Crypto Layers Simplified: Layer 0 vs Layer 1 vs Layer 2 vs Layer 3
You’ve finally wrapped your head around blockchain (well you think you have), and then you come to find that there are also layers too!!! Do not fear MrBlogALot will explain all.
AIMS
- Define and explain Protocols (you will keep hearing this word pop up so you need to understand it, don’t blame me I don’t make the rules)
- Explain what layer 0, layer 1 & layer 2 & layer 3 are
- Purpose of each layer
- Provide fancy Web3 examples
- Provide real-life examples so you can actually visualize it in your head and understand how it works (this is where you would get your money's worth… but this article is free)
- Differences between each layer
- Interoperability: Layer 0 vs Layer 2
What are protocols?
Protocols — set of rules that computers and applications abide by to communicate and work together, it's essentially just the language they use to communicate.
Example: Bitcoin Protocol — Transaction Processing
What the protocol does: the protocol defines how transactions are made, verified, and added to the blockchain. In the context of crypto, the protocol sets the rules out for how the blockchain operates. It can define how transactions are made, verified, and added to the blockchain. Satoshi Nakamoto's whitepaper outlined a set of computational rules (protocol) that established how the BITCOIN blockchain would operate. The Bitcoin blockchain would work like a ledger, tracking every BITCOIN transaction, it would self-verify and be constantly checked and secured by the computing power of the entire p2p network it operated on. The miners whose computers help maintain the Bitcoin blockchain would be rewarded in Bitcoin. These collective rules formed the Bitcoin protocol.
Simple Analogy: a rulebook that explains the rules of the game, in the context of transaction processing, it would explain how players can make moves and what moves are illegal or legal.
If you still don’t understand how a protocol works in the context of crypto; transaction processing is just one of the examples, here are a few others:
Creating New Coins (Mining or Staking)
What the protocol does: sets rules for how new coins are created, whether through mining (like Bitcoin) or staking (like in some newer cryptocurrencies).
Simple Analogy: A board game that has rules about how and when players can earn points.
Maintaining Security and Integrity
What the protocol does: rules to secure the network against fraud and ensure that all transactions are legitimate.
Simple Analogy: rules that prevent cheating and ensure fair play.
Consensus Mechanism
What the protocol does: determines how agreement is reached among all participants in regard to the record of all transactions on the ledger.
Simple Analogy: players agree on the score in a game.
Summary:
A crypto protocol is essentially the rulebook of a digital currency, that all participants in the network have to follow. It defines how transactions are conducted, how the network stays secure, how new coins are made, and how everyone agrees on the current state of the ledger. The protocol ensures that the cryptocurrency operates efficiently, securely, and fairly.
Blockchain Layers Explained
There are 4 layers to a blockchain: Layers 0, 1, 2, and 3.
I will be using the analogy of a house, as it helps me visualize how these layers operate.
Layer 0
The foundational network infrastructure in which blockchains are built, it is the underlying framework that supports layer 1 blockchains. Consists of hardware and networking technologies (like internet protocols, servers, and connectivity) that enable blockchain networks to function.
Function: facilitates interoperability and communication between different blockchain networks.
Why can’t different blockchain networks communicate with one another?
Because they are written in different coding languages, and these different languages can’t communicate with one another. Just as if you can only speak English, you wouldn’t be able to communicate with someone who only speaks Mandarin. Layer 0 attempts to solve this lack of interoperability.
Examples of layer 0 blockchains:
- Avalanche: provides a framework on which dApps can be built.
- Cosmos: connects layer 1 blockchain so they can interact with one another.
- Polkadot: uses ‘para-chains’ to facilitate the interoperability of different blockchain networks.
House Analogy: layer 0 is the literal foundation of a house, the concrete, the soil, and the physical base that supports the entire structure of the house.
Takeaways: I want you to remember two words when you think about layer 0 and these are:
- FOUNDATION
- INTEROPERABILITY
Layer 1
The primary blockchain layer which builds upon the foundation.
House Analogy: framework of a house — the walls, floors, and roof.
Function: execute and verify transactions, maintain a distributed ledger, and store the entire transaction history.
Transaction execution and verification
Layer 1 blockchains process and validate transactions using their own specific consensus mechanism. For example, Bitcoin uses a Proof of Work (PoW) consensus mechanism to validate transactions. This is where miners, who are participants in the bitcoin blockchain network compete to be the first to solve a 64-digital hexadecimal number (hash). The first one to solve the mathematical, 64-digital hexadecimal problem earns the right to form a new block and confirm the transaction. They also receive a reward in the form of a block reward (bitcoin).
Layer 1 blockchains have their own cryptocurrencies native to their blockchain which facilitate transactions. Examples of layer 1 blockchains include:
- Bitcoin: the world's largest cryptocurrency, which has experienced issues with scalability i.e. it couldn’t process enough transactions quickly enough, hence why layer 2 blockchain solutions were created.
- Ethereum: layer 1 blockchain which runs on Ethereum protocol.
- Solana: scalable layer 1 blockchain that was built specifically for scalability and is capable of 65,000 transactions per second at low cost.
One of the main problems with layer 1 blockchains is scalability. In the context of crypto, this meant that as cryptocurrencies such as Bitcoin and Ethereum became more popular, the blockchain couldn’t handle the increased popularity and could only handle a number of transactions per second. It’s similar to when the servers crash when a new game is released, the servers can’t handle the excess players, because the game developers didn’t create the servers to handle (for example) 10000 players online at one time, as they didn’t think/expect the game would reach that level of popularity.
Scalability — the ability of a cryptocurrency to handle (process) a large number of transactions.
Layer 2
Blockchains/solutions which are built on top of layer blockchains.
House Analogy: the installation of a house; the plumbing, electrical systems, heating, and cooling in a house. These systems make the house livable and functional but aren’t the basic structure.
Purpose: increase the capability of the number of transactions per second the blockchain can handle (scalability) whilst also improving interoperability, and aiming to maintain the security and decentralization of layer 1.
Note: Layer 2 solutions are commonly referred to as OFF-CHAIN SOLUTIONS
Scalability
Layer 2 solutions help improve transaction speed and scalability by moving transactions off the main blockchain and onto layer 2 networks which are more efficient, but the final outcome is recorded on the layer 1 blockchain.
Examples of layer 2 blockchains:
- Polygon: Layer 2 blockchain which aims to improve Ethereum’s scalability through faster transaction speeds and lower costs for developers.
- Arbitrum: layer 2 solution (blockchain) for Ethereum blockchain, designed to improve the speed of transactions, decrease fees, increase scalability, and boost network privacy and security.
There are different types of layer 2 solutions:
- State channels
- Side chains
- Off-chain protocols
State Channels
Off-chain channels which are like side paths separate from the main blockchain, which allow participants to conduct multiple transactions without directly involving the layer 1 blockchain. However, once participants are done with the transactions in the off-chain channel, they must ‘close’ the channel, which involves ultimately recording the final state of all their transactions onto the layer 1 blockchain.
State channels purpose: handling MULTIPLE TRANSACTIONS.
Sidechains
Sidechains are like side roads that connect to the main road, they are independent blockchains that connect to the main blockchain (layer1). They operate alongside the main layer 1 chain but have their own ways of validating transactions (consensus mechanism) and rules.
Side chains also use a two-way peg system that links the main layer 1 blockchain to the sidechain, which allows assets (like cryptocurrency) to be securely moved between them. Like a checkpoint between a main road and a side road, where you can switch roads securely.
Side chains purpose: validating transactions and transferring assets.
Off-chain Protocols
Off-chain protocols enable fast and scalable transactions by conducting them off the main blockchain through establishing payment channels among participants, facilitating instant and low-cost transactions, with final settlement recorded on the layer 1 blockchain.
Examples include: Lightning Network for Bitcoin and the Raiden Network for Ethereum.
Here’s how the Lightning Network works:
- Two users agree to transfer some coins between themselves. In order to do this, they first move their coins to a special address. This is like putting their money into a shared safe where both need to agree to open it.
- The address only releases the funds when both parties agree on the conditions of the transfer. Think of it as a contract that says both parties must agree before any money moves out of the safe.
- Instead of recording every detail of their transaction on the main blockchain (layer 1), they keep a private record of their transactions. the private record is like a secret notebook that only they can see, and it doesn’t immediately tell the main layer 1 blockchain what’s happening.
- When the transfer is completed, the private ledger reports to the main blockchain. The main blockchain updates both users' balances accordingly.
Summary: transfer of funds on a unique private ledger which then notifies the main ledger (layer1 blockchain) once the transfer is complete and confirmed.
Purpose of lightning network: allows for the creation of countless unique ledgers, so thousands of transfers can occur simultaneously without slowing down the main bitcoin protocol (layer 1 blockchain) thus helping overcome the issue of scalability.
Layer 3
Layer 3 is the application layer. It is where developers create and deploy decentralized applications (dApps) and services that users interact with directly. This layer is about the end-user experience and the functionalities offered by the blockchain ecosystem. It is the layer where the end-user interacts. It is the tangible applications that users interact with i.e. the dApps.
House Analogy: the interior design, furniture, appliances, and personal touches that make the house a home. The layer is about the EXPERIENCE of living in the house, influenced by the structure, functionality, and foundation beneath it.
Remember: if the foundation is weak (layer 0), the structure (layer 1) will be compromised. Without a good structure, the systems (layer 2) will not operate well, and without the systems operating well, the usability/user experience (layer 3) of the house will be compromised.
Note: layer 3 blockchains are also referred to as application layers.
Characteristics of Layer 3:
- Focus on user interface and experience.
- Application-specific functionalities.
- Integration of blockchain technology into user-oriented services and products.
Examples of Layer 3 blockchains/protocols:
- DeFi platforms — Aave, Uniswap, Compound.
- Non-Fungible Tokens (NFT) marketplaces — OpenSea, Rarible, Foundation.
- Decentralised social media applications — Steemit, Minds, Voice.
Summary: A Comparison Of All 4 Layers
Remember the blockchain ecosystem is a multi-layered structure, think of it like an onion, or different floors in a hotel. Each layer serves distinct functions.
Layer 0: Network Layer
- Role: Layer 0 forms the underlying infrastructure that supports the blockchain ecosystem. It consists of the hardware and networking technologies (protocols, servers, connectivity) that enable blockchain networks to function.
- Similarities: fundamental to the operation of blockchain networks, just like all other layers.
- Differences: not part of the blockchain architecture itself, but supports it. Layer 0 does not deal with blockchain protocols or applications directly, rather it provides the necessary groundwork for them to operate.
Layer 1: Base Layer
- Role: core blockchain itself. Layer 1 protocols are the blockchains themselves, such as Ethereum, and Bitcoin. They define the rules for transaction validation, consensus mechanisms (proof of work or proof of stake), and the native cryptocurrency.
- Similarities: focuses on maintaining the security of the blockchain ecosystem, just like all other layers do.
- Differences: where the actual ‘blocks’ and ‘chains’ exist, recording all transactions. Layer 1 is about building the foundational blockchain network.
Layer 2: Scaling Layer
- Role: built on top of layer 1 to improve scalability and transaction speed. These are protocols or solutions like Lightning Network for Bitcoin or Plasma and Rollups for Ethereum. They handle transactions off the main chain (Layer 1) and periodically update the main chain.
- Similarities: Works in conjunction with Layer 1 to enhance the blockchain’s functionality, especially in handling transactions.
- Differences: Unlike Layer 1, it doesn’t change the fundamental protocol of the blockchain but builds on top of it to enhance performance. Layer 2 solutions are more about efficiency and scalability rather than establishing basic network rules.
Layer 3: Application Layer
- Role: Layer 3 is the application layer, where developers create specific applications like decentralized apps (DApps), NFT marketplaces, DeFi (Decentralized Finance) platforms, etc. These are built on top of Layer 1 and possibly Layer 2 infrastructures.
- Similarities: It relies on the underlying layers (Layer 1 and Layer 2) for security, consensus, and transaction verification.
- Differences: Layer 3 is focused on user interaction and experience, providing end-user applications. It’s less about the underlying blockchain technology and more about the practical use cases and interfaces that users interact with.
In summary:
- Layer 0 is about foundational network infrastructure.
- Layer 1 establishes the basic blockchain protocol and rules.
- Layer 2 enhances the scalability and speed of Layer 1.
- Layer 3 is where actual applications are developed for end-users.
Interoperability: Layer 0 vs Layer 2
The last topic I will be discussing is layer 0 vs layer 2 in regards to interoperability. A lot of people tend to get confused when it comes to the function of layer 0 vs layer 2 as they both enhance interoperability, but they do so in different ways:
Layer 0 and Interoperability
- Primary Focus: layer 0 solutions are specifically designed to ENHANCE INTEROPERABILITY among different blockchains.
- How it works: they provide a foundational structure that allows various layer 1 blockchain to communicate and interact with each other. E.g. Polkadot’s Relay Chain or Cosmos’ Tendermint enables different blockchains to transfer value and information seamlessly.
- Goal: create a network of blockchains that can work together, despite having different protocols (rules).
Layer 2 and Interoperability
- Primary Focus: layer 2 solutions' main focus is to IMPROVE SCALABILITY and TRANSACTION speed of a specific layer. However, they can also indirectly enhance interoperability (secondary function).
- How it works: By creating protocols or platforms that sit on top of a Layer 1 blockchain (like the Lightning Network for Bitcoin or Polygon for Ethereum) -> Layer 2 can enable more efficient transactions. This can also include interoperable features within the ecosystem of a particular blockchain.
- Goal: main goal is to increase scalability and handle transactions efficiently by offloading the main chain.
Key Differences:
- Scope of Interoperability: Layer 0 is designed with the broad goal of connecting different blockchains at a foundational level, whereas Layer 2’s interoperability is more focused on applications and transactions within a specific blockchain ecosystem.
- Implementation: Layer 0 solutions are more about creating a universal framework for multiple blockchains. Layer 2 solutions are developed for specific blockchains to enhance their performance.
Both layer 0 and layer 2 can improve blockchain interoperability but layer 0 focuses on creating a universal framework for where DIFFERENT blockchains can interact, while layer 2 aims to improve the efficiency of a specific blockchain, which may also include enhancing the interoperability within that specific blockchain.
