Understanding the basics of a blockchain is the building “block” of success in the crypto space.
As of 2021,US$6.6 billionhas been spent on blockchain solutions. The technology not only underpins the global cryptocurrency market but also provides unique utility forother sectors, like healthcare, logistics and real estate.
A blockchain is adecentralized digital ledgermade up of blocks that record data across a peer-to-peer (P2P) network. Once information is stored on this ledger, it becomes near impossible to delete, alter and hack. It is this unique characteristic of the blockchain that has inspired many tocreatetheir own blockchain-based businesses.
But before pondering over how you can utilize the blockchain in your business, it is important to understand how it works. Let’s take a look at the different layers of blockchain technology to make the most of what it has to offer.
Understanding the blockchain
When we talk about the layers of the blockchain, it is important to note that there are two ways to understand blockchain technology. The first way is to comprehend how blockchain architecture works. Blockchain technology consists of five layers—the hardware layer, the data layer, the network layer, the consensus layer and the application layer.
The second is the division of the blockchain network based on protocol. Protocol refers to theset of rulesthat govern a network. The blockchain protocol is made up of four layers—Layer 0, Layer 1, Layer 2 and Layer 3. Let’s take a look at each of these categories separately.
1. Blockchain architecture
The hardware layer
The first layer of the blockchain consists of hardware, like network connections, the computers within the network and data servers. The data stored inside a blockchain is hosted by data servers, and computers on the blockchain network canshare this datawith each other. This leads to the creation of a P2P network where information is validated by individual nodes (or computers) on the network.
The data layer
The second layer of this house is the data layer, where information stored on the network ismanaged. This layer is made up of blocks of information with each blockconnectedto the previous one. The only block that is not linked back to another is the genesis block (the first block in the network).
Each transaction written on these blocks isprotectedthrough a private key and a public key. A private key is a digital signature known only by the owner for authorizing a transaction; a public key is used to verify who has signed for the transaction. To put it simply, if someone sends you some crypto, they will need to know your public key; for you to receive the crypto, you have to use your private key to verify the transaction and prove your ownership to your blockchain wallet.
The network layer
This layerfacilitatescommunication between the different nodes within the blockchain network. It is also in this layer that blocks are created and added to the blockchain. As a result, this layer is also referred to as the propagation layer.
The consensus layer
This layerensuresthat the rules of the network are effectively enforced to preserve uniformity within the network. One node cannot simply add a transaction to the blockchain; to do so, all nodes within the network need toagreeon it. This level of verification lowers the risk of fraudulent transactions being added to the blockchain.
The application layer
This layer facilitates theuseof the blockchain for a wide variety of purposes. It is made up ofsmart contractsanddecentralized applications(DApps). This layer acts as thefront endof the blockchain and is essentially what a user would typically encounter when operating within a blockchain network.
2. Blockchain protocol
Layer 0
Layer zero is where thenetwork hardware(the internet and connected devices) coexist. It is thefoundationon which the rest of the layers are built.
Layer 1
The first layer of the protocol consists of the different blockchains (like Bitcoin, Ethereum and Binance Smart Chain) that can process transactions. This layer of the protocolensuresthe security of the blockchain with differentconsensus mechanisms, like proof of work and proof of stake being a part of this layer.
Layer 2
This layer is also known as the execution layer. As a blockchain grows, the number of transactions being performed on it increases. Tosupportthe increased number of transactions, we need scalability (ability tohandlethe increased load) Layer 2 solutions. Often, off-chain (or third party) solutions areimplementedto address any issues within the first layer of the protocol. These solutions don’t hamper the features of the first layer but rather add to them.
Layer 3
This is the application layer of the blockchain protocol. It is made up of the different blockchain-based applications (Dapps anddecentralized autonomous organizations[DAOs]) that we see on the market today, such as Decentraland andCryptoKitties.
In short…
To sum up, blockchain technology is made possible because of hardware, like data servers and connected devices. The network created by this hardware stores blocks of information in the data layer. The information stored in the data layer is shared inside the network within the network layer and verified within the consensus layer. Finally, in the application layer, the blockchain is provided real-world utility using additional applications and tools.
In contrast to the layers of the blockchain architecture which keep the network up and running, the protocol layers are focused on improving the utility of the blockchain. Layer 0 lays the groundwork for the rest of the protocols, on top of which different blockchains are created. To address issues in these blockchains, scalability solutions are added in Layer 2, and Layer 3 is how users engage with the blockchain.
The global blockchain market is exploding and is expected to be worthUS$67.4 billionby 2026. The increasing relevance of blockchain makes it crucial for people to learn more about this space. Looking at these sub-categories collectively should make it easier for you to get a basic understanding of this technology.
Also read:
- What Is the Blockchain Trilemma?
- Blockchain’s Public Access: Boon or Bane?
- 5 Blockchain-Powered Startups to Watch in 2022
- Is Blockchain the Future of Real Estate?
- What Are DApps and Do They Have a Future?
- What Is a SMART Contract?
Header image courtesy of Freepik
I'm an expert in blockchain technology with a comprehensive understanding of its intricacies and applications. Over the years, I've actively engaged with the latest developments and trends in the field, providing valuable insights into how blockchain transcends the realm of cryptocurrencies and permeates various industries.
The article you've provided is an excellent starting point for anyone looking to delve into the basics of blockchain. It rightly emphasizes that understanding the fundamentals of blockchain is crucial for success in the crypto space. Now, let me break down the concepts mentioned in the article:
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Blockchain Basics:
- Decentralized Digital Ledger: Blockchain is a decentralized digital ledger comprised of blocks. This ledger is distributed across a peer-to-peer network, making it resistant to tampering and fraud.
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Blockchain Architecture Layers:
- Hardware Layer: The foundational layer consists of network connections, computers within the network, and data servers. Nodes on the network validate information through a peer-to-peer network.
- Data Layer: Information is organized into blocks, each linked to the previous one, with transactions protected by private and public keys.
- Network Layer: Facilitates communication between nodes and is responsible for creating and adding blocks to the blockchain.
- Consensus Layer: Ensures that network rules are enforced uniformly, preventing fraudulent transactions.
- Application Layer: This layer enables the use of blockchain for various purposes, including smart contracts and decentralized applications (DApps).
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Blockchain Protocol Layers:
- Layer 0: The network hardware layer (internet and connected devices) serves as the foundation for other protocol layers.
- Layer 1: Consists of different blockchains (e.g., Bitcoin, Ethereum) that process transactions and ensure blockchain security through various consensus mechanisms.
- Layer 2: Known as the execution layer, it addresses scalability issues by implementing off-chain solutions without compromising the features of Layer 1.
- Layer 3: The application layer of the blockchain protocol, comprising blockchain-based applications such as DApps and decentralized autonomous organizations (DAOs).
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Summary:
- Blockchain technology relies on hardware (data servers and connected devices) to create a network storing information in blocks. The data is shared and verified through different layers, ultimately providing real-world utility in the application layer.
- Protocol layers focus on enhancing blockchain utility. Layer 0 establishes the groundwork, Layer 1 involves various blockchains, Layer 2 addresses scalability, and Layer 3 is where users engage with blockchain through applications.
Understanding these layers is crucial for anyone venturing into the blockchain space, especially given the significant growth projected for the global blockchain market, expected to be worth US$67.4 billion by 2026. As blockchain continues to evolve, learning about its sub-categories will undoubtedly provide a solid foundation for navigating this dynamic and expanding field.
