Peeling the Layers of Blockchain Technology
Like the invention of the internet, protocols are being built to standardize messaging and the transfer of information in blockchains.
Blockchains are their isolated worlds confined within an ecosystem, with several dApps inhabiting these worlds.
There are different layers and protocols that connect each blockchain network which we’ll attempt to explain below:
The term “blockchain” is technically the 1st layer of blockchains in crypto. They’re networks with an accessible ledger that stores the transaction history of every address. It is known as the ‘settlement later’ where miners and validators verify the finality of transactions.
‘Finality’ means that transactions are executed onchain cannot be altered or changed once they’re completed and verified.
Ethereum is the first distributed ledger that is touted as the blockchain network that settles transactions and a world computer that implements smart contracts simultaneously.
L2 technologies were born due to the shortcomings of layer-1: scalability.
dApps couldn’t scale what Visa has achieved for financial transactions and what AAA games have achieved for microtransactions because of the limit on Transaction per Seconds (TPS) of blockchains and the hardware needed to increase throughput (horizontal scaling).
Before Axie Infinity, Cryptokitties caused the then-largest congestion in the Ethereum network with an average of 20k unconfirmed transactions. Bitcoin transactions were then behind a queue of almost 200k.
By design, L2 also has cheaper gas fees than L1 alongside scaling of transactions and users.
Security and code-wise, L2 solutions are usually EVM compatible and don’t have a steep learning curve for developers to adopt.
Ethereum is the first cryptocurrency that is also a programmable money, which gave birth to Decentralized Finance. EVM or Ethereum Virtual Machine defines the set of rules which can execute arbitrary machine code using smart contracts. Ethereum clients and EVM-compatible chains adhere to these specific rules.
Polygon is a Proof-of-Stake (POS) and EVM-compatible blockchain with its native currency MATIC. It’s defined as an L2 that acts as a ‘commit-layer’ that periodically commit checkpoints to the ethereum network. You can build out dApps and services in Polygon just as you usually do in the L1.
Arbitrum and Optimism are L2 solutions that were created to enhance the scalability and speed of transactions by using Rollups, performing transactions offchain before finally committing to the base layer (L1).
Ronin network is an ethereum sidechain with the explicit goal of supporting transactions for Axie NFT pets, land NFTs, and item NFTs within the Axie Infinity game. It uses the reputation-based Proof-of-Authority (POA) consensus algorithm to efficiently validate transactions within the blockchain network, albeit with a limited delegation of stakers.
Layer 3 or L3 is the application layer where dApps may reside and be implemented to interact with smart contracts deployed on L1 or L2.
Protocols and frontend apps like the Metamask wallet can access both layer 1 and layer 2 blockchains with a click of a button.
Layer 0 technologies are protocols that communicate with different blockchains.
Polkadot is a layer-0 blockchain that allows not just tokens but also arbitrary data to be transferred to different blockchains. It runs Relay chain as its main chain and its sister chains called Parachains (L1).
Avalanche is another layer-0 tech composed of a Primary Layer with 3 blockchains — Exchange Chain to exchange assets, Platform Chain to create custom chains via subnet, and Contract Chain to execute the smart contracts.
Layer 0 as the data and interoperability layer enables multiple technologies to communicate with each other.
Blockchains are inherently isolated, and currently, Bridge and rollups are two of the three working interoperable technologies — atomic swap is still a proof of concept — that can transfer value or information across networks.
We foresee a multichain world, adopting the current experimental technologies for the next trend — a world connected with different blockchains existing in parallel with different metaverses.
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Disclaimer: This article is for educational purposes only and must not be treated as financial advice.
As always, please conduct due diligence and manage your risks accordingly.