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Blockchain Technology and Its Layers: The Ultimate Guide

In this fast-developing technological world, improving or enhancing tech solutions is constantly needed. This has been seen in blockchain technology too. With the increase in the number of transactions, traders face some issues. An additional layer gets attached to the main blockchain with each arising problem.

Blockchain and its layers have made the decentralized network a breeze for traders and customers. This blog includes the details and needs of layers 1, 2, and 3. Let’s find out more about these layers and what the reason is for them to implement in the blockchain network.

What is a Blockchain?

what is blockchain and how does it works

Blockchain is a distributed database that keeps records of all the blocks. All of these blocks are interlinked through cryptography. When a new block gets added to the blockchain, it gets a cryptographic hash of the previous block, the timestamp of the same, and transaction data.

It can be portrayed as a decentralized public ledger that records transactions across many systems to ensure that all the records can not be altered without making changes in all the subsequent blocks.

The blockchain network initiated a few things that make it unique:

  • Transactions are secure and eliminate bank transfer fees.
  • It monitors the supply chain and points out inefficiencies fast.
  • Users get all access through their digital IDs, which provides them full ownership of their digital currencies.
  • Enterprise data can be moved among industries for secure access.
  • Its decentralized database provides real-time open-source development.
  • Benefit through trial data and electronic records for commercial transactions like hospitals, hotels, etc.

What are Blockchain Layers?

Blockchain stores the data and focuses on the security of all payments. Blockchain layers are the networks that help the transactions proceed and get completed in a flow. The need for multiple layers arose when issues like scalability took over digital currencies.

There are four layers to the blockchain, which are 0, 1, 2, and 3. Blockchain considered itself as layer 0. Multiple components make the blockchain functions, like hardware, internet, and other connections. Layer 0 solution allows various networks like Bitcoin, Ethereum, and others to function.

Interoperability of cross-chain communication is also established in layer 0, which facilitates a flow of information from the top to the bottom layer. Other layers have been added afterward for various functions and to solve the pre-existing issues. Let’s get to know about these varied layers in detail.

Layer 1

It is the base layer of the blockchain through which all the transactions get validated and finalized without the interaction of any other network. All the processes took place in a streamlined format. This layer 1 solution is also called an on-chain network; it is the first-ever network used for the transaction of bitcoins. In this network, the transactions get approved by following a chain of methods.

There are many layer one solutions, but the main one is Bitcoin which is the underlying architecture of layer 1. Another famous one is Ethereum, which was introduced in Web 3.

➠ How does Layer 1 work?

A layer 1 solution is easy due to its step-by-step confirmations. When a transaction is initiated, it passes to the main blockchain as a block. These blocks get stored in the cluster of already stored blocks. Every time a new block is added, it generates information like the time of payment initiation and the number of transactions.

In an on-chain network, when the information forms a complete block, the validators do proof of work; these validators are mainly miners. To mine a block, they have to solve a cryptographic equation using powerful computers; many miners compete with each other to find the block; once a miner succeeds in mining it, they get paid a small amount.

This process validates the transaction and sends its details to the blockchain mainnet. When a blockchain approves that everything is completed, the transaction is counted as complete.

For example, when a person wants to spend a certain amount of Bitcoin on groceries, then they have to

  • Initiate a transaction with the amount of Bitcoin mentioned beforehand.
  • After initiating the transaction, the request gets stored in the blockchain blocks.
  • Miners will get to know a new block has been added for grocery transactions.
  • They will start solving it and will receive rewards for it.
  • The transaction gets processed to the grocery store when the puzzle is solved.
  • By getting through all these steps, an on-chain layer 1 transaction will get completed.

➠ Features of Layer 1

Before a network is introduced, certain features are incorporated to achieve the desired results. Some of these features make the layer 1 solution an effective way to trade in crypto:

  • Enhanced Capacity: This feature is the most important in terms of blockchain. On-chain, many computers work together with great power in a decentralized format, allowing them to hold a large amount of transaction data. Layer 1 has improved the capacity of the whole network.
  • Better Security: It operates on a well-distributed network of blocks; hence layer 1 is considered more secure. As all the blocks are attached, the data gets stored at multiple places, ensuring that the data are not interrupted by any external factors and original data remains secure.
  • Immutability: Databases that are centralized are always prone to hackers’ attacks; to secure them, one must trust some third-party intermediary. Layer 1 provides immutable ledgers for protection against fraud. Once a transaction block is added to the ledger, it can not be reversed, which means that any user can not delete or update the data.

➠ Pros and Cons of Layer 1

Pros Cons
It provides a decentralized trust to the users. Can not handle large transactions at a point.
Optional costs are minimal with Layer 1. Its public accessibility allows unknown visitors to view your transactions.
Avoids the possibility of single-point failure. Miners’ cost of hardware is relatively high as they need special computers.
Confidential with enhanced security. Leads to unnecessary competition between the businesses.
Transactions are quick and backed by the blocks and miners. In the case of large transactions, the speed does not match up.

 

Layer 2

In the previous layer, the transactions performed well, but with an increase in their popularity, the rate of transactions gets slower due to scalability issues. To solve this problem, researchers have established lightning labs to make a better solution that provides higher scalability and security.

Blockchain layer 2 solution is a protocol that operates on top of blockchain layer 1. It improves specific characteristics like scalability and privacy, lacking in the previous layer.

➠ How does Layer 2 work

Layer 2 solution is generally referred to as a lightning network; there are other Layer 2 solutions. However, LN has gained popularity due to its advanced features. The functionality of LN is simple to understand and use. A transaction using a layer 2 blockchain makes the payment scalable and provides the needed security. Let’s understand how a layer 2 blockchain transaction takes place.

When a person wants to pay in Bitcoin to the other user, they need to create a lightning channel between them; there are a set of rules both parties need to follow while creating a payment channel. To ensure that a transaction is secure, a digital contract is formed between them both; this contract provides that an initiated transaction is completed and the receiver gets the promised amount.

In layer 2, transactions are fast and get settled in a few minutes; for instance, if A sends Bitcoin to B, then this transaction will be validated by nodes. These nodes are present in several devices and approve the authentication of payment. After getting through nodes, the receiver gets the bitcoin which they can then store in the wallet of their choice.

When one payment gets completed, a user can either close the channel or continue it; they have to add any amount to the LN and lock it for use. If there is no such requirement for the transaction, then both users have the authority to close the channel.

In the layer 1 blockchain, every single transaction gets stored in the blockchain, which consumes a lot of processing time, while in LN, the data information does get stored in the blockchain but in bundle format. In this way, the processing time gets reduced, and public ledgers can not view every transaction that has been processed.

Transactions done through layer two solutions are called off-chain transactions; due to its bundling format, getting each transaction verified in an on-chain network is unnecessary.

➠ Features of Layer 2

The need for Layer 2 blockchain arises when people start feeling the transaction processes are complicated. There are certain unique features that make the layer 2 solutions an ideal protocol for transaction processing.

  • Trusted transactions: When the channel is created, it binds both parties with digital contracts, which makes it a trusted medium for all transactions. Digital signatures are required to authenticate transactions, and this security makes layer 2 blockchain a trusted protocol.
  • Easy Management: Payment gateways are created in layer 2 blockchain for all the transactions. There are 2 simple ways, after a transaction has been done, to either close the channel or add another amount and keep it running. Apart from this, there is no hassle in managing the channel.
  • Secured and Private: The data gets bifurcated and secured with multiple nodes. Apart from this, transactions get bundled up and, after that, get uploaded to the main blockchain. Some users feel uncomfortable revealing all their transactions; for them, layer 2 has been the best solution till now.

➠ Pros and Cons of Layer 2

Pros Cons
Compatible with various wallets and exchanges. There is an indirect dependency on the layer 1 blockchain.
Scalable solution for small as well as large transactions. Features are limited, and minimum add-ons are there.
Transactions get settled in a few minutes with a fast settlement ratio. Apart from Bitcoin, other transactions take a little time to get settled.
Blockchain interruption is minimal and nested.

 

Layer 3

In the blockchain, layer 3 is an additional built-in layer on top of layer 2. This 3rd layer provides additional scaling solutions and customized options for the decentralized applications. It gives better control for app designers, hyper-scalability, and improved privacy.

Layer 3 solution emphasizes the similarities with the layered structure of the internet. It provides the most convenient and cost-effective interoperability between various networks and layers. Layer 3 offers customized functionality for all its users. For a company that started working with cryptographers unaware of which layer of blockchain is appropriate for the user, layer 3 blockchain is the most sophisticated method.

➠ How does Layer 3 work

Layer 3 works on interoperability protocol, which interplay between Layer 2 and 1 blockchain solutions. It is associated with the blockchain network and is seen as a simplifier between both layers. The whole system of layer 3 blockchain does not depend on any custodian or intermediary.

It functions as a separate supercharge blockchain that possesses cross-chain capabilities. Layers 1 and 2 are closely related; another layer is formed to maintain the protocol and avoid complicating the transactions. Layer 3 of the blockchain’s primary work is communicating as a messenger between L1 and L2. There are some operating differences between these layers, and L3 makes the interoperability functions well through its technical concept.

➠ Features of Layer 3

There are 3 essential elements in the blockchain: decentralization, security, and scalability; layer 3 blockchain keeps all of them in function. There are various ways interoperability is helpful for blockchain layers through the features it provides. Let’s, look at some of its features:

  • Routing and Forwarding: Packets of data have been forwarded between intermediate routers; for this, layer 3 is responsible. The media access control of layer 2 and error checking of layer 1 blockchain is conducted by layer 3 through its independent technical variables.
  • Internetworking: As layer 2 blockchain reports to the main blockchain, and its data get stored there, similarly, both the layers of the blockchain get information from each other through the internetworking done by layer 3 protocol. It removes connectivity complications, and all the required data can be shared within multiple layers.
  • Congestion Control: If there are too many data packets, there are chances of congestion. To avoid this, layer 3 blockchain acts as an additional layer of scaling solution. As the delay increases, the performance will decrease and create retransmission. By this, all the transaction gets settled in minutes, and other data packets can use the space.

➠ Pros and Cons of Layer 3

Pros Cons
It works as an additional application layer over layers 1 and 2. More beneficial to businesses rather than individuals.
Interoperability has been obtained among various blockchain protocols. Connecting both layers may create a data distribution issue.
An effective connection between layer 1 and layer 2 is established.
Provides all three features of blockchain, i.e., decentralization, security, and scalability.

 

Layer 1 Vs. Layer 2 Vs. Layer 3. What makes them different?

Layer 1 Layer 2 Layer 3
It maintains the dispute resolution mechanism and blockchain programming. It has better scalability in comparison to layer 1 and can integrate with third-party applications too. User-facing applications are hosted by a layer 3 solution, combining the previous layers.
Data gets stored in a publicly accessible ledger; everyone can see the transaction made in the blockchain. Transaction data is not stored individually, although when a channel gets close, the data bundle is stored in the main blockchain. It hosts DApps and all the protocols that support it.
Ledgers are replicated in nodes supporting blockchains. No ledger is included in the transaction; nodes verify all the transfers. Layer 3 supporting applications provide staking, lending, and liquidity mining.
Use cryptographic methods to accomplish robust security. Secure due to two-party channels and data bundles. Secure platforms can be used for the centralized exchange of off-chain coins.

 

Conclusion

Blockchain was the first and the base platform on which transactions of cryptocurrencies started. As time passes, several issues arise within the blockchain; more transactions lead to less scalability. This gives rise to the need to introduce layers over the blockchain where these different layers work individually but still under the security of the blockchain.

Layer 1 blockchain improves the reliability of transactions, but there are still congestion issues, and the time of settlement is long. The Layer 2 solutions were implemented to improve this, focusing on privacy and scaling solutions. These two layers were enough to function well, but they function individually. To make them interoperable, layer 3 blockchain was introduced, which operates with the DApps and communicates between the layers.

Speed Team

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