decentralization
Decentralization means that overall network has control, instead of one entity or organization.
What is Blockchain Security
Ensure that transactions remain secure to keep the whole network from going all wild west and protect the assets on the network.
What is Blockchain Scalability
Scalability refers to a network’s ability to keep up with increasing demand without negative tradeoffs.
So how do blockchains accomplish all three goals simultaneously?
The truth is, they don’t. At least not yet.
What Is The Blockchain Trilemma?
Enter a concept known as the “Blockchain Trilemma.” First coined by Ethereum founder Vitalik Buterin, the trilemma argues that most blockchains can only hope to achieve two of these three supreme goals simultaneously.
Major blockchains like Ethereum and Bitcoin have always put security and decentralization at the head of the pack. But as a result, they’re still trying to fine-tune scalability solutions.
Nonetheless, using different layers has already gone a long way toward getting blockchain technology to where it is today. While some layers are essential, others help increase the scalability of specific networks.
Blockchain Layers Explained – What Are The Blockchain Layers
Admittedly, blockchain technology isn’t always the most straightforward concept to wrap your head around. So, let’s break things down via the power of metaphor.
Imagine, if you will, that the average blockchain is operating as a business in the real world.
Got it? Good.
Layer 0 is to the blockchain what architectural components are to the average building. While physical facilities consist of materials like concrete and steel, Layer 0 consists of technological components.
These include hardware, peer-to-peer connectivity capabilities, and other protocols required to make a decentralized ecosystem possible.
But the average office building isn’t just designed to look pretty; its purpose is to provide people with a place to build a business.
Same thing with Layer 0 protocols like Polkadot, Cardano, and Avalanche. These blockchains are platforms companies can build other blockchains or applications on – a place to set up shop.
Layer 0 also allows cross-chain interoperability, enabling various blockchains to communicate.
If Layer 0 is our office building, Layer 1 is the company that operates inside it. Layer 1 is where a blockchain becomes Bitcoin or Ethereum by laying out its policies and procedures.
It’s where everything from consensus mechanisms to programming languages is established and carried out. Layer 1 also encompasses the security measures that ensure the blockchain runs smoothly and orderly.
On the downside, some security protocols, such as Proof-of-Work (PoW), can also be where scalability issues come into play. Such is what led to the Ethereum Merger of 2022.
Ethereum was initially built on a PoW system which worked out okay. But eventually, its popularity began to outgrow the number of miners available to validate network transactions.
This tremendous workload resulted in insanely high gas fees, slower processing times, and overall scalability failure. That’s why ETH has decided to kick PoW to the curb in favor of a new Proof-of-Stake system.
So how does Layer 2 fit in with our business metaphor? Imagine that the Layer 1 business inside our Layer 0 building is starting to find itself stretched a little thin.
The building is not large enough to accommodate any additional resources. So, that’s when our blockchain business comes up with an innovative solution.
We’ll build additional space on top of the existing building for a third party that can move in to help handle the workflow. This, in essence, is the idea of Layer 2 protocols, such as Bitcoin’s Lightning Network.
Level 2 protocols, or L2 solutions, are different networks operating on L1 bases. L2s constantly communicate with L1 and exist to help improve scalability.
Providing additional nodes and handling specific interactions frees L1 to focus on only the most vital tasks.
When you walk into the average business, you rarely see many of the internal operations that keep the whole thing up and running. Mostly, you stick to the storefront that the company has set up for customers.
Level 3 is that storefront. It comprises the interfaces that users interact with when placing day-to-day blockchain trades.
When you log into your wallet or trading platform, you interact with Level 3, whether you know what it’s called or not. The truth is that there are plenty of users around the world who are blissfully unaware that the blockchain even has different levels.
Which is not all that odd when you think about it. After all, when was the last time you took a backstage tour of the factory that made the clothes you’re wearing?
Why does all this matter?
People tend to care less about how a business runs and more about what it offers. Nonetheless, understanding a company from the inside out can have its perks, particularly when it comes to investing.
While most customers could care less about significant company operations changes, the same news could be precious among its shareholders.
Even something like the announcement of a new CEO can drastically affect a company’s stock value. Same thing with cryptocurrency.
Many Ethereum holders may not even know about ETH’s upcoming merger. But insiders who understand the significance of its upcoming Level 2 changes will likely be a lot less confused if the token’s value is affected one way or the other.