Blockchain Layers Explained: What Are They and Why Do We Need Layer Solutions?

The Lightning Network is Bitcoin’s Layer-2 scaling solution. Polkadot is a Layer-2 platform that solves Ethereum’s scalability issues. If you have paid even a little bit of attention to cryptocurrencies or blockchain, you must have come across terms like Layer-1 and Layer-2 protocols. Wondering what these layers are and why they exist in the first place? Let’s find out. 

Why Do We Need Layers?

Blockchain is a unique combination of multiple already existing technologies – cryptography, game theory, etc. – with a large number of potential applications. Cryptocurrencies are just one of them. It brings efficiency, transparency, and security to remove intermediaries, bring down the costs, and bring efficiency. 

The distributed ledger technology (DLT) stores information verified by cryptography among a group of users, agreed through a predefined network protocol without a central authority oversight. It’s the marriage of these technologies that bring trust between people or parties who otherwise have no reason to trust one another. They enable blockchain networks to securely transfer value and data directly between users. 

Blockchains need to be highly secure in the absence of a centralized authority. And they need to be highly scalable to accommodate a rapidly growing number of users, transactions, and other data. It’s the need for scalability while maintaining top-notch security that gave rise to layers. 

The Four Layers

Academics haven’t finalized the conceptual models of blockchain networks yet. But, in essence, a blockchain network comprises four layers that each add different components to the ecosystem. 

• Layer Zero

Layer zero is made up of things that form the groundwork making blockchain a reality. It’s the infrastructure required to support Bitcoin, Ethereum, and other blockchain networks. Layer zero components are the Internet, hardware, and connections that enable smooth operations of Layer-1.

• Layer-1

This is the base layer that relies on its immutability for security. When people say the Ethereum network, they are referring to Layer-1. This layer is responsible for consensus mechanisms, computing language, block time, dispute resolution, and the rules and parameters that ensure the base level functionality of a blockchain network. It is often referred to as the implementation layer.

One of the main issues experienced in L1 is scalability needed to accommodate a rapidly growing amount of data. As users, transactions and other data on Layer-1 increase, the speed of transactions reduces. Transactions become more costly to execute quickly as the traffic rises.

To resolve these problems of scalability and cost of transaction, while still maintaining the benefits of Layer-1 (security, conflict resolution etc), there is a need for a second layer.

• Layer-2

L2 solutions are the overlaying networks that lie on top of the base layer. Protocols use Layer-2 to boost scalability by taking some of the interactions away from the base layer. So, smart contracts on the main blockchain protocol only handle deposits and withdrawals, and verify that the off-chain activities have obeyed the rules.

There are a variety of different Layer-2 technologies such as sidechains, ZK rollups, Optimistic rollups, Plasma framework, and more to overcome the main blockchain’s scalability limitations and operational difficulties.

To give a practical example, Celer Network is a coherent Layer-2 scaling platform built on the Ethereum network. It is driving mass adoption of blockchain technology by enabling a frictionless experience. Celer allows users to use existing DeFi protocols with up to 100x lower costs with no fear of security issues as it does not cause liquidity fragmentation or break composability. 

Celer Network developed the first-ever Layer-2 State Channel Network that helps speed up transactions and reduce gas fees by more than 100X on Ethereum, DFINITY etc. It also supports other blockchains like Polkadot.

• Layer-3

Layer-3 is often referred to as the application layer. The L3 projects mask the technical details of the communication channel and serve as a user interface. It’s the L3 applications that create real-world use cases for blockchains.

🙌cBridge 2.0 testnet is live at https://t.co/OGJkbZZQV2.
🥳Simpler UX: two-click -> one-click
💵Lower cost: lowest gas + efficient pricing
🌊 Easier LP/X: no need to run a node, single-click liquidity management, farming integrated
📈 Built to support billion $ vol. every day pic.twitter.com/D2ayNhp5w7

— CelerNetwork (@CelerNetwork) October 18, 2021

Continuing our example of the Celer network, decentralized apps built on top of Celer are Layer-3. The Celer platform provides a scaling solution enabling developers to build fast and secure dApps without being affected by the limitations of Layer-1 blockchains. 

Conclusion

There you have it: An overview of various layers of a decentralized network without too much technical jargon. L1 is the base infrastructure layer the decentralized systems are built upon. L2 resolves the scalability issues by taking some of the activity off-chain to facilitate fast and cheap transactions. Most of the Layer-3 projects are decentralized applications that we interact with.