The details of blockchain are extremely complex, even on the surface.
Underneath the hood there is even more going on. Blockchain layers are one of those complicated things that, thankfully, normal users do not have to worry about.
But understanding layers can help with your knowledge of blockchain, especially while doing research for certain cryptos.
Every blockchain that exists has a layer that it is built upon.
Right now, there are 4 main layers of blockchain. Let’s take a look at what blockchain layers are and each of these layers in detail.
What are blockchain layers?
Layers are terms that help us understand the architecture of blockchains, how they are built, and what they aim to accomplish.
Blockchain tries to solve the trilemma of security, scalability, and decentralization. This is difficult, however, and most blockchains can only have two while missing the third. Each layer of blockchain has a different approach to solving this trilemma.
Layer 0 (L0)
Layer 0 blockchains serve as the root layer, allowing other blockchains to exchange data with each other even if the blockchains are incompatible. Much like a translator can help an American and a Bengali speak to each other, layer 0s allow blockchains like Bitcoin and Ethereum to speak to each other even though under normal circumstances they can’t.
Layer 0 blockchains were created to solve the scalability problem. They bear the burden of validating the data between separate blockchains, while the blockchains validate the data that is sent and received on its own network.
Just like any other blockchain, it has its own consensus method (proof of work, proof of stake, etc…). Layer 0 blockchains have their own token to give as a reward to validate transactions, to participate in the network, and sometimes are used for governance (voting on the future of the blockchain).
Layer 0s can have blockchains be built on top of them. These blockchains would be considered layer 1 blockchains, and could do anything a layer 1 blockchain can do like mint cryptocurrency, allow users to build dApps, use smart contracts, and more. The blockchains built on layer 0 could have their own token, method of consensus, and uses.
Polkadot is a layer 0 blockchain because it is a network that allows other layer 1 blockchains (parachains) to be built on top of it. Parachains can exchange information with each other through Polkadot’s main blockchain. If you are interested, you can learn more about
Polkadot and how it works.
Layer 1 (L1)
Layer 1 is the base blockchain layer. It is made up of a network and its tools. This layer is responsible for recording transactions sent over its network, and coming to the consensus that they are valid. That is the basic
blockchain process.
This layer is responsible for checking things like wallet addresses, public and private keys, and token balances. It’s also responsible for choosing the consensus method of the network. The two main consensus methods are proof of work, or proof of stake.
Proof of work is what you think of when you think of
mining cryptocurrency, which means that miners on the network race to solve complex problems in order to validate blocks and receive new cryptocurrency tokens. This is extremely secure, but incredibly slow.
Proof of stake is when users lock their crypto holdings on the network in order to be given a chance to be randomly selected to validate blocks and receive rewards. This is fast, but less secure.
Layer 1 has services like peer-to-peer payment or smart contracts, and the token is used to pay for the network’s services. The token is earned during the consensus process, whether through proof of work, proof of stake, or some other method.
Bitcoin is the most popular layer 1 cryptocurrency. It is also the most popular by market cap. Bitcoin is a digital currency that can be sent to users over its network. Bitcoin uses a proof of work consensus method.
Another popular layer 1 blockchain is Ethereum. It is the second most popular cryptocurrency by market cap. Ethereum is different from Bitcoin in that it is a software platform that makes use of smart contracts. That means applications can be built on top of Ethereum, but we will get into that in a second. Ethereum also uses a proof of work consensus method.
Other common cryptocurrencies that use layer 1 technology are Cardano, Solana, Avalanche, and Algorand. These cryptocurrencies use a proof of stake method of consensus.
Layer 2 (L2)
Layer 2 is a framework that is built on top of an existing blockchain with a focus on speed and scalability of the main blockchain. The main idea behind layer 2 is to take transactions off of layer 1. Instead, transactions are processed on layer 2 and then sent to the layer 1 blockchain.
Since layer 1 cryptocurrencies like Bitcoin (4.6 transactions per second) and Ethereum (15 transactions per second) are slow to process transactions, fees can be extremely expensive during times of high demand. Ethereum’s gas fees were once as high as $200 worth of ETH. Layer 2 networks are designed to help overcome that problem by being able to process thousands of transactions per second.
Layer 2s help layer 1 blockchains by increasing scalability, speed, decreasing energy used (
important for the environment), all while keeping the security, decentralization, and transparency of the main blockchain.
There are a few different ways that layer 2 solutions work called rollups. The main ways are optimistic rollups, and zero-knowledge rollups. They achieve the same basic thing, which is to take a bunch of little transactions, package them up, and send them to the main chain as one transaction.
Optimistic rollups are smart contracts that receive transactions that are verified by validators on their network through their own method of consensus, mainly proof of stake. Once the contract has enough transactions, they are sent to the main blockchain as one large transaction. The whole process is completed on the main chain. This means low gas fees and increased scalability, but means longer withdrawal times (though that means nothing to the end user).
Zero-knowledge rollups (zkRollups) can be completed on-chain and off-chain. On-chain takes advantage of smart contracts, which will store both accounts and balances. The transactions themselves are done off-chain, sometimes using a different token to pay for transaction fees. Again, once enough transactions have been processed they will be sent to the main chain. This means near instant transactions, lower gas fees, and less vulnerability to attacks.
The Bitcoin Lightning Network is a very popular layer 2 solution for, you guessed it, Bitcoin. At times of high demand, it can take hours to process a Bitcoin transaction. Many believers think that Bitcoin will become the world’s currency in the future, but that won’t work if it can’t even process 5 transactions per second. Just to compare, Visa can process something like 20,000 transactions per second. Thus, the Bitcoin Lightning Network was created to scale Bitcoin. This off-chain network packages up Bitcoin transactions between users and then sends them to the main Bitcoin blockchain.
There are a few popular layer 2 cryptocurrencies. My two favorites are
Polygon and Loopring. Polygon aims to speed up transactions over the Ethereum network, and uses zkRollups to reach up to 7,000 transactions per second. Loopring also attempts to scale Ethereum by allowing users to build decentralized exchanges, and makes use of zkRollups to allow thousands of transactions per second at the cost of less than a penny.
Layer 3 (L3)
Finally, the last blockchain layer (for now) is layer 3. This is the application layer. These decentralized apps (dApps) are usually built on layer 1 or layer 2 and are visual tools that allow users to interact with blockchains. Basically, layer 3 is the user interface and they help create real world uses for blockchains.
Applications on layer 3 use smart contracts, and can be anything from decentralized finance, to decentralized exchanges, to NFT marketplaces, to play-to-earn games, to storage apps. It’s like downloading an app off of the App store. You can interact with the application without knowing anything about the code running underneath.
One of the main selling points of layer 3 is cross-chain functionality, which means that users can exchange data from multiple blockchains on a single application. Similar to L2s, these L3 apps will process transactions on their own platforms and then send them to the main chain when needed.
Only certain layer 1 networks allow layer 3 applications to be built on them. For example, Ethereum and Cardano allow applications to be built on them, but Bitcoin does not because it was never designed to.
Some popular layer 3 cryptocurrencies include UniSwap, Yearn, SundaeSwap, Aave, Decentaland, and The Sandbox.
Summary
Blockchain layers are a way to help us understand how a blockchain is built and run.
Layer 0 blockchains are those that allow the exchange of data between other separate blockchains, or allow blockchains to be built on top of them to take advantage of their scalability. Polkadot is a popular layer 0 blockchain.
Layer 1 blockchains are a foundational layer that is responsible for validating transactions sent across its network. Bitcoin and Ethereum are the most popular layer 1 cryptocurrency.
Layer 2 solutions are a solution to layer 1’s scalability problem. They wrap a bunch of transactions into one and send that to the main chain, which improves speed and reduces costs for the users. Polygon, Loopring, and the Bitcoin Lightning Network are popular layer 2 solutions.
Layer 3 is the application layer. This is the layer that the end user will see and interact with. The applications built on this layer can be anything from dApps, to DeFi, to play to earn games. Popular L3 cryptos are Uniswap, Aave, and Decentraland.
Now that you know all about blockchain layers, learn about
different types of cryptocurrency next!
