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February 28, 2023

5 Blockchain Layers You Should Know in 2023

Innovations in blockchain have grown rapidly in recent years. While this growth has brought blockchain technology to new industries and use cases, it has also led to the development of blockchain layers.

Blockchain layers are proposed solutions to the scalability of the technology. While there are currently Layer 1 and Layer 2 solutions, to understand them better, it is important to understand the necessary blockchain layers that work together.

In this article, we will explore the five layers that structure this technology, how they interact with each other to create a blockchain solution.

What are blockchain layers?

Blockchain technology is a unique mix of several technologies that work together. All transactions in blockchain are safeguarded and securely stored on a distributed ledger.

The distributed ledger technology (DLT) operates on a pre-defined protocol with several computers or nodes responsible for adding, verifying and validating every transaction that occurs on the network.

Blockchains use a layered design to support this method of authentication. There are five blockchain layers involved and each has a function to perform. Let’s take a look at each blockchain layer and what it does.

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The 5 layers in blockchain technology architecture

  1. Hardware infrastructure layer 
  2. Data layer
  3. Network layer
  4. Consensus layer
  5. Application layer

Each blockchain layer has a function and purpose that helps the blockchain solution work. We will go into more detail about each blockchain layer below.

layered structure of blockchain architecture

1. Hardware infrastructure layer 

The hardware infrastructure layer is the most fundamental blockchain layer. It houses the nodes that process and store blockchain transactions. When content or data is requested from application servers while browsing the net or utilizing any app, the client connects with peers and shares data.

Node?In blockchain parlance, a node is a person or an entity who verifies the legality of a new block, and all the transactions in it. By legality, we mean the technical legality and not the laws of the land. They are rewarded for this responsibility, and penalized if they act with negligence or malafide intent. 

A salient feature of blockchains is that regardless of which node validates a block, the information of the block needs to be updated to all nodes. Hence, the validator node acts as a server, while the updating nodes act as a client in this case. This is an interesting system where each node can act as both a client and server. The main purpose of this layer is to keep the blockchain distributed ledger tamper-proof by validating and storing blockchain transactions in a decentralized manner.

And therefore, a distributed database is created that stores all data in blockchain format which is chronological and transparent. All data or transactions that take place on the blockchain are verified by this layer through consensus mechanisms.

Server?A server is a computer that serves data. The data could be an image, video, webpage stored on the computer, served at clients request.
Client?A client is the computer, running an application that requires inputs from the server. 

2. Data layer

The data layer is the second blockchain layer. This is where all node validated blockchain transactions are stored in a digital ledger. Once validated, the transaction is then bundled into a block with other validated transactions and added to the blockchain.

The data layer is important because it ensures that all blockchain transactions are transparent and immutable. This means that once a transaction is added to the blockchain, it cannot be changed or deleted.

3. Network layer

The network layer is the third blockchain layer and is commonly referred to as a P2P layer. This layer is responsible for connecting all the nodes in the blockchain network together. Discovery, transactions and block propagation are all handled by the network layer.

This layer ensures that nodes can find one another and interact with each other in order to exchange blockchain data. The network layer is also responsible for relaying messages that help in validating transactions and blocks before they are added to the blockchain.

In order for a transaction to be added to the blockchain, it must first be broadcasted to all nodes in the network. Once the transaction has been validated by the consensus protocol, it is then broadcasted again to all nodes so that they can add it to their blockchain copy.

4. Consensus layer

The consensus layer is the fourth blockchain layer and is responsible for ensuring that all blockchain transactions are valid. This is done through a consensus algorithm which allows nodes to reach agreement on the order of blockchain transactions.

The most common consensus algorithm used in blockchain networks is Proof of Work (PoW). Under this algorithm, nodes compete against each other to validate transactions and add them to the blockchain. The node that wins the race is rewarded with a cryptocurrency.

Other consensus algorithms include Proof of Stake (PoS), Delegated Proof of Stake (DPoS) and Practical Byzantine Fault Tolerance (PBFT).

5. Application layer

The application layer is the fifth blockchain layer and is where most people interact with blockchain technology. This layer consists of smart contracts, chaincode and decentralized applications (DApps). Scripts, application programming interfaces (APIs), user interfaces and frameworks are all part of it.

The application layer is important because it enables people to build and use blockchain applications. without this layer, blockchain would be nothing more than a distributed database.

Understanding Blockchain Layers

You’ve probably come across terms like L1, L2 and L3 blockchain before. These terms refer to blockchain layers that are built on top of the base layers that we discussed. Since we have an overview of the layers that form the blockchain architecture, let’s take a closer look at some of the components of blockchain.

Layer 0 (L0)

This is where the internet, hardware and connections  that blockchain needs to function are found. The blockchain network is the most important thing at this stage, as it is the foundation of everything that happens on the blockchain. Here are some of the activities that can be performed in L0:

  • Blockchains can interact with each other
  • Enables faster and cheaper transactions
  • Provides infrastructure for developers

Layer 1 (L1)

Layer 1 includes blockchains that process and finalize transactions on their own blockchain. This is where consensus and other technical aspects like block time, dispute resolution, etc. come into play. Bitcoin and Ethereum are examples of L1 blockchains.

The three most important aspects of blockchain is conquering the blockchain trilemma:

  • Decentralization
  • Security and
  • Scalability

Technically, it is believed that a decentralized blockchain may not be scalable, while a scalable blockchain may not be secure. A secure blockchain may be decentralized, but not scalable. A case in point is Bitcoin’s unparalleled decentralization and security, but slow block times making it redundant for mass scaling. Solana on the other hand is posited as a scalable and secure blockchain, but very evidently lacks decentralization.

blockchain trilemma

Layer 1 blockchain typically have their own cryptocurrency that is used to pay for transaction fees. They also tend to be more secure than other blockchain layers, as they are not reliant on other blockchain networks.

Layer 2 (L2)

Layer 2 are third-party integrations used in conjunction with L1 to increase  performance and scalability. The most popular Layer 2 solutions are Optimism, Polygon, Starknet, and Arbitrum.

Layer 2 solutions aim to improve blockchain performance without sacrificing decentralization or security. They do this by off-loading some of the work onto a separate network or layer.

Layer 3 (L3)

This is the application layer, where blockchain-based applications, like smart contracts are built. These could be anything from a cryptocurrency wallet to a decentralized exchange. The most popular blockchain application is probably the Ethereum blockchain, which has hundreds of different applications built on top of it. Basically it is a UI that consumers or users usually interact with.

Blockchain applications are usually developed using smart contracts. A smart contract is a piece of code that is executed when certain conditions are met. For example, a smart contract could be used to send money from one person to another when both parties agree to the terms of the contract.

While certain blockchains, such as Ethereum or Solana (SOL), have a robust ecosystem of layer 3 applications, Bitcoin is not designed to support such applications.

L1, L2 and L3 overview

Scalability:  The ability to process more transactions per second. Decentralized but slow with around 10-20 TPS.More scalable than L1 but still decentralized. Can achieve around 100-1000 TPS. Centralized but very scalable. Can handle millions of TPS. 
Decentralization: The number of entities that control the network.
Fully decentralized with thousands of entities running nodes. Partially decentralized with a few entities running nodes. Centralized with one entity running most of the nodes. 
Security: The risk of losing funds due to hacks or fraud.Highly secure as it is very hard to 51% attack the network. Less secure than L1 as fewer entities are running nodes. Least secure as there is only one entity running nodes. 

The Bottom Line

The distinctions between blockchain layers are mostly related to scalability and interaction with dApps. However, when all of the layers are considered, they individually serve as independent levels of improvement on a blockchain system.

The ever expanding blockchain ecosystem which includes novel solutions like DeFi, NFTs and cryptocurrency is attracting  more users and developers to the space. Many well-known organizations are also taking a step towards accepting cryptocurrency as  a mode of payment towards their employees. 

The blockchain industry is expected to grow even more in the coming years, and it will be interesting to see how the different blockchain layers evolve to meet the needs of this growing ecosystem.

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