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Things you should know about Blockchain Layers

  1. Layer 0
  2. Layer 1
  3. Layer 1’s problems
  4. Solutions
  5. Layer 2
  6. Layer 2 Scaling solutions
  7. Nested blockchain
  8. State channels
  9. Sidechain
  10. Rollups
  11. Layer 3
  12. Summary

If you've been looking into crypto or blockchain, chances are you've probably come across terms like "Layer 1" and "Layer 2" protocols. So what are these layers? Let's find out in this article.

Layer 0

Layer 0 is the basic component of Blockchain. It is the underlying technology that allows networks like Bitcoin or Ethereum to go live. Layer 0 includes the Internet, hardware, and connections that allow Layer 1 of the blockchain to run on.

Layer 1

Bitcoin, Ethereum, Solana, Avalanche, BNB Chain or Terra are all Layer 1s. They are private networks and have their own ecosystems. These networks process transactions on their own blockchain and use the network's native token to pay transaction fees. Layer 1 is responsible for the consensus mechanism, programming language, blocktime, and basic rules or parameters of the blockchain network.

Layer 1’s problems

One problem Layer 1 often encounters is scalability. Networks like Bitcoin struggle to find ways to increase network throughput to handle enough transactions per second. Bitcoin uses the Proof-of-work consensus mechanism, a mechanism that requires high hardware power, and has the advantages of security and decentralization. Conversely, when the network has more users, the network has more work to do, causing slower transactions and higher gas fees.

Solutions

Proof-of-stake is an alternative consensus mechanism to Proof-of-work that Ethereum 2.0 adopts. This consensus mechanism will validate new blocks of transaction data against the collateral (stake) of network participants, resulting in a more efficient process. Many variations of Proof-of-stake have also been developed to increase the scalability of the network, including Nominated Proof-of-Stake - the consensus mechanism used by BHO Network. (For more information, visit: NPoS - What is NPoS and how does it work?)

Sharding is also a scaling solution for Layer 1 blockchains. Simply put, sharding divides the task of validating and validating transactions into smaller, more manageable chunks. As a result, the workload can be distributed across the network to optimize the computing power of more nodes. Since the network processes these shards in parallel, multiple transactions can be processed concurrently. BHO Network's BHO Chain will also aim at sharding as an important solution to increase the scalability of its network.

Layer 2

Overlapping networks that stay on top of the base layer are called Layer 2 solutions. Protocols use Layer 2 to increase scalability by removing some interactions from the base layer. As a result, smart contracts on the main blockchain protocol only handle deposits and withdrawals, while ensuring that off-chain transactions remain compliant with regulations. Bitcoin's Lightning Network is an example of a Layer 2 blockchain.

Networks built on top of Layer 1 are often referred to as Layer 2 solutions. Protocols use Layer 2 to increase scalability by reducing interaction with Layer 1. Smart contracts on the protocol will only have to handle deposits and withdrawals, to ensure off-chain transactions are properly executed. Bitcoin's Lightning Network or Ethereum's Polygon Network are Layer 2 blockchains.

To differentiate, Blockchain is the first layer in a decentralized ecosystem, Layer 2 is an integration with a 3rd party that works with Layer 1 to increase the number of nodes processing the network, thereby increasing network throughput.

Layer 2 Scaling solutions

Layer 2 protocols have become extremely popular in recent years and they are proving to be the most effective approach to solve scaling problems, especially in PoW networks. Some solutions to scale Layer 2 are:

Nested blockchain

Blockchain Layer 2 runs side by side with other layers. In essence, Layers 1 will be the ones who set the rules and settings, while Layer 2 will handle the business procedures. Thereby, the work will be divided among the layers of the network and reduce the workload on a network.

State channels

A state channel improves total transaction capacity and speed by facilitating two-way communication between the blockchain and external transaction channels through a variety of approaches. To validate transactions over the state channels, miners do not need to participate immediately.

State channels enable two-way communication between the blockchain and external channels using a variety of approaches. State channels allow a group of participants to conduct an unlimited number of private transactions off-chain. Unlike regular on-chain transactions, state channels transactions are not public.

State channel examples include Bitcoin Lightning and Ethereum's Raiden Network. In the trade-off in the blockchain trilemma, state channels give up some decentralization in exchange for scalability.

Sidechain

Sidechains are chains that run parallel to the blockchain and are used for large transaction volumes. Sidechains have their own consensus mechanism and are tunable for speed/scalability. Their utility tokens are used as part of the data transfer mechanism between the sidechain and the main chain. The main function of the chain is to ensure security and resolve conflicts.

Transactions on the sidechain will still be public on the distributed ledger. And security breaches on the sidechain do not affect the main network. Building a sidechain is quite a time-consuming and labor-intensive job.

Rollups

Rollups are Layer 2 blockchain scaling solutions that execute transactions outside of the Layer 1 network, then upload data from the transactions to the Layer 2 blockchain. Layer 1 can keep backups safe because the data is on the base class.

Users benefit from rollups because they help increase transaction throughput, and reduce gas fees.

With the growing demand for expansion, the need to develop layer 2 scaling solutions is increasingly being promoted. Currently, besides the 3 solutions above, many new effective solutions have also been developed, such as Plasma, Validium, Hybrid, and Parachain - developed by Polkadot.

Layer 3

The application layer is often referred to as Layer 3 or L3. L3 projects act as a user interface while hiding the technical aspects of the communication channel. L3 applications are what give blockchains their real-world applicability.

Summary

In order for blockchain technology to be widely adopted, the problem of scalability needs to be solved. And since both Layer 1 and Layer 2 have limitations, it is essential to develop a system that combines the two.

Layer 1 is crucial as it serves as the foundation for decentralized systems. The fundamental scalability issues of blockchain are solved through Layer 2 protocols. Most Layer 3 protocols (DApps) currently run only on Layer 1 and ignore Layer 2. The three are all important because they help develop real-world applications for blockchains.

Published on May 03, 2022

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