A primer on the layers of blockchain technology for beginners

A distinctive fusion of contemporary technologies, including game theory and cryptography is blockchain technology. Blockchain technology thus has a wide range of applications, including the most recent fintech fad, cryptocurrencies. For those who are unfamiliar with the terms cryptography and game theory, cryptography simply refers to the encrypting and decrypting of data, while game theory is the study of the mathematical representations of rational decision-makers interacting strategically.

Recognizing the blockchain’s layers

Layer one and layer two protocols are undoubtedly familiar to anyone who has done any research on cryptocurrency or blockchain. Are you interested in learning more about these levels and their purpose? In this essay, let’s talk about the blockchain layer architecture.

Cryptography, game theory, and other modern technologies have been uniquely combined to create blockchain technology, which has a wide range of potential uses, including cryptocurrency. Cryptography is a mathematics and computer science branch that deals with encoding and decoding data. Game theory is the study of mathematical representations of rational decision-makers interacting strategically. By offering transparency and security, blockchain reduces the need for intermediaries, decreases costs, and increases efficiency.

If you’ve done any research on cryptocurrency or blockchain, Distributed ledger technology (DLT) maintains data that has been cryptographically validated among a group of users who have consented through a predetermined network protocol without the oversight of a central authority. By combining these technologies, trust is fostered amongst individuals or groups that otherwise wouldn’t have any incentive to do so. 

Blockchains must be incredibly secure because there is no central authority, hence they must be. They also need to be very scalable to accommodate growing user counts, transaction volumes, and other data. Layers were developed in response to the need for scalability while maintaining the highest level of security. I’m sure you’ve heard of the terminology.

How can a blockchain be scaled?

In blockchain technology, the term “scaling” refers to a rise in the rate of system throughput, expressed in transactions per second. Blockchain layers are now necessary due to the growing use of cryptocurrencies in daily life to enhance network security, recordkeeping, and other features.

“Throughput” is the number of transactions processed by a system each second. The primary chain of Bitcoin (BTC) cannot perform more than seven transactions per second, whereas Visa’s VisaNet electronic payment network can process over 20,000 transactions per second.

The foundation of a decentralized ecosystem is the blockchain. When layer one and layer two are combined, the number of nodes and, consequently, the system throughput, are increased. There is numerous layer-two blockchain technology in use right now. These systems automate transactions through the use of smart contracts.

As Bitcoin becomes a more powerful force in the commercial sector, blockchain developers are attempting to expand the scope of blockchain administration. Through the development of blockchain layers and the enhancement of layer two scalabilities, they intend to decrease processing times and boost TPS.

The trilemma of blockchain

The blockchain trilemma refers to the widely accepted idea that decentralized networks can only offer two out of the three advantages of decentralization, security, and scalability at any given moment.

The consistency, availability, and partition tolerance (CAP) theorem was developed by computer scientists in the 1980s to define what may be the most critical of these challenges. The CAP theorem asserts that only two of the three aforementioned guarantees may be met concurrently by decentralized data storage, such as blockchain.

In the context of modern distributed networks, this theory has developed into the blockchain trilemma. The widely accepted belief is that security, decentralization, or scalability must be compromised in public blockchain infrastructure.

As a result, building an internet-scale transactional throughput network with unbreakable security over a globally decentralized network is the holy grail of blockchain technology.

Let’s first define scalability, security, and decentralization in broad terms before exploring the dynamics of the trilemma:

• The scalability of the blockchain is the capacity to handle a larger number of transactions.
• Security is the capacity to protect data on the blockchain from various forms of attacks and the capability of the blockchain to prevent double-spending.
• Decentralization is a sort of network redundancy that makes sure the network isn’t controlled by just a few people or organizations.

Scalability, security, and decentralization interactions

The network must first accept a transaction’s validity before it can be settled. If the system has a lot of users, the agreement could take some time. As a result, we can demonstrate that, when security criteria are the same, scalability is inversely proportional to decentralization.

Now let’s assume that the level of decentralization in two proof-of-work blockchains is the same and that the hash rate of the blockchain serves as a proxy for security. Scalability increases as security increases, and confirmation time lowers as the hash rate increases. Scalability and security there, fore increase with ongoing decentralization.

A blockchain must therefore make trade-offs because it is unable to concurrently optimize for all three desirable qualities. The trilemma’s most recent application can be seen in Ethereum. This summer has witnessed a surge in the use of decentralized finance (Defi) applications, which has resulted in increased utilization of the Ethereum platform. Ethereum can only increase so much.

Transaction costs have escalated as a result of the increased demand to the point where some people are no longer able to use the blockchain. The trilemma is illustrated by increased Ethereum fees, as it is clear that scaling Ethereum did not come at the expense of security or decentralization.

With a cap on transactions per second, Ethereum placed a strong emphasis on decentralization and security (scalability). Users pay greater fees to persuade miners to give their transactions priority. Similar to Bitcoin, decentralization, and security have been prioritized over scalability.

The current scalability of blockchains like Bitcoin and Ethereum is well known to be constrained. To overcome the blockchain trilemma, a global community of IT corporations, startups, and researchers is frantically creating layer one and layer two solutions.

Blockchain networks at layer one are built for speed, security, and expansion. Technology advancements and solutions that can be used to increase the scalability of current blockchain networks are referred to as layer two. A breakthrough in blockchain acceptance and the growth of decentralized networks could come from finding the ideal balance between the two layers.

The problem is being approached by developers in many different ways. To strengthen Bitcoin’s scalability, Bitcoin Cash (BCH) introduced larger blocks. However, there is no proof that its popularity is rising.

To address the problem, Bitcoin plans to add a layer to the present blockchain layer. The idea behind scaling solutions is that the layer two solutions will group several transactions together and only periodically query the base layer blockchain. With sharding scaling the base layer blockchain and the community anticipating various layer two solutions to increase throughput even more, Ethereum is adopting a hybrid strategy.

The blockchain architecture’s tiered structure

Each network participant in the dispersed network of the blockchain architecture maintains, approves, and updates new entries. A collection of blocks with transactions listed in a specific order represent the structure of blockchain technology. These lists can be saved as a flat file or a simple database (in text format). A blockchain’s architecture may be public, private, or consortium-based.

Some blockchain experts claim that blockchain technology consists of five layers:

• Infrastructure or hardware layer
• Data layer
• Network layer
• Consensus layer
• Application and presentation layers

Blockchain technology layers, however, can also be grouped into:

• Layer 0
• Layer 1 
• Layer 2 
• Layer 3

Hardware foundation layer

The content of the blockchain is kept on a server at a data center somewhere on this beautiful planet. When consumers browse the web or use any apps to request material or data from application servers, the client-server architecture is employed.

Now, clients can communicate with one another and exchange data. A vast network of computers that share data is known as a peer-to-peer (P2P) network. A shared ledger of transactions is computed, verified, ordered recorded via a peer-to-peer computer network called the blockchain. As a result, a distributed database is used to store all information, transactions, and other pertinent data. A computer serves as a node in a P2P network.

 Data layer 

An ordered linked list of blocks is the definition of the data structure of a blockchain. The two major elements of the blockchain’s data structure are pointers and linked lists. A linked list is a collection of linked blocks that each contain data and a pointer to the block before it.

A linked list is a collection of chained blocks that each contain data and a pointer to the block before it. A binary tree of hashes is the Merkle tree. Each block includes the Merkle tree’s root hash in addition to the hash, timestamp, nonce, block version number, and current difficulty target from the previous block.

The Merkle tree, cryptography, and consensus algorithms make up the blockchain system. The genesis block, or first block, lacks the pointer because it is the first in the chain.

To guarantee the integrity and security of the data present in the blockchain, transactions are digitally signed. A private key is used to sign transactions, and anyone possessing a public key can verify the signer. The digital signature can identify information alteration. By encrypting and signing the encrypted data, digital signatures provide unity assurance. Therefore, any tampering renders the signature invalid.

Since the data is encrypted, it cannot be found. Even if it is discovered, it cannot be tampered with once more. A digital signature also conceals the sender’s or owner’s identity. Therefore, a signature is inextricably linked to its owner and cannot be disregarded.

Network layer

Inter-node communication is handled by the network layer, often known as the P2P layer. Block propagation, transactions, and discovery are controlled at the network layer. The propagation layer is another name for this layer.

This P2P layer makes sure that nodes may connect, communicate, share, and synchronize to maintain the integrity of the blockchain network. In a P2P network, nodes are distributed and share network workloads to achieve a common objective.  Nodes process transactions on the blockchain.

Consulting layer

For blockchain platforms to function, the consensus layer is necessary. The consensus layer is the most crucial and necessary component of all blockchains, including Ethereum, Hyperledger, and others. The consensus layer arranges, verifies, and ensures that the blocks are placed in the proper order.

Application layer

The application layer is composed of smart contracts, chain code, and decentralized apps (DApps). The application and execution layers are further separated into the application layer protocols. The software that end users use to interact with the blockchain network is included in the application layer. It includes user interfaces, frameworks, application programming interfaces (APIs), and scripts.

The blockchain network serves as the back-end technology for these applications, and they communicate with it through APIs. Chain code, smart contracts, and underlying logic are all parts of the execution layer.

Even though a transaction moves from the application layer to the execution layer, it is still accepted and executed at the semantic layer. Applications control the execution layer, which executes commands and upholds the blockchain’s determinism.

Explaining blockchain layering

Layer 0 

Blockchain layer zero is made up of the elements that make blockchain possible. Blockchain networks like Bitcoin, Ethereum, and others can function because of this technology. Layer 0 components include the hardware, connectivity, and internet that support layer one. 

Layer 1

The security of this layer’s foundation rests on its immutability. When individuals use the term “Ethereum,” they are referring to layer one, or the Ethereum network. A blockchain network’s fundamental operation is maintained by this layer, which is in charge of consensus procedures, programming languages, block times, dispute resolution, and other guidelines and limitations. Additionally called the implementation layer. An illustration of a layer one blockchain is Bitcoin.

difficulties with layer one

When combined, these scaling techniques increase the network’s throughput. However, layer one seems to be lacking as more people embrace blockchain technology. On the layer one blockchain, the antiquated and cumbersome proof-of-work consensus algorithm is still in use.

Although this strategy is more secure than others, its quickness is a drawback. Cryptographic methods must be solved using processing power by miners. Long-term demands for processing capacity and time increase as a result. Additionally, as the number of users has increased, so has the workload on the layer one blockchain. As a result, capacity and processing rates have slowed.

Potential remedies

Ethereum 2.0 will use a different consensus called proof-of-stake. This consensus method, which produces a more effective process, verifies fresh transaction data blocks based on the staking collateral of network users.

Sharding is a scalability fix for the layer one blockchain issue. To put it simply, sharding breaks up the process of validating and authenticating transactions into more manageable pieces. The burden can then be dispersed over the network to utilize more nodes’ computational power. The parallel processing of these shards by the network enables the simultaneous and sequential processing of many transactions.

Layer 2

L2 solutions are overlapping networks that are positioned above the base layer. By transferring some interactions from the base layer to layer two, protocols can scale better. Therefore, the principal blockchain protocol’s smart contracts solely handle deposits and withdrawals and make sure that off-chain transactions adhere to the rules. Layer two blockchains, like the Lightning Network used by Bitcoin, are an example.

What distinguishes layer one from layer two blockchains, then? The foundation of a decentralized ecosystem is the blockchain. When layer one and layer two are combined, the number of nodes and, consequently, the system throughput, are increased. Currently, many layer-two blockchain technologies are in use.

Scaling solutions for layers two

The adoption of layer two protocols has skyrocketed recently, and they are proven to be the best method for addressing scalability problems, particularly in PoW networks. The sections below provide explanations of several layer two scaling solutions.

Blockchain with nodes

Layer two blockchains are nested one on top of the other. In essence, layer one creates the conditions, whereas layer two performs the actions. There could be numerous blockchain levels on a single mainchain. Think of it as a conventional company organization.

The manager distributed responsibilities to subordinates, who then reported back to the management when they were finished, rather than having one person (such as the manager) handle all of the work. The manager’s workload is thereby decreased, and scalability is enhanced. For instance, the OMG Plasma Project functions as a level two blockchain for the level one Ethereum protocol, enabling less expensive and quicker transactions.

Channel states

By enabling two-way communication between a blockchain and off-chain transactional channels via various methods, a state channel increases overall transaction volume and speed. The miner does not have to get engaged immediately away to validate a transaction over a state channel.

Instead, a multi-signature or smart contract technique is used to protect a network-adjacent resource. When a transaction or batch of transactions is completed on a state channel, the “channel’s” final “state” and all associated transitions are posted to the underlying blockchain.

Sidechains

In addition to the blockchain, a sidechain is a different transactional chain that handles a very high volume of transactions. A utility token is typically used as part of the data transfer mechanism between side and main chains, and side chains have their consensus algorithm that can be modified for speed and scalability. The main chain’s primary duties include providing all-around security and conflict resolution.

Sidechains are distinct from state channels in many significant respects. To begin with, sidechain transactions are public on the ledger and are not private between participants. The mainchain and other sidechains are unaffected by security flaws on sidechains, as well. It takes a lot of time and effort to construct a sidechain from the ground up.

Examples of state channels include Ethereum’s Raiden Network and Bitcoin Lightning. State channels trade off some decentralization for greater scalability in the trilemma tradeoff.

Rollups

By doing transactions outside of the layer one network and uploading the resulting data to the layer two blockchains, rollups are layer two blockchain scaling options. Rollups can be kept secure by Layer One because the data resides on the base layer.

Rollups help to increase transaction throughput, open participation and reduce gas prices, all of which are advantageous to users.

Layer 3

Layer three, or L3, is frequently used to refer to the application layer. The L3 projects serve as a user interface while hiding the communication channel’s technical details. L3 apps, as defined by the layered nature of the blockchain architecture, are what give blockchains their usefulness in real-world applications.

Can we resolve the blockchain trilemma?

The issues with distributed data storage from which blockchains were formed were passed on to them. The phrase “blockchain trilemma” was created to categorize these challenges and associated issues for easier understanding.

The term “trilemma” has persisted, however, the blockchain trilemma is an assumption. Based on preliminary data, it is suspected that this idea is true, although it hasn’t been established either way. Even though layer one and layer two solutions have already seen some success, more study is still required.

FAQS:

Who is the blockchain king?

The assumed pseudonymous individual or individuals that founded bitcoin, wrote the bitcoin white paper, and built and implemented bitcoin’s original reference implementation went by the moniker Satoshi Nakamoto (born 5 April 1975). The first blockchain database was also created by Nakamoto as part of the implementation.

Define the Dogecoin layer 

On the other side, Dogecoin is more scalable because it doesn’t require a second network thanks to its layer-one protocol. The latter is thought to be superior, as it normally shouldn’t rely on a third-party solution. The fundamental blockchain architecture is referred to as layer one.

What kind of database does blockchain use?

The cloud-based database-as-a-service from MongoDB, MongoDB Atlas, is ideal for storing a blockchain ledger. It is simple to store complicated items like transactions thanks to its flexible structure.

Summary of findings

Scalability is one of the factors preventing mainstream crypto adoption in the blockchain industry today. As demand for cryptocurrencies increases, so will the desire to build blockchain technology. Building a scalable system is the only way to solve the scalability trilemma because each level of the blockchain has its own set of limitations.

The first layer is essential for the blockchain ecosystem since it forms the basis for all decentralized systems. The scaling issues with the underlying blockchain are resolved by layer two protocols. Unfortunately, the majority of layer three protocols (DApps) now only operate on layer one and ignore layer two. Therefore, it makes sense if these systems aren’t living up to our expectations.

In contrast to conventional networks, they won’t be able to extract nearly as much value as the underlying blockchain.

Blockchain technology is now quite advanced and in its infancy. As a result, the development of the blockchain will take years.

To better understand the idea, it would be helpful to divide the numerous underlying elements that make up a blockchain into technical layers.

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