What are layer 1, layer 2 and layer 3 in blockchain? Important differences with examples

When we talk about blockchain protocols, there are 3 different types that come to our mind: layer 1, layer 2 and layer 3.

What is Layer 1 in Blockchain?

Basic blockchain is often referred to as the layer-1 network. It serves as the primary network of the ecosystem, blockchain is referred to as layer 1. The term “on-chain network” is also often used to describe these layer-1 scaling methods.

The blockchain network’s basic technology is referred to as Layer 1. The basis for the other levels is provided by this layer. It contains the data structures, cryptographic techniques, and consensus processes required for the blockchain network to function.

How transactions are verified and new blocks are added to the blockchain are both governed by the consensus process. Proof of Work (PoW) and Proof of Stake (PoS) are the two consensus procedures most commonly used. PoW is used by the Bitcoin network and requires participants to perform computationally intensive tasks to validate transactions and create new blocks. PoS is used by Ethereum and other networks and requires participants to hold a certain amount of the network’s native token in order to participate in the validation.

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• How does a Layer 1 Blockchain work?

The cryptographic algorithms used in layer 1 provide security for transactions and ensure the immutability of the blockchain. For example, the Bitcoin network uses the SHA-256 hash function to secure transactions, while Ethereum uses the Ethash algorithm.

The data structures used in layer 1 are responsible for storing blocks of transactions. In addition, maintaining the integrity of the blockchain. In a blockchain, transactions are grouped into blocks and linked together in a chain. Each block contains a hash of the previous block. This ensures that the blockchain is a secure and tamper-proof ledger of all transactions.

The blockchain is a secure and impenetrable ledger of all transactions since each block contains a hash of the previous block.

Also read: Explained: What is Layer 0 in Blockchain? Layer Zero Crypto Examples

What is Layer 2 in Blockchain?

A network or system that runs on top of the underlying blockchain protocol to improve scalability and efficiency is called layer-2. This method requires transferring part of the blockchain protocol’s transaction burden at layer-2 scaling to modify the system architecture. Once the network processing burden is managed, it simply reports the results back to the primary blockchain for finalization.

The primary blockchain that acts as the base layer becomes less crowded and ultimately more scalable by abstracting most of the computing to different designs.

Examples of layer-2 used on the Ethereum blockchain network are Polygon and Immutable X.

• How does a Layer 2 Blockchain work?

In layer-2, three techniques have been used: rollup, sidechain and state channel.

Also read: What are Blockchain Bridges? Here is everything you need to know

Layer-2 off-chain transactions are combined and sent as a single transaction on the main chain using zero-knowledge calls, which is the most popular variant. To verify the accuracy of trading, the system uses proof of validity. On the main chain, which is connected by smart contracts, assets will be kept. The roll-up process will then be verified by the smart contract. The original network can have security by using this technique.

Blockchain sidechains are separate networks with their own validators. Smart contracts act as a link between the sidechain and the mainchain, as well as a means of validating the sidechain network. The sidechain can manage the assets on the mainchain, so you need to make sure it works properly.

A state channel is a two-way communication channel for the parties to a transaction. The parties connect it to an off-chain transaction channel and encrypt part of the underlying blockchain. Typically, a pre-negotiated or multi-signature smart contract is used to do this. Without immediately sending the transaction data to the underlying distributed ledger or main chain, the parties then perform the transaction or collection of transactions off-chain.

The final state of the channel is sent to the blockchain for validation when each transaction in the set is completed. This method exists to speed up transactions and expand the network’s overall capacity.

Also read: Explained: What is a Merkle tree in Blockchain and how does it work?

What is Layer 3 in Blockchain?

Applications constructed on top of the blockchain network are referred to as Layer 3. These applications use the immutability and security of the underlying blockchain architecture to offer fresh and creative answers to a variety of problems.

A decentralized exchange (DEX), which enables users to trade cryptocurrencies in a decentralized and trustless manner, is an illustration of a layer 3 application. Trades on a DEX are done on the blockchain. The assets that are traded are not under the stock exchange’s direct control. This removes the requirement for a trusted third party.

Important differences between layer 1, layer 2 and layer 3

On the Ethereum Layer 1 blockchain, the price of mining and transfer varies every day. However, it usually ranges between $50 and $125. On the Polygon Layer 2 lightning network, the cost to mint and transfer coins is approximately $0.05. This is 2000 times cheaper than on the Layer 1 blockchain.

It shows that Layer 2 blockchains, which have more efficient topologies than Layer 1 blockchains, are much cheaper.

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As more first-generation and next-generation blockchains adopt PoS and other more efficient models, this is expected to improve. Layer 1 and Layer 2 blockchains are often inefficient due to outdated Layer 1 consensus processes. The environmental impact of more efficient algorithms and designs is reduced, while transaction efficiency is increased.

Finally, it is important to note that not all of these different options for scaling solutions are equal, and that there is no standardized definition of a Layer 2 crypto network when it comes to Layer 2 protocols. For example, while Lightning Network transactions do not offer the same level of security and censorship resistance as on-chain transactions, they do offer much greater guarantees than conventional, centralized transaction servers.

Others propose higher requirements for a platform to function as a simple layer-2 cryptosystem, but some consider pending transactions on controlled exchanges to be layer-2 networks since they allow users to trade custody of coins off-chain.

Also read: What is Ethereum Staking, how does it work? Pros and Cons of Ethereum Staking