Introduction
When you invest in a crypto token or coin, you’re also investing in the project behind it. And, as with traditional investing where you look into every detail behind a company whose share price is being floated on an exchange, you should know exactly where you are putting your money when you buy a crypto token/coin.
Aside from the high-level messaging a project may put out, it’s important to understand how each project fits into the broader ecosystem.
One of the easiest ways to begin categorizing different coins (and, in turn, different projects) is via the layering concept. You might have heard of layer 1 and layer 2 solutions, but what do they exactly mean? And what about layer 0 and layer 3 solutions which are almost unheard of in the crypto world?
The cake sure does look delicious. But alas — blockchain layers are nothing like that.
Layer breakdown
- Layer 0
Blockchain in itself is called layer zero. The components required to make blockchain real are the internet, hardware, and many other connections.
Layer 0 is the initial stage of blockchain that allows various networks to function, such as Bitcoin, Ethereum, and many more. The Layer 0 blockchain lays the road for layer 1 blockchains. It gives the underlying infrastructure to create chains and also it allows cross-chain interoperability which means the chains created on top of layer 0 can communicate with each other.
If we were to use an analogy to explain Layer 0 — think of it as the concrete base of a house. Layer 0 technology provides the framework, through both software and hardware, for blockchains to be built upon.
Think nodes and everything else it takes to connect them to transfer data, including protocols and other mining hardware. This layer is often dubbed the “Internet of Blockchains,” because multiple blockchains can be built on a single layer 0 networks.
Key features
Allows for interoperability (i.e., different blockchains built on the same layer 1 foundation can speak to each other)
Dapps can be “cross-chain” if two chains are built on the same layer. (Huge plus for developers!)
Integrates blockchain with a traditional network.
Examples: Polkadot and Cosmos*
*The Binance Chain is built on top of Cosmos.
- Layer 1
A layer-1 network is another name for a base blockchain. BNB Smart Chain (BNB), Ethereum (ETH), Bitcoin (BTC), and Solana are all layer-1 protocols.
We refer to them as layer-1 because these are the main networks within their ecosystem. In contrast to layer-1, we have off-chains and other layer-2 solutions that are built on top of the main chains.
In other words, a protocol is layer 1 when it processes and finalizes transactions on its own blockchain. They also have their own native token, used to pay for transaction fees.
An analogy for Layer 1 would be the first floor of the house. L1s use the L0 infrastructure to transfer the data. Each L1 has its structure, including consensus mechanisms, ledger systems, and coding language, and often has its token. Essentially, L1 is where all the work happens to run the core functions of a blockchain, which takes the most energy to run.
Key Features
Layer1 is where the three main characteristics of a blockchain start to come in: decentralization, open-source, and immutability.
Each blockchain can run independently of any other chain.
It has its structure that defines how the chain is run and how data is transferred and recorded.
Define protocols/standards to support decentralized applications (Dapps).
Examples: Bitcoin, Ethereum, Solana, Cardano, Tezos, Algorand
- Layer 2s
The Layer 2 blockchains solve different problems that arise in the Layer 1 Blockchain and also the Layer 2 can be defined as a scaling solution for a certain blockchain. It inherits security from its respective Layer 1 chain.
As an example, Polygon is a Layer-2 Scaling solution that runs on top of Ethereum and it solves the scalability issue in Ethereum and it charges a lot lower gas fees for transactions.
Think of Layer 2 as the second floor (Nice to have, but not necessary for a blockchain to run). They are third-party integrations that are built on top of L1 chains to add efficiency (system throughput) or scalability. Layer 2 transactions are considered “off-chain.”
There are no debates going on in the crypto world about the survivability of Layer 2 Blockchains as the Ethereum Merge closes in.
If Ethereum’s move to proof-of-stake achieves its goal of addressing gas fees and transaction volume, then the need for layer-2s becomes reduced. Additionally, the move to proof-of-stake comes with the potential to improve the mechanism for securing the network.
There are also others like Tyler Perkins, the CMO of zkSync, who don’t believe The Merge will affect layer-2s.
He told CryptoSlate in this interview that The Merge will have “no impact” and that “L2s will be most impacted by sharding, which is planned for after the merge, as it will increase the amount of data storage available to rollups, dramatically increasing their throughput.” When The Merge happens this mid-Septmber we will all find out who is correct.
Key Features:
Not to be confused with apps, layer 2 solutions are primarily built to solve L1 congestion by taking some of the transactions off-chain
More flexibility for L2 nodes (i.e., they can be any number of servers owned by a company or an individual, rather than decentralized.)
Rely on Layer 1 chains for security
4. Layer 3
Lastly, the Layer 3 blockchain’s main task is to host the DAapps and many other protocols that enable other apps. Here, the blockchain protocol is split into two significant sub-layers, that being, application and execution.
It is the most diminutive and most potent solution made to separate blockchains with cross-chain capabilities for achieving the target of real interoperability.
Think of Layer 3 as the rooftop and outer landscape. L3 adds the visual UI component, creating apps and utilizing blockchain technology to create applicable use cases for everyday users. They are often referred to as Dapps.
Key Features:
Add ease of use to blockchain technology.
Provide clear use cases for an everyday end user
Key for mass adoption
Examples: Uniswap, Curve, Opensea
Conclusion
Today’s blockchain ecosystem has several Layer-1 networks and Layer-2 protocols. Because Layer-1s have so much to process, speed and scalability are difficult to maintain. This is particularly true because improving scalability requires a sacrifice in security or decentralization (coined as the “blockchain trilemma” by Vitalik Buterin).
As more and more people join the blockchain community, it is becoming harder and harder for L1s to keep up with transactions. Users either end up paying astronomical fees or waiting hours, even days, for their transactions to be confirmed.
In turn, several solutions have popped up:
Types of layer 1 solutions: consensus protocol changes (like forks), sharding, changes in block size
Types of layer 2 solutions: State channels, nester blockchains, sidechain, Optimistic rollups, Zero-knowledge rollups, Plasma, Validium
