Blockchain is a distributed ledger that records transactions and enables the transfer of digital assets. There are two main components in a blockchain system: the blockchain layer and the application layer.
The blockchain layer refers to the actual technology behind the blockchain – it is an open, distributed ledger that records transactions between two parties efficiently, permanently, and without requiring trust or a central authority. The application layer, on the other hand, refers to the applications developed using this technology.
What is Blockchain?
Blockchain is a decentralized ledger and distributed database. It’s designed to store any type of data, including financial transactions, but it also has other uses.
Blockchain technology was first used by Bitcoin as its underlying technology, but it can be used for many other things as well. A blockchain is made up of many blocks that are chained together in chronological order through cryptography (or digital signatures).
When it comes to the design of a blockchain, there are two layers that can be distinguished: Layer 1 and Layer 2. The first layer refers to the protocol that handles transfer of data between nodes. It uses cryptography to ensure security, and it is responsible for every transaction that occurs in the blockchain.
The second layer is simply a consensus mechanism built on top of Layer 1. It’s often referred to as “Layer 2,” but it isn’t technically a layer since it doesn’t process any data itself (more on this later). Instead, Layer 2 serves as an interface between Layer 1 and applications built on top of the blockchain protocol—these applications include wallets, decentralized crypto exchange, and smart contracts.
What is Blockchain Layer 1?
First, let’s take a look at what blockchain layer 1 is.
Blockchain Layer 1: The first layer of a blockchain system is the base layer and contains all transactions that have occurred on the network. It’s also known as “consensus,” because it verifies and records all transactions on the network.
It’s important to note that this layer doesn’t actually store any information; rather, it acts as an interface between users and miners who validate those transactions by solving complex mathematical problems with their computers (called nodes).
What is Blockchain Layer 2?
The next layer is the “Layer 2” solution, which is built on top of a blockchain. The main advantage of this approach is that it can be faster and more scalable than the first layer, but it’s also designed to be more flexible and easier to use by developers.
Additionally, layer 2 solutions are designed to provide users with greater privacy as well as other benefits like instant transactions or scalability without sacrificing decentralization (the ability for every node on a network to participate).
Layer 2 provides more scalability, privacy, and efficiency than Layer 1 by allowing off-chain computation while still being anchored into place through smart contracts on top of them.
Blockchain Layer 1 solutions are the base of the blockchain technology. They are typically associated with assets such as LUNC crypto and also called “the base layer” in this context. The two main examples of Layer-1 solutions are Bitcoin and Ethereum, which are both known for their decentralized nature, as well as their scalability issues.
Layer-1 Solution Pros
- Fast Transactions
- Low Fees
- Secure, No Third party involved
L2 solutions are not limited by the same limitations as Layer-1 solutions. This makes them more flexible and easier to implement, scalable, cheaper to use, and they can provide better user experience.
Layer-2 Solution Pros
- Layer-2 solutions are more efficient, scalable and cheaper.
- Layer-2 solutions have more flexibility.
- Layer-2 solutions can be implemented faster than a blockchain layer 1 solution.
State channels are a way to move transactions off-chain, which means they don’t need to be recorded on the blockchain. This allows you to reduce the amount of on-chain transactions and save money on fees. State channels can be used for micropayments, low-value transactions, or even proof of work (like mining).
Nested blockchains are a combination of both Layer-1 and Layer-2 solutions. They are built on top of existing blockchains, such as Bitcoin or Ethereum, and can be used to build other blockchains. This allows developers to create new decentralized applications without having to start from scratch.
Nested blockchain solutions usually have three components:
- A consensus algorithm (e.g., Proof-of-Work) that enables the blockchain network to reach agreement about the order in which transactions were processed;
- The consensus mechanism will be used by miners/validators who receive rewards for validating blocks;
- A virtual machine that executes smart contracts written in programming languages like Solidity (Ethereum) or Vyper (Hyperledger Fabric).
Consensus protocol changes
Consensus is the process that enables a group of people to agree on something. It’s what allows them to come to an agreement and create a system that can be used by all participants. In blockchain, consensus is achieved through a set of rules that everyone follows in order for transactions to be verified and added into blocks by miners (or stakers).
Consensus protocols are different ways for blockchains to reach an agreement about which transactions should be added next onto the chain. The most popular ones include proof-of-work (PoW), proof-of-stake (PoS), delegated Byzantine Fault Tolerance (dBFT) and more recently Nakamoto Consensus which includes Bitcoin’s SHA256 hashing algorithm.
Sharding is a technique used to partition data across multiple databases. It’s the process of breaking down large datasets into smaller ones, and then distributing those subsets across different nodes on a network.
Sharding is used to scale blockchain by increasing throughput on a blockchain. This means that when you’re trying to process more transactions than your current system can handle, sharding allows you to split them into smaller batches, which can then be processed more quickly and efficiently because there are fewer transactions being processed at once.
The Biggest Problem with both Layer-1 and Layer-2
The biggest problem with both Layer-1 and Layer-2 is scalability. Layer-1 is not scalable in that it has a limited capacity for transactions per second (TPS). For example, Bitcoin can only process about 7 TPS while Ethereum can do 10 to 20 TPS depending on how many nodes are running on the network at any given time.
This means that if you want to use cryptocurrency as your payment method then you will have to wait longer than usual before your transaction gets confirmed by miners and added into a block by them.
The second issue with Layer-1 cryptocurrencies is their high transaction fees which make them less competitive when compared against other payment methods such as PayPal or Visa cards which have much lower fees per transaction than anything else currently available today.
But nevertheless still charge users high amounts when sending money across borders solely because these centralized institutions don’t want anyone else getting involved in their business model by offering cheaper rates than themselves.