More companies and individuals are getting engrossed in cryptocurrency trading. However, many people do not understand the technical infrastructure of a blockchain network which can hinder their ability to make the best investing decisions. This article explores blockchain layers and how they work.
What is a Blockchain Layer?
Blockchain is essentially a combination of hardware and software that operates as a decentralized network. However, blockchain typically consists of many different parts that made up the whole network.
The collection of these parts and their classification into discernable entities are known as layers. By understanding different layers of blockchain, developers can investors can get familiar with the inner workings of a blockchain network.
Basics of Blockchain Layers
Depending on whom you ask the total amount of blockchain layers can range from 5 to 7. However, at its core, some fundamental layers of blockchain are mentioned as under:
Layer 0 is a foundational layer that consists of internet, hardware, and protocol networks among other things. This layer cannot create scalability for a blockchain network but it serves as a foundational layer for adding it. Layer 0 is responsible for cross-chain interoperability and communication between different layers.
Layer 1 is built on Layer 0 or the foundational layer. This layer defines the functionality of a blockchain. These functions may include but are not limited to consensus, dispute settlements, programming syntax, protocols, and limitations.
All changes, edits, and upgrades implemented on layer 0 directly impact the structure of layer 1 therefore it is also called the implementation layer. Layer 1 also grants scalability for the blockchain but it has limited scope. Bitcoin, Ethereum, Binance Smart Chain, and Solana are some examples of Layer 1 blockchains.
Layer 2 is all about upgrading and up-scaling the blockchain network. As participation in a layer 1 blockchain grows the network needs more power and nodes to maintain its decentralization.
Therefore, the layer 2 network is introduced to make sure that layer 1 maintains functional immutability while continuing to expand seamlessly. Despite the addition of the layer 2 solution new blocks are added at the layer 1 level.
Layer 3 can be understood as the user interface for a blockchain network. This layer allows non-technical individuals to make more sense of Layer 1 and Layer 2. Layer 3 may also introduce intra or inter-chain operations like liquidity provisioning, DEXs, staking, and decentralized applications or DApps.
It is also known as the application layer sometimes it is split into a sub-layer called the execution layer. The execution sub-layer can be used to generate new blockchains using cross-chain and improving interoperability. AAVE, Uniswap, and Pancake Swap are some good examples of Layer 3.
Classification of Blockchain Layers
Here are 7 types of blockchain layer classification that are found across the board of the sector with the addition or subtraction of a few types.
The hardware layer is the basic and most important layer of a blockchain network that makes up its foundational components. It could be a server that houses all the data of a blockchain network or nodes. It is also called the infrastructure layer.
The data layer is present in the form of pointers and linked lists. Pointers are variables that are used to locate other variables and link lists are collections of chained blocks containing data.
Sometimes, Merkle Tree is added to the data layer as a branch of hashes containing information that is used to verify and maintain data integrity on the blockchain. Creation, storage, and management of private and public encryption keys are crucial functionality of this layer.
The network layer is a P2P communication enabler. It is also called the propagation layer and performs transactions, discovery, and block propagation. P2P systems can share the workload and operate to accomplish a unique goal.
Nodes are divided into full and light nodes. Light nodes are responsible for transactions and store blockchain header while full nodes are used for mining, validating, verification, delegation, and consensus rule implementation.
The consensus layer is a mandatory component of the blockchain layer. It is used for electing agreed-upon or approved blocks and keeping them chronologically synchronized. Consensus layer blockchain is decentralized and ensure that the governance is distributed among blockchain stakeholders.
The incentive layer decides the amount, form, and criteria for issuing rewards for node operators, stakers, miners, and network validators. At the same time, it also ascertains the minimum gas levied per transaction.
The contract layer decides what and how the information available on a blockchain network is going to be accessible to its users. There are four basic types of contract layers namely service, data, message, and policy/ binding.
Application and Presentation Layers
The application layer is made up of APIs, scripts, UIs, frameworks, smart contracts, decentralized applications, and other programmed features. It is subdivided into an execution layer that can hold chain code, smart contracts, and other underlying operational rules.
When it comes to the composition of a blockchain network there are no defined rules. Blockchain layer taxonomy depends on the features, scope, and functionality of a given network.
By learning about the inner workings and technical architecture of a blockchain project investors can improve their trading strategies and understand how the market variables may impact its native currencies.