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  • Writer's pictureFrancesco Greco

What is a layer in crypto?

Updated: Apr 14, 2023


"What is a layer in crypto?" article cover

To better understand the full potential of blockchain and its technology, it is essential to know its architecture.


In this article, we will cover the layers of blockchains and analyze the differences between layers in the blockchain architecture, and the definition of each layer.


 

The blockchain architecture


The blockchain architecture enables secure and transparent transactions to be conducted without the need for intermediaries. At its core, the blockchain architecture is a decentralized and distributed database that maintains a continuously growing list of records, called blocks, which are linked and secured using cryptography.


In this way, the blockchain ensures that transactions are immutable, transparent, and verifiable, making it an attractive option for a wide range of use cases.


We will explore the various layers that makeup blockchain architecture and how they work together to enable the functionality of blockchain technology.


The blockchain consists of 5 different layers:


Let’s analyze each layer in detail.


Hardware Layer

The foundation of blockchains rests on peer-to-peer information sharing, with the network of computers contributing to the computing power constituting the hardware layer. The nodes on this layer are responsible for decrypting transactions, as blockchains are essentially a sum of all these nodes.


Data Layer

After the hardware layer, the data layer stores transaction details on a block, including the crypto sent, the public key of the receiver, and the private key of the sender. Blocks with data are connected to the previous and next blocks, except for the genesis block, which is connected only forward.


Network Layer

The communication between nodes is handled by the network layer, which enables each node to know about the transactions being validated by other nodes, due to the open nature of blockchains.


Consensus Layer

The validation of a block is the responsibility of the consensus layer, where validators compete to solve a cryptic mathematical puzzle. This process of consensus mechanism is known as Proof of Work, where the winner gets to add the block to the blockchain. In the case of Proof of Stake, the system randomly picks a validator.


Application Layer

Lastly, the application layer is where various apps are built, such as wallets, social media apps, browsers, Defi apps, and NFT platforms, among others. While the UI/UX of the app is similar to any normal application, the decentralized nature of data storage at the backend of these apps sets them apart.


 

Blockchain Layers


What is Layer 0 in crypto?


A Layer 0 protocol is the foundation on which Layer 1 blockchains can be built.


Layer 0 refers to the underlying blockchain protocol that serves as the main infrastructure layer for an ecosystem. It plays a crucial role in enhancing interoperability, scalability, and developer flexibility within the blockchain space.


By providing a foundation for multiple blockchains to communicate with one another, Layer 0 protocols allow for a more tightly integrated network of blockchain products and services. This creates a better user experience and enables the cross-chain transfer of data and tokens, without the need for dedicated bridges.


Additionally, Layer 0 allows for better scalability by delegating critical functions to different blockchains, thereby optimizing performance, and providing developers with great flexibility to customize their own blockchains, with easy-to-use SDKs and a seamless interface, encouraging them to build on the protocol.


Layer 0 is used to construct large and complex blockchain ecosystems. It can be integrated into layer 1 or exist alone, as long as at least one layer 1 is built on it.


Layer 0 crypto list


Polkadot, Avalanche and Cosmos are the three most popular Layer 0 blockchains.


 

What is Layer 1 in crypto?


Layer 1 is the core level of the blockchain structure, it executes and validates transactions, and is the most common standard, used without the aid of other layers, especially in older blockchain as Bitcoin and Ethereum.


This category deals mainly with two tasks:


  • Execution: processing all transactions and operations.

  • Consensus: means the mechanisms and rules dedicated to the block validation (PoW and PoS).


While layers 0 and 2 are optional, layer 1 is always mandatory. Without it, no operations of any kind could take place.


If there is no layer 0, layer 1 performs some functions, especially in terms of security.


As we know, all layers 1 suffer or have suffered from the blockchain’s trilemma, which means being able to guarantee decentralization, security and scalability at the same time. Thanks to the transition to PoS, Ethereum is preparing to solve this problem.

Newer chains, such as the layer 1 Solana, try to integrate at the top of their pyramid layer 2 solutions to improve their scalability without disrupting their ecosystem.


Layer 1 crypto list


The most popular layer 1 blockchain are BSC, Fantom, Cronos, Osmosis, Harmony, Solana, Ethereum and Bitcoin, and all the parachains of Polkadot.


Other layers 1 blockchain are Cardano, Dogecoin, Tron, Litecoin, Tezos, Celo, Moonbeam, Moonriver, Acala, Kadena, Waves, Fantom.


 

What is Layer 2 in crypto?


Layer 2 allows for significantly improved performance and functions of layer 1.

Arbitrum for Ethereum (also defined as rollup) and Lightning Network on Bitcoin stand among the various names.


Layer 2 is responsible for downloading the weight of everyday transactions from layer 1, which is only responsible for ensuring security and consent.


Having layer 2 is not mandatory, it is an option available to developers to overcome the possible limits of layer 1, but layer 2 cannot exist without layer 1.


As mentioned above, layer 2 is designed to solve some problems that characterize layer 1. For example, Ethereum is a secure layer 1 but lacks a lot of scalabilities: transactions are limited in number, and users are enormous. Waiting times get longer, and the gas fees explode. Arbitrum was designed to solve this problem. Ethereum remains a guarantee of everything related to security and consent, while Arbitrum is responsible for processing the various transactions. This way, many more operations can be carried out, and the costs are significantly reduced.


An important aspect to highlight is that layer 2 should not have its native coin because it rests on layer 1 and inherits all of it, even the consent. Layer 2 ultimately improves and enhances layer 1, reducing its workload.


Another example is the Polygon blockchain, which takes a stand-alone position, as it is identifiable as layer 2 but with some irregularities. This blockchain has its native coin (MATIC) mechanisms of consent and specific validators.


However, Polygon periodically checks with Ethereum for security. Therefore, it is a hybrid solution, a sort of more independent sidechain.


Layer 2 crypto list


Polygon, Optimism, Ox, Cartesi, Synthetix, Loopring, Celer Network, dYdX, GMX.


 

What is Layer 3 in crypto?


Layer 3 is an upcoming layer in blockchain technology that builds on top of Layer 2 to offer additional scalability and customization for decentralized applications. It enhances the capabilities of Layer 2 by providing features such as hyper-scalability, improved privacy, and better control for app designers.


Layer 3 solutions can be designed for specific use cases such as privacy-preserving transactions or app-specific performance.


While there are currently no widely-adopted Layer 3 blockchains, companies such as Starkware are leading the way in developing Layer 3 solutions and fractal scaling. The ultimate goal of Layer 3 is to provide a more efficient and user-friendly experience for decentralized applications and transactions on blockchain networks.


 

Frequently Asked Questions about Layers in crypto



Is Polkadot a Layer 1 or 2?

Polkadot is a Layer 0 blockchain, it allows all layer 1 parachains built on top of it to communicate with each other and benefit from Polkadot’s features (talking a shared language because they are built on the same layer 0, parachains benefit from the security of the Relay Chain and the interoperability).

Is Cardano a layer 1 or layer 2?

Is Solana a layer 1?


 

Conclusion

We have seen how it is essential to know the architecture of any blockchain to understand all the network's operations and make their own assessments and subsequent investments.


Understanding the stratification of a blockchain helps to better visualize all the indicators of the expansion of a project. The indicator should include:

  • recognising the native coin;

  • evaluating it and understanding what type of layer you are interfacing with;

  • considering use cases and whether this is used for validation and, therefore, for staking;

  • if the chain supports smart contracts and DeFi;

  • observing deposited liquidity and daily volume exchange.


Recap of the differences between Layers 0, 1, 2 and 3

Layer 0

Hardware, protocols and other core elements

Layer 1

Resolution, consensus mechanism and programming of the blockchain

Layer 2

Improved scaling capabilities, can be integrated with third-party solutions

Layer 3

Enhanced effectiveness of the previous layers



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