What are blockchains layers?

As we explore blockchain technology in more detail, references to Layer 0, 1 and 2 protocols appear frequently. In understanding how blockchain technology works, or otherwise known as Distributed Ledger Technology (DLT), we can break this down further to review the blockchain layer architecture. 

First and foremost, let’s acknowledge that the main goals of blockchain technology are to eliminate the dependence on third parties or intermediaries, lower costs and enhance the efficiency, transparency and security of data or value transfers. When we consider that this occurs without any third party oversight, particularly that of a centralized authority, the DLT must ensure at all times information is verified and encrypted by the network according to the associated network protocol. For example, within the Bitcoin network all bitcoin transactions are verified according to the Bitcoin Protocol.

The lack of a centralized authority overseeing the activity requires blockchains to be extremely secure. Where we reference security in this context, this is the ability of the blockchain to secure the data on the blockchain from any types of attack and ensure any attempts to double-spend are blocked.

Equally, the need for blockchains to be scalable and handle rapid growth in users, transactions and any other data only increases. As a result, layers were established to meet the increasing requirements for blockchains to scale and meet the desired level of security. 

Put simply, blockchain scalability refers to the ability of a blockchain network, such as Bitcoin or Ethereum, to cope with the growing number of transactions or users without compromising security, performance or speed. In this sense, as the blockchain network expands the ability for it to cope with the increased demand is its scalability. A blockchain that can effectively scale is one that can accommodate the increased demand, all the while maintaining the level of efficiency and effectiveness. 

If we put the need for scalability into context, it is crucial when we consider if blockchains are to become widely adopted they will be required to handle significant volumes or transactions and data. All of which must be handled with the highest degree of security and efficiency possible.

To summarize, in one clear definition, the scalability of a blockchain is its ability to handle an increased volume of transactions.

Key examples include Cosmos (ATOM) and Polkadot (DOT).

Layer 0:

Layer 0 protocols form the foundational layer of the blockchain technology stack. They provide the essential infrastructure that enables interoperability and communication between different blockchain networks. Unlike higher-layer protocols that focus on specific applications or smart contracts, Layer 0 protocols establish the groundwork for creating and connecting multiple blockchain ecosystems. This layer is responsible for the transport of data across various blockchains, ensuring seamless interoperability, scalability, and security. 

Layer 0 protocols address fundamental issues such as cross-chain communication, data transfer, and consensus mechanisms across different blockchain networks. By establishing a unified framework, these protocols facilitate the development and integration of Layer 1 blockchains, making it easier for developers to build versatile and interconnected blockchain applications.

Key examples include Cosmos (ATOM) and Polkadot (DOT).

Layer 1:

Layer 1, also referred to as the implementation layer, are the foundational blockchain protocols that operate independently and have their own native tokens. For example;

• Ethereum with its native token ETH
• Bitcoin and its native token BTC
• Cardano and their native token ADA
• Solana and their native token SOL

You can think of Layer 1 as responsible for the consensus mechanism and associated processes, the programming language, block time, dispute resolution approaches and the parameters in which the blockchain network is maintained. 

Layer 2:

Layer 2 blockchains build upon the existing Layer 1, they essentially sit on top of the base layer (Layer 1) and serve as the secondary protocol. The main objective of Layer 2 is to provide a solution that improves the scalability, efficiency and functionality of the blockchain. Functionally, the original protocols leverage Layer 2 to make improvements for scalability by removing certain interactions from Layer 1. Meaning, the smart contracts that exist on the Layer 1 protocol focus on the deposits and withdrawals and ensure off-chain transactions meet regulatory requirements. 

To compare Layer 1 and 2 more clearly, consider Layer 1 as the decentralized ecosystem and Layer 2 as a third party integration that can be used alongside Layer 1 to enhance the system throughput. Layer 2 aims to enhance the existing capabilities of Layer 1, enabling scalability without sacrificing security.

Some examples of Layer 2 blockchains are:

1. Lightning Network: Bitcoin’s Layer 2, designed to enable instant, lower-cost transactions by creating an off-chain payment channel for users.
2. Raiden Network: Ethereum’s Layer two, designed to support instant and scalable payments off-chain by creating payment channels that support peer-to-peer token transfers. 
3. Optimism Rollup: Ethereum’s Layer 2 solution that brings together multiple transactions into a single group, submitting them as one to the Ethereum mainnet. 
4. Polygon: Polygon, formerly known as the Matic Network, is a Layer 2 for Ethereum offering side chains, plasma chains and other scaling solutions to enable Ethereum’s scalability and usability.
   

Layer 3:

Layer 3 solutions, also known as the application Layer, serve as a user interface that conceals the back-end technical aspects of the communication channel. It is the Layer 3 that provides blockchains with their real-world applicability and allows the end-users to communicate with the blockchain network. Examples of Layer 3 include application programming interfaces (APIs), user interface and frameworks.

Traditionally, Layer 3’s have been tightly coupled with the blockchain's application layer, providing enhancements and specialized features. However, emerging approaches are redefining the role of L3s, offering innovative solutions that leverage Layer 2 scaling solutions as their base.

A notable example is Arbitrum Orbit, a project focusing on a new paradigm in blockchain architecture. Arbitrum Orbit introduces a novel framework that enables developers to construct Layer 3 chains utilizing Arbitrum as their foundational layer. This approach presents a paradigm shift, decoupling Layer 3 functionality from the native application layer of the blockchain and instead integrating it with Layer 2 infrastructure.

By leveraging Arbitrum as the base, Layer 3 chains built on Arbitrum Orbit inherit its scalability and performance benefits, including reduced transaction costs and increased throughput. This separation of concerns between Layer 2 and Layer 3 enables developers to focus on crafting specialized functionalities and applications without being constrained by the limitations of the underlying blockchain's application layer.

Essentially, projects like Arbitrum Orbit exemplify the evolution of Layer 3 solutions, offering a flexible and scalable framework that extends the capabilities of blockchain networks while maintaining interoperability with existing scaling solutions.