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Layers 0, 1 and 2 are all components of a blockchain network, with each playing different roles and performing various functions. There are scaling protocols spread around each layer – all aimed at addressing scalability concerns. Find out more…
Blockchain technology is touted as one of the greatest innovations humankind has ever witnessed. Apart from being the underlying technology for another significant innovation in history, cryptocurrency, blockchain is receiving multiple applications in several mainstream sectors, including banking, supply chain management, sports, IP and copyright management, because of its tremendous benefits. Some of these benefits include decentralisation, top-level security and immutable recordkeeping.
Over the years, blockchain networks have evolved, with hundreds of blockchain solutions being deployed daily to improve on certain functionalities such as scalability, security, interoperability or composability to offer users the best experience. The most common problem many solutions aim to address is scalability, which is the bane of older blockchains. Some of these solutions have been given different names such as sidechains, state channels, plasma, rollups, hashgraph and parachains.
Different layers within a blockchain network host these solutions. Thus, it is common to see terms such as Layer 1, Layer 2 and Layer 3. Each of these layers serves its purpose, which is made possible by an underlying and invisible layer known as Layer 0. The Layer 0 technology plays a significant role in keeping processes running within a blockchain. Most blockchain enthusiasts are oblivious of this layer and only privy to the overlays or overlaying networks. Understanding these overlays is key to identifying the role Layer 0 plays as a blockchain component.
Layer 1 Technology
Layer 1 technology is the blockchain network itself. Bitcoin, Ethereum and Litecoin are all examples of Layer 1 blockchains. These serve as the base protocols upon which solutions and applications are developed. They represent the first generation of blockchain networks that laid the groundwork for all other existing layers within the blockchain ecosystem. Layer 1 is also known as the consensus layer or protocol layer, or the implementation layer.
Layer 1 blockchains held sway for quite a while, handling basic payments and consensus protocol until cryptocurrency began witnessing more mainstream adoption. More and more people became interested in this financial innovation that offers immense benefits compared to traditional finance.
When the Bitcoin blockchain emerged, it was a novel concept to many people globally. However, soon, the perks of decentralisation, high-level security and transparency became well known. People started seeking out the better alternatives that a digital currency like Bitcoin presented. The increasing adoption brought more burden on the Bitcoin blockchain and other Layer 1 blockchains. Transactions took longer before getting added to blocks. As the burden mounted, alternatives were suggested.
These alternatives are referred to as Layer 1 scaling solutions. The most-recognised Layer 1 scaling solutions include consensus protocol changes and sharding. Consensus protocol changes aim to transition from older, cumbersome protocols like proof of work (PoW) to faster and energy-efficient ones like proof of stake (PoS). In the case of sharding, transactions are divided into small data sets known as shards, making it easier for blockchains to process them.
While the Bitcoin blockchain still retains the PoW consensus, Ethereum has begun a major protocol change to the PoS, which will be completed by the second quarter of 2022.
Layer 2 Technology
Scalability challenges also prompted the emergence of Layer 2 technology as Layer 1 or L1 scaling solutions failed to address them in their entirety. For blockchains like Ethereum – a hub for decentralised finance (DeFi) – the problem of scalability caused gas costs to skyrocket, especially during congestion in the network. Also known as the service layer, Layer 2 technology helps developers create digital wallets for storing cryptocurrencies, including smart contracts and any other functionality not directly connected to the generation of new blocks.
Layer 2 technology consists of overlaying networks built on top of underlying blockchains, otherwise known as Layer 1s. Many Layer 2 networks have been created as scaling solutions for Layer 1 blockchains. A Layer 2 scaling solution proposes to expand the capacity of its base protocol, increasing its transaction throughput. Following this, the base protocol can process more transactions than usual. Examples of L2 solutions include state channels; rollups (Optimism, Zero-Knowledge); nested blockchains; sidechains and parallel chains (parachains), including Polygon (MATIC), an L2 solution designed to scale on Ethereum.
Lightning Network, a Layer 2 scaling solution for the Bitcoin blockchain, is an example of a state channel, serving as an off-chain network that processes peer-to-peer transactions outside the main chain. Most DeFi applications on Ethereum have integrated some of these Layer 2 solutions to help users avoid costly gas fees.
Understanding Layer 0
Layer 0 is the most significant layer of a blockchain network because it determines how data are transmitted on the P2P network. Using a clothing analogy that Ashwath Balakrishnan of marketpsycles.com proposed, Layer 0 is the undershirt, which keeps people warm but is never visible. Meanwhile, Layers 1 and 2 are the shirt and jacket, respectively, with each of them performing different functions.
Layer 0 sits under Layer 1, serving as the channel that enables communication between blockchain protocols. This layer is the foundation upon which the overlapping layers rest. Thus, sitting atop Layer 0 is Layer 1, and sitting atop Layer 1 is Layer 2. The hierarchy is designed such that each layer provides support to the one above it. Layer 0 allows seamless connection with other protocols to build interconnected value chains.
Components of Layer 0
Layer 0 consists of protocols, connections, hardware, miners and other parts that form the foundational infrastructure of a blockchain. As the root layer, it enables cross-chain interoperability with all Layer 1 protocols like Bitcoin and Ethereum. Layer 0 provides support for several consensus algorithms while complimenting the three core pillars now collectively known as the blockchain trilemma: scalability, security and decentralisation.
In the past, developers advanced several Layer 0 protocols as solutions to the problem of scalability in blockchain networks: Bloxroute, Marlin Protocol and Fibre. These solutions attempted to improve throughput, diving under the hood of Layer 1 often by assessing the load of miners’ nodes and redirecting traffic routing the data flow, leading to increased transaction speeds and block sizes.
Layers in the Algorand Blockchain
Algorand, as a blockchain network, is also divided into layers. The component that hosts selected validators or verifiers chosen from each step of the Byzantine Agreement is Layer 0. Algorand’s Layer 1 hosts its PPoS consensus algorithm, which it uses to verify transactions and add new blocks. The green and carbon-negative blockchain enables the creation of assets (fungible tokens like the ALGO native token) within Layer 1, ensuring that these assets enjoy the security of the PPoS consensus protocol.
In comparison, whereas the creation and control of fungible tokens by token managers is only allowed via smart contracts (a Layer 2 functionality) on Ethereum based on the ERC20 token creation standard, Algorand supports these features within its Layer 1 based on the Algorand Standard Assets (ASA) functionality. Further, Algorand enables atomic multi-party transfer of tokens simultaneously in a single on-chain transaction.
Creating Non-fungible Tokens (NFTs) in Algorand’s Layer 1
Algorand’s Layer 1 (ASC1) also features smart contracts that can be used for valuable applications such as post-and-sale transactions, securitised loans, crowdfunding, accredited-only transactions and multi-sig wallets. Algorand also enables the creation of NFTs in Layer 1, allowing them benefits off of its trustless and decentralised infrastructure – a factor that is key to the ownership of NFTs. Other assets that can be created through the ASA functionality include restricted fungible tokens and restricted non-fungible tokens.
Meanwhile, Algorand’s Layer 2 framework allows users to build off-chain contracts that are too big and complex to reside on the MainNet. As a green and carbon-negative blockchain, Algorand offers many advantages to developers and businesses, providing them with the necessary tools to leverage [P40] while creating assets and DeFi applications.
Conclusion
Scalability, as an integral part of the blockchain ecosystem, has slowed the mainstream adoption of digital currency because existing blockchain protocols have failed to live up to expectations. Although scaling solutions keep emerging to address the prevalent issue, the inherent risks are a cause for concern. Thus, there have been calls for a blockchain network that specifically tackles scalability problems. Algorand fits this bill on account of its key components.
