What are the different layers of blockchain technology?

Understanding the basics of a blockchain is the building block for success in the crypto space.

As of 2021, USD 6.6 billion has been spent on blockchain solutions. The technology not only underpins the global cryptocurrency market, but also provides unique benefits to other sectors, such as healthcare, logistics and real estate.

A blockchain is a decentralized digital ledger consisting of blocks that record data over a peer-to-peer (P2P) network. Once information is stored on this ledger, it becomes almost impossible to delete, change and hack. It is this unique feature of the blockchain that has inspired many to create their own blockchain-based businesses.

But before you ponder how you can use the blockchain in your business, it is important to understand how it works. Let’s take a look at the different layers of blockchain technology to get the most out of what it has to offer.

Understanding the blockchain

When we talk about the layers of the blockchain, it is important to note that there are two ways of understanding blockchain technology. The first way is to understand how blockchain architecture works. Blockchain technology consists of five layers – the hardware layer, the data layer, the network layer, the consensus layer and the application layer.

The second is the division of the blockchain network based on protocol. Protocol refers to the set of rules that govern a network. The blockchain protocol consists of four layers – Layer 0, Layer 1, Layer 2 and Layer 3. Let’s take a look at each of these categories separately.

1. Blockchain architecture

The hardware layer

The first layer of the blockchain consists of hardware, such as network connections, the computers in the network and data servers. The data stored inside a blockchain is hosted by data servers, and computers on the blockchain network can share this data with each other. This leads to the creation of a P2P network where information is validated by individual nodes (or computers) on the network.

The data layer

The second layer in this house is the data layer, where information stored on the network is managed. This layer consists of blocks of information with each block connected to the previous one. The only block that is not connected back to another is the genesis block (the first block in the network).

Each transaction written on these blocks is protected through a private key and a public key. A private key is a digital signature known only by its owner to authorize a transaction; a public key is used to verify who signed for the transaction. To put it simply, if someone sends you any crypto, they need to know your public key; in order for you to receive the crypto, you must use your private key to verify the transaction and prove ownership of your blockchain wallet.

The network layer

This layer facilitates communication between the different nodes in the blockchain network. It is also in this layer that blocks are created and added to the blockchain. As a result, this layer is also referred to as the propagation layer.

The consensus team

This layer ensures that the rules of the network are effectively enforced to maintain uniformity in the network. A node cannot simply add a transaction to the blockchain; to do so, all nodes in the network must agree on it. This level of verification reduces the risk of fraudulent transactions being added to the blockchain.

The application layer

This layer facilitates the use of the blockchain for a variety of purposes. It consists of smart contracts and decentralized applications (DApps). This layer acts as the front end of the blockchain and is essentially what a user will typically encounter when operating within a blockchain network.

2. Blockchain protocol

Create 0

The first layer is where the network hardware (the internet and connected devices) coexist. It is the foundation on which the rest of the teams are built.

Layer 1

The first layer of the protocol consists of the various blockchains (such as Bitcoin, Ethereum and Binance Smart Chain) that can process transactions. This layer of the protocol ensures the security of the blockchain with different consensus mechanisms, such as proof of work and proof of stake are part of this layer.

Layer 2

This layer is also known as the execution layer. As a blockchain grows, the number of transactions performed on it increases. To support the increased number of transactions, we need scalability (ability to handle the increased load) Layer 2 solutions. Often, off-chain (or third-party) solutions are implemented to solve any problems within the first layer of the protocol. These solutions do not inhibit the functions of the first layer, but add to them.

Layer 3

This is the application layer of the blockchain protocol. It consists of the various blockchain-based applications (Dapps and decentralized autonomous organizations [DAOs]) that we see on the market today, such as Decentraland and CryptoKitties.

Briefly summarized…

To summarize, blockchain technology is made possible by hardware, such as data servers and connected devices. The network created by this hardware stores blocks of information in the data layer. The information stored in the data layer is shared within the network within the network layer and verified within the consensus layer. Finally, at the application layer, the blockchain is provided with real tools using additional applications and tools.

Unlike the layers of the blockchain architecture that keep the network running, the protocol layers are focused on improving the utility of the blockchain. Layer 0 lays the foundation for the rest of the protocols, on top of which different blockchains are created. To solve problems in these blockchains, scalability solutions are added in layer 2, and layer 3 is how users engage with the blockchain.

The global blockchain market is exploding and is expected to be worth $67.4 billion by 2026. The growing relevance of blockchain makes it imperative for people to learn more about this area. Looking at these subcategories together should make it easier for you to get a basic understanding of this technology.

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