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?
The foundation 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 networking” is also frequently used to describe these Layer-1 scaling methods.
The blockchain network’s foundational 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 that are most frequently utilized. PoW is used by the Bitcoin network and requires participants to perform computationally intensive tasks in order 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 validation.
How a Layer 1 Blockchain works?
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. Additionally, maintains the integrity of the blockchain. In a blockchain, transactions are grouped into blocks and linked 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.
What is Layer 2 in Blockchain?
A network or system that runs on top of the underlying blockchain protocol to improve its scalability and efficiency is referred to as layer-2. This method calls for transferring a portion of the blockchain protocol’s transactional burden at layer-2 scaling in order to modify the system architecture. Once the network processing burden has been managed, it simply reports the results back to the primary blockchain for finalization.
The primary blockchain that serves as the base layer becomes less crowded and ultimately more scalable by abstracting the majority of the data processing into different designs.
Examples of layer-2 used on the Ethereum blockchain network are Polygon and Immutable X.
How a Layer 2 Blockchain functions?
In layer-2, three techniques have been applied: rollup, sidechain, and state channel.
Layer-2 off-chain transactions are combined and sent as a single transaction on the main chain using zero-knowledge rollups, which are the most popular variant. To verify the accuracy of commerce, 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 using this technique.
Blockchain sidechains are separate networks with their own validators. Smart contracts serve as a link between the sidechain and the main chain as well as a means of validating the sidechain network. The sidechain can manage the assets on the main chain, thus you must ensure that it is functioning correctly.
A State channel is a two-way channel of communication for the parties to a transaction. The parties connect it to an off-chain transaction channel and encrypt a portion 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 subsequently carry out the transaction or collection of off-chain transactions.
The final status of the channel is broadcast to the blockchain for validation when each transaction in the set has been completed. This method exists to speed up transactions and expand the network’s total capacity.
What is Layer 3 in Blockchain?
Applications that are 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 issues.
A decentralized exchange (DEX), which enables users to trade cryptocurrencies in a decentralized and trustless way, is an illustration of a layer 3 application. Trades on a DEX are made on the blockchain. The assets being traded are not under the exchange’s direct control. This does away with the requirement for a reliable third party.
Key differences between Layer 1, Layer 2, and Layer 3
On the Ethereum Layer 1 blockchain, the price of mining and transferring varies every day. However, it typically ranges between $50 and $125. On the Polygon Layer 2 lightning network, the cost of minting and transmitting coins is approximately $0.05. This is 2,000 times less expensive than on the Layer 1 blockchain.
It shows that Layer 2 blockchains, which have more effective topologies than Layer 1 blockchains, are much less expensive.
As more first-generation and next-generation blockchains adopt PoS and other more efficient models, this is projected to improve. Layer 1 and Layer 2 blockchains are commonly inefficient because of out-of-date Layer 1 consensus processes. The environmental impact of more efficient algorithms and designs is reduced, while transaction efficiency is increased.
Finally, it’s important to note that not all of these various scaling solutions options are equal and that there is no standardized definition of a layer-2 crypto network when it comes to Layer 2 protocols. For instance, 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, however, some people consider pending transactions on controlled exchanges to be Layer 2 networks since they allow users to trade custody of coins off-chain.