Blockchain has been hailed as the most revolutionary in the past ten years. Most likely to be impacted are the financial markets. Healthcare, pharmaceuticals, insurance, smart properties, automobiles, and even governments are just a few of the industries that are incorporating technology. However, Bitcoin – A Peer-to-Peer Electronic Cash System, which is also the initial application of blockchain technology, is the implementation of the technology that has been most successful so far. So, it makes sense that the easiest way to grasp blockchain technology is to first comprehend how the Bitcoin System was created and put into use.
An ever-expanding digital list of data entries is what a blockchain is, to put it simply. This type of list is made up of numerous data blocks that are linked together and secured using cryptographic proofs in the order that they are stored. The article focuses on discussing the layered architecture of the blockchain ecosystem.
The following topics will be discussed here:
- What Is Blockchain?
- Components of Blockchain Technology
- Different Layers of Blockchain.
- Types of Blockchain Layers Based on Professionals.
- What Are Layer 2 Solutions?
- Ethereum Blockchain Laye
- What Is The Blockchain Security Layer?
- Layer 1 vs Layer 2 Blockchain.
- Best Layer 1 Crypto
- Best Layer 2 Crypto
- Best Layer 3 Crypto
- Best Layer 4 Crypto
Let’s start discussing each of these topics in detail.
What is Blockchain?
An ever-expanding digital list of data records is what a blockchain is. This type of list is made up of numerous data blocks that are linked together and secured using cryptographic proofs in the order that they are stored.
A blockchain is a particular type of distributed ledger technology (DLT) that comprises a growing list of data, known as blocks, that are securely connected to one another using encryption. A cryptographic hash of the block before it, transaction data, and a timestamp are all included in every block (generally represented as a Merkle tree, where data nodes are represented by leaves). The timestamp proves that the transactional information existed at block creation. Because each block contains information about the blocks before it, they link to one another and effectively form a chain (see linked list data structure). As a result, blockchain transactions are irreversible once they are recorded because doing so would require undoing all blocks that came after it.
- One of the most cutting-edge technologies of the twenty-first century, blockchain technology is changing a wide range of industries, including banking, healthcare, supply chains, education, and other fields.
- Since it was introduced in the early 1990s when its popularity started to rise, a number of applications have surfaced, almost conclusively demonstrating the kind of impact that blockchain is likely to have as the race for digital economies quickly advances.
In the 1990s, S. Haber and W. Scott Stornetta’s pioneering work on a cryptographically secure blockchain with unaltered document timestamps led to the creation of the Blockchain.
Components of Blockchain Technology
The main components of any blockchain ecosystem are given below:
- Node Application: Every internet-connected computer is allowed to participate if it so chooses, according to a node application. The applications for bitcoin wallets and blockchain are two examples of node applications. In the case of a bank chain as a Blockchain ecosystem, for instance, only banks are permitted to participate. Node applications are not free from restrictions.
- Distributed/Shared Ledger (Database): A particular blockchain system’s participants can access shared databases and contents through the distributed ledger. The shared ledger contains a list of the regulations that must be adhered to. For instance, if we are operating a bitcoin node application, we must abide by all regulations listed in the program code of the bitcoin node application.
- Consensus Algorithm: Consensus algorithms are one of the main parts of a blockchain system and are essential to the functionality and security of the network. Blockchain data is secure and reliably consistent thanks to the consensus algorithm. It displays the network’s current state and illustrates how the network’s nodes decide which transactions to accept. Additionally, the fact that changing a block only requires creating a new block from its predecessor and necessitates regenerating all succeeding blocks and redoing their contents helps to protect the blockchain from being tampered with. For instance, while it only takes ripple a few seconds to ensure ledger agreement, bitcoin can take several minutes.
- Virtual Machine: The term “virtual machine” refers to a computer program’s depiction of a machine, real or hypothetical, that may be controlled via instructions expressed in a language. Inside a machine, it is an abstraction of a machine. The abstraction of physical objects and entities into virtual counterparts on a computer is something to which we have grown somewhat used. Put yourself in the position of a button on a graphical application’s user interface. The program’s state inside the computer changes when you press the button on the screen. A different illustration could be the way a government computer displays your driver’s license.
- Peer-to-Peer (P2P) Network: A peer-to-peer is a decentralized model to communicate between many peer nodes without any central server. On blockchain networks, each node flexibly participates in the role of a client and a server to jointly provide and control data. Improving the availability of data helps the system to avoid information loss.
Different Layers of Blockchain
In the domain of blockchain technology, an ecosystem is a collection of components that work together to produce a unique environment. Blockchain-based ecosystems have a collection of distributed nodes where immutable transactions are repeated. The blockchain (or digital ledger) technology is built upon a layered architecture as shown in the below figure.
According to some blockchain professionals, there are five layers of blockchain technology:
- Hardware/Infrastructure layer.
- Data layer.
- Network layer.
- Consensus layer.
- Application and Presentation layer.
Some blockchain experts believe that blockchain has 7 layers:
- Hardware/Infrastructure layer.
- Data layer.
- Network layer.
- Consensus layer.
- Incentive layer.
- Contract layer.
- Application and Presentation layer.
The 7 Blockchain layers are explained below:
1. Hardware or Infrastructure Layer
- Hardware or infrastructure makes up the Blockchain’s top layer. On a server housed in a data center, the content for the Blockchain is hosted.
- Client-server architecture, as used in web browsing and other applications, refers to the process where clients request data or content from application servers.
- Blockchain technology typically uses a Peer-to-Peer (P2P) network of computers to calculate, validate, and record transactions in an ordered format in a shared ledger.
- A distributed database is the end result, and it keeps track of all the data, transactions, and other pertinent information.
- Nodes are the computers that make up a peer-to-peer network. The Blockchain network’s nodes are responsible for verifying transactions, grouping them into blocks, broadcasting them to the network, and so forth.
- In the event that all parties agree, the nodes update their local copies of the ledger and commit the block to the Blockchain network. A device is referred to and utilized as a node after it connects to a blockchain network.
2. Data Layer
- The linked list used to represent a blockchain’s data structures has two main components: pointers and a linked list of blocks that arrange the transactions.
- A linked list is a collection of chained blocks where each block is filled with data and pointers to the block before it. Pointers are variables that refer to the location of other variables.
- A Merkle tree is a binary tree of hashes that holds the hash of the Merkle root along with other information including the hash of the previous block, the date, the nonce, the block version number, and the current difficulty goal.
- Blockchain technology is secured, has integrity, and is irrefutable due to a Merkle tree.
- A hash tree, also known as a Merkle tree, is a tree in which each leaf node is labeled with the cryptographic hash of a data block and each non-leaf node is labeled with the labels of all of its child nodes.
- In order to guarantee the security and integrity of the data stored there, transactions are digitally signed on the blockchain.
- Anybody with the public key can validate the signer of a transaction that has been signed using a private key.
- Because the encrypted data is also signed, the digital signature ensures data integrity and verifies information tampering.
- Data encryption prevents the detection of the information. The sender’s or owner’s identity is also protected by a digital signature.
- The structure of a block on a blockchain is determined by the data layer.
3. Network Layer
- The network layer is also known as the peer-to-peer (P2P) layer. In addition to being known as the propagation layer, it is in charge of inter-node communication.
- Transactions, block propagation, and discovery are handled by the network layer.
- The network layer makes sure that nodes are able to communicate, synchronize, and propagate with one another in order to keep the blockchain network’s present state valid.
- Peer-to-peer networks are types of computer networks where nodes are dispersed and share workloads in order to accomplish a common purpose. Nodes also carry out blockchain transactions.
- The terms “full node” and “light node” refer to two different types of nodes. Ensured by full nodes include mining, consensus rule enforcement, and transaction validation and verification. Light nodes, however, can send transactions and merely store the Blockchain header.
4. Consensus Layer
- Blockchain platforms cannot function without the consensus layer. Whether using Ethereum, Hyperledger, or another blockchain, the consensus layer is the most important and fundamental layer.
- The consensus layer is in charge of validating the blocks, putting them in the proper sequence, and making sure everyone is in agreement.
- The distributed peer-to-peer network’s consensus layer establishes a certain set of agreements between nodes.
- Power remains distributed and decentralized due to the consensus layer.
5. Incentive Layer
This stack’s optional incentive layer is the fourth tier. This layer handles how network nodes are compensated for the effort they put forth to establish consensus in terms of rewards. Depending on the consensus process being used, this layer may or may not be implemented.
- This layer defines the minimum amount of transaction fees needed to perform actions on the blockchain.
- This determines the variant types of incentives available on the network.
6. Contract Layer
The information in the contracts layer, which is right next to the application layer and specifies how a service will operate and what kind of information will be made accessible, is similar to that in a real-world contract. In essence, there are four types of contracts, which are briefly discussed below:
- Service contract: The endpoint’s offerings and the protocols to be used in the communication process are described in this contract for the benefit of the client as well as the general public.
- Data contract: A data contract lays out the terms of the data that a service will exchange. The data contract must be accepted by the service as well as the client.
- Message contract: An agreement over a message governs a data contract. Its main function is to customize the SOAP message parameters’ type formatting. The SOAP format is used by WCF for communication purposes, it should be noted. Simple Object Access Protocol is the abbreviation for this.
- Policy and Binding: There are a few prerequisites that must be met in order to communicate with a service, and these prerequisites are set forth in the policy and legally binding agreements. This contract must be adhered to by the client.
- The application layer is subdivided into the execution layer and the application layer.
- The programs that end users utilize to engage with the blockchain network are included in the application layer.
- Scripts, APIs, user interfaces, and frameworks made up the application layer, together with smart contracts, chaincode, and decentralized applications (dApps). The blockchain network serves as the back-end system for various applications, which are connected to it through APIs.
- Chain code, smart contracts, and underlying rules make up the execution layer, which is a sublayer.
- However, the transaction is validated and carried out at the semantic layer before moving from the application layer to the execution layer.
- Applications transmit instructions to the execution layer, which carries out transaction processing and maintains the Blockchain’s deterministic nature.
Types of Blockchain Layers Based on Professionals
But there are additional categories into which blockchain technology layers can be put:
- Layer 0
- Layer 1
- Layer 2
- Layer 3
Types of Blockchain Layers Based on Professionals explained below:
1. Layer 0
- Layer-0 serves as a network architecture for the blockchain and is made up of the hardware, protocols, connections, and other elements that make up a blockchain ecosystem. A “network of blockchains” might be used to describe this layer.
- In addition to enabling communication across blockchains, Layer 0 also supports inter-chain operability. In order to tackle future layer scalability issues, it offers a crucial foundation. To encourage involvement and development, Layer 0 frequently uses a native token.
- The patterns in Layer 0 include Polkadot, Avalanche, Cardano, and Cosmos.
2. Layer 1
- The majority of work that keeps a blockchain network’s core functions, such as dispute resolution, consensus, programming languages, protocols, and limitations, is done at Layer 1. The first layer stands in for the blockchain itself.
- Scalability issues are frequently caused by the large volume of jobs that this tier must manage. Higher fees and extended processing times result from the increased computational power needed to solve and add blocks to a blockchain as more users join it.
- By using better consensus techniques like proof-of-stake and the introduction of sharding, the scalability issue is substantially reduced (the division of computing operations into smaller parts). History, though, has demonstrated that they fall short.
- Layer 1 examples include Ethereum, the Binance Smart Chain, Solana, and Bitcoin.
3. Layer 2
- Extra processing power is needed to increase the productivity of the blockchain. The network becomes congested as a result of the need for additional nodes, though. Although adding nodes is necessary to maintain a blockchain’s decentralized nature, adjusting scalability, decentralization, or throughput will have an impact on the other layer 1 factors.
- Because of this, layer 1 cannot be made larger without moving all processing to layer 2, a layer that is added on top of layer 1. By allowing the integration of layer 1 solutions from third parties, this is made possible.
- Redesigning Layer-1 and overseeing all transactional validations is a new network called Layer-2. In the blockchain ecosystem, Layer 2 is positioned on top of Layer 1 and communicates with it continuously. The management of new blocks’ addition to the blockchain, however, is the sole responsibility of Layer-1.
- Think of a layer 2 blockchain that has been implemented on the Bitcoin blockchain, such as the Lightning Network.
4. Layer 3
- The final layer of the blockchain ecosystem is also the one that can be seen with the naked eye. Participants will eventually communicate with user interfaces on Layer 3 of the protocol. This layer seeks to offer simplicity and ease when working with L1 and L2.
- L3 not only offers user interfaces (UI), but also functions such as intra- and inter-chain operability, such as decentralized exchanges, liquidity provisioning, and staking applications. Blockchain technology can be used in real-world settings thanks to decentralized apps (dApps), a kind of layer 3 interfaces.
- Other examples include Decentralized cryptocurrency exchanges like Uniswap and Pancake Swap, Like Binance and Coinbase, wallet providers, and Compound and Aave-style liquidity management protocols.
What are Layer 2 Solutions?
Layer 2 (L2) is an additional network or technology that runs on top of an already existing blockchain system. The goal is to overcome the scalability and transaction speed constraints that major blockchain technologies must deal with.
Typically, this involves shifting some of the transactional load from a blockchain network to an adjacent network, which will conduct the processing and report back to the base layer to finalize the findings. The base layer blockchain is made more scalable and less crowded as a result.
Benefits of a layer 2 solution:
- No structural alterations are required to the main chain.
- Increased throughput without sacrificing network security at the base layer.
- Reduced costs.
Need of layer 2 solutions:
- Although it isn’t the case, a blockchain would ideally be able to handle any number of transactions per second (TPS). By giving the main blockchain some breathing room without having to increase block sizes or implement other changes that would affect the protocol’s ability to be decentralized and have high levels of security, L2 scaling solutions can assist in solving issues like these.
- For example, thousands of TPS cannot be processed on the Ethereum and Bitcoin blockchains, and as volume increases, fees also increase. Higher throughput is desired because it has the potential to obstruct adoption and long-term growth.
Example of Layer 2 solutions:
Lightning Network: Bitcoin
- In comparison to centralized payment networks, the Bitcoin blockchain can only handle 3 to 7 TPS, a tiny amount. Because of its small block size and low TPS, Bitcoin promotes a high degree of decentralization by keeping hardware costs down. A global network of nodes must accept, mine, distribute, and validate each Bitcoin transaction.
- Among Layer 2 options for Bitcoin, the Lightning Network has seen the most adoption. It processes main chain transaction bundles off-chain before transmitting the results back, similar to many other L2 systems. The state channels, which are associated channels that carry out these actions, are what the Lightning Network uses specifically to run. Smart contract capabilities are also added to Bitcoin via Lightning, significantly enhancing the network as a whole.
Ethereum Blockchain Layers
Ethereum blockchain layer includes:
- A network of node administrators for network security and verification.
- A collection of producers of blocks.
- The blockchain itself as well as the data on previous transactions.
- The network’s system for reaching consensus.
Ethereum has significantly more flexibility and applications to provide than Bitcoin but has a core that is very comparable to it. One of the many uses of Blockchain technology is the exchange of Bitcoin or other cryptocurrencies. At this point, Bitcoin is surpassed by Ethereum Blockchain. In addition to enabling bitcoin transactions, Ethereum has other goals as well. Ethereum’s two USPs, smart contracts and decentralized apps (DApps) along with supporting digital currency transactions.
For funding the platform’s upkeep and all of its applications, Ethereum has its own digital currencies, Ether and Gas, which can be used in place of Bitcoin. Bitcoin is limited to 21,000,000 digital currencies, but Ethereum has no such restriction. This is another significant distinction between the two Blockchain networks.
In addition to supporting cryptocurrency transactions, the Ethereum Blockchain has a wide range of other uses. Some of these uses include:
- Smart Contracts: A group of computer programs and protocols known as “smart contracts” in blockchain technology are used to automatically enforce particular contract terms. All of the parties involved are required to follow the codes of smart contracts as the set of regulations. The contract automatically starts the next action decided upon and agreed upon by the developers when one or more of the requirements are satisfied. These contracts are efficient, secure, trustworthy, and autonomous, which are all features of Blockchain technology.
- DApps: Decentralized Applications (DApps) development is another way to use the Ethereum blockchain. Due to the decentralized nature of the platform, companies and developers can create apps that can be accessed from anywhere on the Ethereum network. Open-source DApps reward miners for their work by providing them with a tiny cryptographic token for each transaction. Developers who are using Ethereum to build DApps now have more opportunities thanks to the Microsoft and ConsenSys alliance. Through their relationship, Ethereum Blockchain as a Service has been introduced (EBaaS). With just one click, EBaaS gives developers access to a cloud-based blockchain ecosystem.
Blockchain Security Layer
Another aspect of blockchain security that is highlighted when it is adequately discussed is the difference between public and private blockchain security. Regarding participation rights and data access privileges, blockchain networks may have a variety of effects. Because of this, blockchain networks have two different sorts of labeling. Blockchain networks can be either private or public depending on the permissions for membership. However, whether a blockchain network is permissioned or permissionless is determined by the ways users can access it.
- With the guarantee of participant anonymity, public blockchain networks are accessible to everyone and could allow any user to join. In order to achieve consensus and validate transactions, public blockchain makes use of computers that are connected to the internet.
- For confirming membership and access privileges, private blockchain networks rely on identity. They also only permit well-known organizations to participate.
Better learning opportunities for blockchain security challenges are promoted by an understanding of security issues with various forms of blockchain networks. Making the best choice may be aided by evaluating the blockchain network type that best suits your company’s objectives. Networks that are private and have permission, for instance, might have stricter controls to address compliance and regulatory issues. Contrarily, improved distribution and decentralization may be made possible via public and permissionless networks.
Layer 1 Vs Layer 2
It’s crucial to comprehend the differences between the two because blockchain scalability is a fundamental issue for all cryptocurrencies. A blockchain network like Bitcoin’s primary structure is referred to as its first layer, or Layer 1. However, Layer 2 refers to networks that are constructed on top of other blockchains, like Ethereum.
To put it another way, Layer 1 solutions directly alter the fundamental principles of the blockchain, whereas Layer 2 solutions rely on a parallel network to enable transactions outside of the main chain. The parallel network Polygon, which runs on the Ethereum blockchain, would make a good illustration of a Layer 2 parallel network.
A good illustration of how this idea will improve the effectiveness of blockchains and promote wide adoption is the scalability of Ethereum.
||Layer 1 scaling solutions are modifications in the base protocol of the blockchain network to achieve improved scalability.
||Layer 2 scaling solutions involve the use of off-chain services or networks to improve scalability.
||Changes in the base protocol, such as larger block sizes or new consensus mechanisms, can empower scalability.
||Sharing the transaction ordering and processing workload with off-chain solutions improves scalability.
- Consensus protocol improvements.
- Modifications in block size.
- Nested Blockchains.
- State channels.
Best Layer 1 Crypto
- Avalanche: The list of layers 1 crypto coins is headed by Avalanche (AVAX), which is also a layer 1 coin. It has the quickest time to finality, or the moment when you can be sure that a transaction cannot be reversed. Its novel consensus mechanism is to blame for this. It is also more decentralized than most layer 1 platforms because just the barest minimum hardware is needed to run a node.
- Cardano: Through more inclusive, secure, and scientifically based technology standards, Cardano’s long-term research aims to empower those who need it the most. The layer 1 cryptocurrency Cardano (ADA) aims to move control away from unaccountable institutions and toward the individual. Interestingly, Ethereum was co-founded by Charles Hoskinson, the creator of Cardano.
- Solana: One of the fastest layer 1 transaction speeds is found on the high-performance blockchain Solana (SOL), which aims to surpass 50,000 TPS. Decentralized apps with hundreds of millions of users could potentially run at this throughput rate. While Ethereum is more decentralized, it is also safe and scalable.
- Polkadots: The layer one crypto project Polkadot (DOT) is one to be concerned about. Gavin Wood, a fellow Ethereum co-founder, founded it. It creates a network of blockchains using Parachains. In essence, the Polkadot network is used to support a number of blockchain applications that can communicate and exchange data.
- Algorand: By displacing current financial models, Algorand (ALGO), a cryptocurrency focused on the future of finance, aims to grow the decentralized finance market. They have amassed hundreds of millions of dollars to further develop the ecosystem, and they have already seen a rise in a number of industries.
- Cosmos: One layer of cryptography is Cosmos (ATOM). It is a growing network of interconnected services and apps intended for a decentralized future. It’s noteworthy that both Terra and Binance Smart Chain use the Cosmos technology. Cosmos’ scalability and network interoperability have led many networks to choose it as their foundation.
- NEAR Protocol: As the web stack develops, the Near protocol (NEAR), a layer-1 blockchain, aims to provide support. Due to its sharded proof-of-stake architecture, it will compete with Ethereum and Polkadot with its extremely scalable and affordable solution.
Best Layer 2 Crypto
- Polygon (MATIC): The native token for Polygon, MATIC, is the first choice on our list of the best layer-2 coins. Polygon, formerly known as the Matic Network, is a platform for scalability in the blockchain space that makes it easier to create and link Ethereum-compatible blockchain networks. It refers to itself as the “Internet of Blockchains” for Ethereum, collecting scalable solutions for a multi-chain Ethereum ecosystem.
- OMG Network: OMG is the next top layer-2 currency on our ranking list. The currency is the proprietary token for the OMG Network, formerly known as OmiseGo. The first layer-2 layer-3 Ethereum calling solution, according to OMG Network, is production-grade. With faster speeds and cheaper transaction costs, while retaining the highest levels of security, it aims to make it simpler for users to move money and digital assets on the Ethereum blockchain.
- Loopring (LRC): Even though Loopring’s LRC token may not be one of the larger-cap coins, it is currently quite powerful. powers LRC In order to support the development of new crypto-asset exchanges, Loopring is a layer-2 program running on Ethereum. Loopring has made some bold statements, such as the one that its platform will enable exchanges to build on it and avoid problems common to Ethereum-based decentralized exchanges (DEXs), such as slow transaction speeds and high fees.
- Bancor (BNT): One of those tokens you don’t hear about every day is BNT. The coin has achieved enough to rank among the best layer-2 coins, though. The native token for Bancor is BNT; this platform encourages users to provide liquidity to DeFi protocols. It aims to make it easier for automated market makers (AMMs) to function, which allows investors to supply liquidity to DeFi markets in exchange for commissions and interest.
Best Layer 3 Crypto
- Helium: Best wirelessly enabled web 3.0 coin.
- Ocean protocol: Best AI, IoT, and big data-based web 3.0 coin.
- FLUX: Best web 3.0 coin for cloud computing.
- ChainLink: overall best web 3.0 coin.
- Filecoin: Best web 3.0 coin for the storage system.
- The Graph: Best web 3.0 coin for blockchain indexing.
- BitTorrent: Best web 3.0 coin for file sharing.
- Livepeer: Best web 3.0 coin for video streaming.
- Kadena: Smart contract-based web 3.0 coin.
- Polkadot: Top-rated web 3.0 coin.
Best Layer 4 Crypto
Cosmos and Polkadot: According to its description, Cosmos is “a decentralized network of independent parallel blockchains, powered by Byzantine Fault-Tolerance consensus algorithms, ensuring safety for up to a third of Byzantine, or hostile, actors.” By enabling interoperability across blockchains developed with the use of Cosmos’ open-source tools Tendermint, Cosmos SDK, and IBC, the company hopes to establish an “Internet of Blockchain.” Numerous well-known initiatives, including Binance Chain, Crypto.com, Terra, and Polygon, have built blockchains with Cosmos and are interoperable with one another using Cosmos’ ecosystem. $ATOM, the native token of Cosmos, is employed in the administration of the Cosmos Hub, as well as spam prevention and staking (which secures the blockchain).
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