Blockchain technology has been around for over a decade, and it has been widely adopted across various industries. However, technology has grown and evolved into different layers, each with its unique characteristics and purposes. The layers are referred to as Layer 0, Layer 1, Layer 2, and Layer 3. In this article, we will explore each layer in detail.
What are Blockchain layers?
Blockchain technology has brought about a revolutionary change in the world of finance and beyond. However, the complexity of the technology can be intimidating for newcomers, especially when trying to understand the different layers that make up the blockchain ecosystem.
When most people think of cryptocurrencies, they tend to focus on market capitalization, which can be misleading. The value of a cryptocurrency isn’t just determined by its market capitalization; it’s also influenced by the specific problem it solves, its underlying technology and the layer of the blockchain ecosystem it occupies.
Blockchain layers are the different levels of infrastructure that work together to enable the operation of a blockchain-based system. Each layer builds on top of the previous one, with each layer leveraging the infrastructure of the previous layer.
To make it easier to understand, the blockchain ecosystem is often divided into four layers:
Layer 0 – Software Infrastructure
Layer 0 refers to all digital technologies that make blockchains possible. The goal of Layer 0 is to make blockchain networks functional, accessible, and interoperable. Achieving this allows developers to find more innovation opportunities, creating more token utility for users. Layer 0 makes possible functional blockchains via physical infrastructures such as hardware, electricity, and Internet services. Decentralization is a significant difference between traditional telecom companies and Layer 0 projects. Layer 0 protocols allow blockchains to communicate better, so they can synergize and use each others’ dApp ecosystem.
The value of Layer 0 is cross-chain interoperability protocols (CCIP). Interoperable blockchains can seamlessly transfer information and tokens that aren’t necessarily compatible. Polkadot, Cosmos, and Chain Link are examples of CCIP projects that provide off-chain data to apps and blockchains.
Layer 1 – Blockchains/Networks
Layer 1 projects are blockchains. Public blockchains are digital ledgers designed to easily read or add financial data and prevent changing the existing one. Each blockchain has a different consensus model to agree on what data to add, along with smart contracts to automate transactions without third-party intervention. Unlike applications, smart contracts are autonomous programs that don’t interact with users directly. Some smart contracts, like Bitcoin’s, only allow basic payments, while others, like Ethereum’s, allow developers to create complex applications.
Other Layer 1 blockchains include Solana, Binance Chain, Ripple, Monero, and Litecoin. Developers choose a blockchain based on their architecture, and each network gives priority to scalability, security, and decentralization.
Layer 2 – Sub-Blockchains (or software upgrades)
When blockchain developers use other blockchains to build their own, they are called Layer 2 blockchains. Because they use infrastructure from Layer 1 blockchains, they are more scalable and efficient. For example, Ethereum has L2 blockchains Polygon, Arbitrum, and Optimism, which are faster and cheaper. However, they are more centralized because of their smaller size. This dependence also means that L2s cannot run when L1s are down. Inversely, many L2s are experimental networks, so there’s no guarantee they’ll be as secure as L1 blockchains.
L1 blockchains have regular updates set by the community, such as Ethereum 2.0 or Bitcoin Taproot. Flexible blockchains become more secure and decentralized over time. On immutable blockchains like Ethereum, smart contracts prevent such changes. Instead, developer communities create hard forks like PulseChain. A fork blockchain is a variant of the original blockchain that involves new features and code tweaks, thus having different scalability, security, and decentralization. The teams that design Layer 2 and fork chains are often unrelated to Layer 1 founders.
Layer 3 – Decentralized Applications (DApps)
Layer 3 is where the action happens. Decentralized applications (DApps) built on top of blockchains are the main attraction of Layer 3. DApps are software applications that run on a blockchain network and provide a decentralized user experience. They range from simple applications like cryptocurrency wallets to complex financial applications like decentralized exchanges, lending protocols, and prediction markets.
DApps are built on top of different blockchains, and each blockchain has a different consensus model and smart contract capabilities. Ethereum is the most popular blockchain for
It’s important to note that each layer serves a unique purpose and is essential to the operation of the blockchain ecosystem. Without a strong foundation in the lower layers, the upper layers would not be able to function properly. Therefore, it’s crucial to have a good understanding of each layer to fully appreciate the potential of blockchain technology.
Don’t Be Left Behind
As the digital economy continues to evolve, it’s evident that the blockchain is playing a major role. To successfully take advantage of this and build your layer3 solutions, you’d need reliable blockchain infrastructure for seamless access to multiple blockchains, and networks and that’s what Bitpowr provides. And if you already run a DeFi-based business or are looking to kickstart one, we also have all you need to run and scale your digital asset business easily, quickly, and cost-effectively. Let’s chat here.