As the blockchain ecosystem continues to evolve, having a base understanding of the critical components can be helpful in grasping the value of your investment while also improving the quality of your conversations with others be they well-seasoned crypto veterans, newcomers, or forever skeptics. In this edition of ‘The Cortex Connection,’ we’ll examine the layers of blockchain technology, what they mean, and some examples of each.
Why Understanding the Layers Matters
Understanding the distinct functions of each layer is important for several reasons:
It enables developers, investors, and other users to make informed decisions, design efficient solutions, and unlock the full potential of the tech.
By establishing a common understanding of the terminology, we can engage in meaningful discussions, share insights, and work together to tackle challenges and opportunities encountered along the way.
Recognizing the layers provides a framework for analyzing and evaluating blockchain projects and solutions. It allows us to assess the strengths, weaknesses, and innovations of different layers and understand the trade-offs involved in designing blockchain systems.
Unveiling the Layers: A Path to Clarity
Layer 0: The Foundational Layer
Layer 0 (L0) refers to the underlying infrastructure that supports the entire blockchain ecosystem. It encompasses the hardware, network architecture, software, and basic protocols necessary for blockchain operation. L0 primarily focuses on security, decentralization, and consensus mechanisms.
One of the key developments in L0 is the emergence of novel consensus algorithms like Proof of Work (PoW), Proof of Stake (PoS), and Directed Acyclic Graphs (DAG). These mechanisms are designed to enhance scalability, energy efficiency, security, or a combination of the three — though it is challenging to attain all 3 equally
Examples of L0 hardware components are specialized mining rigs like ASICs (Application-Specific Integrated Circuits) used in Bitcoin mining and the data centers that house them. On the software side, while they are commonly lumped in with other Layer 1 chains, Cosmos, Polkadot, and Avalanche are considered L0 as they serve as the underlying network for independent Layer 1s to be created atop.
Layer 1: The Base Blockchain Layer
Layer 1 (L1) represents the core blockchain network layer. It includes popular blockchain platforms like Bitcoin, Ethereum, Cardano, and Solana. L1 blockchains provide the foundation for decentralized applications (dApps), smart contracts, and digital asset management. They serve as decentralized ledgers and provide a secure and immutable record of transactions, have their native cryptocurrencies, and specific rules governing their operation.
Scalability has been a significant challenge for L1 blockchains. However, several solutions are addressing this concern, such as sharding, state channels, and Zero-knowledge rollups (ZK-rollups). Additionally, the rise of Layer 2 solutions has helped alleviate the scalability bottleneck by offloading some transaction processing to secondary layers while maintaining the security and integrity of the base L1.
Layer 2: Scalability Solutions
Layer 2 (L2) solutions are built on top of L1 blockchains and aim to enhance scalability, reduce transaction costs, and improve overall user experience. They achieve this by processing a significant number of transactions off-chain, thereby reducing congestion without sacrificing network security on the L1 blockchain.
One prominent L2 technology is the Lightning Network which enables fast and low-cost microtransactions by establishing payment channels between users of the Bitcoin network. Other notable L2 solutions are Polygon (formerly Matic), Optimism, and Arbitrum which bundle multiple transactions into a single Layer 1 transaction, significantly increasing throughput.
Layer 3: The Application Layer
Layer 3 (L3) focuses on the execution of smart contracts and decentralized applications (dApps). This layer enables developers to build and deploy code that interacts with blockchain data. Ethereum's Virtual Machine (EVM) is a prominent example of L3 technology. It allows developers to create and execute smart contracts using languages like Solidity. Decentralized applications like Uniswap, a decentralized exchange, AAVE, a decentralized lending and borrowing protocol, and NFT marketplaces like LooksRare all operate under the L3 category.
Layer 4: Middleware and Services
While not a common designation, Layer 4 (L4) might refer to solutions that enhance the functionality and interoperability of blockchain networks. This may include identity management systems and oracle services. Chainlink, for instance, can be considered an L4 protocol that facilitates the connection between smart contracts and real-world data sources, enabling decentralized applications to access external information securely.
More commonly, however, most resources will simply categorize L4 solutions under the L3 application layer, due to their interconnection with smart contracts.
Layer 5: End User Interface
Another uncommon designation, Layer 5 (L5) might refer specifically to the user-facing applications and interfaces that interact with the blockchain ecosystem on the end-user’s behalf. Software wallets like MetaMask and TrustWallet and the graphical user interface (GUI) for your favorite dApps might be categorized as L5.
As with L4, there are clear overlaps in terminology with regard to L5 solutions so they will more commonly be categorized under L3 or have no layer designation at all.
Ongoing Development of Standards
While doing research for this article, it became surprisingly clear that standards, especially around terminology, are still developing. As such, we must acknowledge that different experts and organizations may have varying interpretations, naming conventions, and classifications of the different layers - most notably when going beyond the L3 application layer. These nuances do not detract from the core purposes of the underlying functions but are important to be aware of as formal standards are developed over time.
We’re Still Early…
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We hope you found this exploration of blockchain layers enlightening and useful for future conversations and research. As we strive to make this newsletter the best resource for our readers, we would love to hear from you. We welcome any feedback or suggestions for improvement. If there are any topics related to DeFi that you would like us to cover in future issues, please feel free to visit our Discord channel to let us know! Your feedback and input will make sure that we’re providing content that you want to see.
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