Blockchain Network Architecture

Summary

A blockchain network is a decentralized, distributed database allowing multiple parties to record and verify transactions jointly on a permanent public record. It consists of a network of computers, called nodes, that each maintain a copy of the database and use consensus algorithms to validate and record transactions.

Blockchain networks use cryptographic techniques to ensure the integrity and security of the database, making it resistant to tampering and revision. This makes them suitable for various applications, including financial transactions, supply chain management, and voting systems.

There are several types of blockchain networks, including public networks like Bitcoin and Ethereum, which are open to anyone, and private networks, which are restricted to a specific group of participants. There are also hybrid networks that combine elements of both public and private networks.

The most well-known use case for blockchain technology is creating and managing digital currencies like Bitcoin. However, the technology has the potential to be used in a wide range of other applications, including supply chain management, voting systems, and even identity verification.

Consensus algorithm

A consensus algorithm allows a group of people or computers to agree on a single version of a shared piece of data. In a blockchain, a consensus algorithm is used to ensure that all the computers on the network agree on the contents and state of the blockchain. This is important because it allows the blockchain to function as a secure and transparent ledger of transactions.

Several different consensus algorithms can be used in a blockchain, including:

• Proof-of-work (PoW): In PoW, a group of computers called “miners” compete to solve a complex mathematical problem. The first miner to solve the problem gets to create a new block of transactions, which is then added to the blockchain.
• Proof-of-stake (PoS): In PoS, the creator of a new block is chosen based on their stake (how many coins they hold) in the blockchain. The more coins a miner holds, the more likely they will be chosen to create the next block.
• Delegated proof-of-stake (DPoS): In DPoS, the creators of new blocks (called “block producers”) are chosen through a voting process. The block producers are responsible for creating new blocks and maintaining the network.
• Federated Byzantine Agreement (FBA): In FBA, a group of trusted nodes (called “validators”) reach a consensus by exchanging messages and voting on the state of the blockchain.
• Practical Byzantine Fault Tolerance (PBFT): In PBFT, a group of nodes (called “replicas”) reach a consensus by exchanging messages and voting on the state of the blockchain. PBFT is used in some private or permissioned blockchains.

Proof-of work

Proof-of-work (PoW) is a consensus algorithm some blockchain networks use to achieve distributed consensus and secure the network. It is the most widely used consensus algorithm and was first introduced by Bitcoin, the first and most widely used blockchain network.

In a PoW system, participants, called “miners,” compete to validate transactions and add them to the blockchain. To validate a block of transactions, miners must solve a complex mathematical problem, which involves performing a large number of calculations. The first miner to solve the problem is allowed to add the block of transactions to the blockchain and is rewarded with a portion of the transaction fees contained in the block.

The mathematical problem miners must solve designed to be difficult to solve but easy to verify. This ensures that it takes significant computational power to validate a block of transactions. Still, once a block has been validated, it is easy for other participants in the network to verify that the solution is correct.

The proof-of-work process is intended to be resource-intensive, as it requires miners to perform a large number of calculations. This is done to ensure that it is expensive for an attacker to control a significant portion of the network’s computational power and use it to manipulate the blockchain.

There are many different variations of PoW, each with its own unique set of rules and mechanisms for selecting the miner that gets to add the next block to the blockchain.

Proof-of-stake

Proof-of-stake (PoS) is a consensus algorithm some blockchain networks use to achieve distributed consensus and secure the network. It is an alternative to proof-of-work (PoW), the most widely used consensus algorithm.

In a PoS system, the right to validate transactions and add them to the blockchain is determined by the number of coins a participant holds (their stake). This is in contrast to PoW, where the right to validate transactions is determined by the amount of computational power a participant contributes to the network.

To participate in the PoS process, a participant must first hold a certain amount of the network’s native cryptocurrency (i.e., they must have a stake in the network). They can then participate in the validation process by “staking” their coins, which involves holding them in a special wallet and participating in the consensus process.

If a participant successfully validates a block of transactions, they are rewarded with a portion of the transaction fees contained in the block. The reward for validating a block is proportional to the participant’s stake in the network.

There are many variations of PoS, each with its own unique set of rules and mechanisms for selecting the validator of the next block. Some popular examples include delegated proof-of-stake (DPoS) and cosmoshash.

Delegated proof-of-stake

Delegated proof-of-stake (DPoS) is a consensus algorithm used by some blockchain networks to achieve distributed consensus and secure the network. It is a variant of the proof-of-stake (PoS) consensus algorithm, in which the right to validate transactions and add them to the blockchain is determined by the number of coins a participant holds (their stake). A DPoS system has two main types of participants: delegates and stakeholders. Stakeholders hold tokens in the network and have the right to vote for delegates. Delegates, on the other hand, are chosen by the stakeholders to represent them and validate transactions on the blockchain. DPoS systems aim to improve traditional PoS systems by increasing the speed and efficiency of transaction validation. This is achieved by limiting the number of delegates responsible for validating transactions and adding them to the blockchain. The limited number of delegates means that reaching a consensus is faster, as fewer participants need to agree on the state of the blockchain.

Federated Byzantine Agreement

Federated Byzantine Agreement (FBA) is a consensus algorithm decentralized networks use to achieve distributed consensus and secure the network. It is a variant of the classical Byzantine Fault Tolerance (BFT) algorithm, which ensures that a distributed system can tolerate Byzantine faults (i.e., failures caused by malicious or Byzantine nodes).

In an FBA system, the network is divided into groups, or federations, of nodes. Each federation is responsible for verifying the transactions and maintaining a record of the state of the network within its group. Federations reach a consensus on the state of the network by using a form of BFT algorithm, such as PBFT (Practical Byzantine Fault Tolerance).

One of the key benefits of FBA is that it allows for faster transaction finality compared to other consensus algorithms, such as proof-of-work (PoW). This is because FBA systems do not require multiple confirmations (blocks) before a transaction is considered final, as with PoW.

FBA is used by some blockchain networks, such as Stellar, to ensure the security and integrity of the network. It is also used in decentralized systems, such as federated social networks.

Practical Byzantine Fault Tolerance

Practical Byzantine Fault Tolerance (PBFT) is a consensus algorithm used to ensure the fault tolerance of distributed systems. It is a variant of the classical Byzantine Fault Tolerance (BFT) algorithm, which ensures that a distributed system can tolerate Byzantine faults (i.e., failures caused by malicious or Byzantine nodes).

PBFT is a method for reaching consensus in a distributed system in which some nodes may be faulty (e.g., they may behave maliciously or have failed). It works by having a designated leader node, the primary, to propose new values for the distributed system. Other nodes, called replicas, vote on whether to accept or reject the proposed value.

To ensure fault tolerance, PBFT requires that a certain number of replicas agree on the value to be accepted. This ensures that the system can continue to function even if some of the replicas are faulty.

PBFT is used in distributed systems, including blockchain networks and databases. It is known for being efficient and having a low communication overhead, requiring only a few messages to be exchanged between nodes to reach a consensus. However, it needs to be better suited to systems that require a high degree of scalability, as the number of messages exchanged between nodes grows as the number of nodes in the system increases.

Blockchain Trilemma

The blockchain trilemma is a concept that refers to the trade-offs that a blockchain system must make to achieve scalability, security, and decentralization. These three properties are often seen as conflicting goals, and it is difficult for a blockchain to achieve all three to a high degree simultaneously.

• The blockchain’s scalability refers to its ability to handle a higher volume of transactions.
• Security refers to securing data on the blockchain from various types of assaults and the blockchain’s defence against double-spending.
• Decentralization is network redundancy that ensures fewer entities do not control the network.

For example, a decentralized blockchain with many participants will have strong security, as it is difficult for any one entity to take control of the network. However, this also means that the network may have lower scalability, as more nodes must reach a consensus on transactions. On the other hand, a centralized blockchain can achieve high scalability, as fewer nodes need to reach consensus, but it sacrifices decentralization and the security that comes with it.

The blockchain trilemma is an ongoing challenge in the design and development of blockchain systems, and there is no one-size-fits-all solution. Blockchain projects may prioritize different properties depending on their specific use cases and goals.

Blockchain scalability

Blockchain scalability refers to a blockchain’s ability to handle many transactions and users without experiencing delays or performance issues. Scalability is an important consideration for any blockchain, as it determines the rate at which the network can grow and the number of users it can support.

There are several ways to improve the scalability of a blockchain, including:

1. Off-chain transactions: These transactions occur outside of the blockchain itself, reducing the load on the main chain.
2. Sharding: This refers to the division of the blockchain into smaller pieces called “shards,” which can be processed in parallel, improving the overall speed of the network.
3. Layer 2 solutions: These are additional protocols that operate on top of a blockchain and handle some of the workloads, allowing the main chain to process transactions more efficiently.
4. Optimizing consensus algorithms: Some are more scalable than others. For example, proof of stake (PoS) is generally more scalable than proof of work (PoW).

In summary, improving scalability is an ongoing challenge in the blockchain industry, and different projects have adopted different approaches to address this issue.

Blockchain Layers

There are several layers to a blockchain system, each with specific functions and roles in the overall system. These layers include:

The application layer: The application layer of a blockchain represents the most visible and user-facing aspect of the technology, and it is this layer that enables the creation of a wide range of innovative and practical applications that can be used to solve real-world problems and meet the needs of businesses and individuals.

The contract layer: This layer is responsible for executing smart contracts, self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code.

The consensus layer: This layer ensures that all nodes in the network agree on the state of the blockchain. It does this by using consensus algorithms designed to agree on the order of transactions and prevent fraud.

The network layer: The network layer of a blockchain plays a critical role in enabling the different nodes that make up the network to communicate and interact with each other and in supporting the operation of the blockchain as a whole.

The data layer: The data layer of a blockchain plays a key role in providing a secure and transparent record of all transactions on the network. This structure enables blockchain technology’s decentralized and trustless nature, allowing all participants access to a shared, immutable record of all transactions. This data is organized into blocks chained together using cryptographic techniques to create a secure and immutable record.

Hardware Layer: The hardware layer of a blockchain plays a critical role in supporting the operation of the network and enabling it to process and validate transactions securely and efficiently.

In summary, the different layers of a blockchain work together to create a decentralized, secure, and transparent system for recording and verifying transactions. Each layer is described in detail in the below sub-sections.

Application Layer

The application layer of a blockchain refers to the software applications built on top of the blockchain platform. These applications use the underlying blockchain infrastructure to store and process data. They can implement various functionality, such as financial transactions, supply chain management, voting systems, and identity verification.

Several different types of applications can be built on a blockchain, including:

• DApps (Decentralized Applications): These applications are built on a public blockchain and are open to anyone. They are decentralized, meaning they are not controlled by any single entity and are run by a network of users.
• Private Applications: These are applications built on a private blockchain and are only accessible to a specific group of users. Businesses or organizations typically use them to support internal processes and operations.
• Hybrid Applications: These are applications built on a combination of public and private blockchains and use elements of both to achieve their desired functionality.
• Overall, the application layer of a blockchain represents the most visible and user-facing aspect of the technology. This layer enables the creation of a wide range of innovative and practical applications that can be used to solve real-world problems and meet the needs of businesses and individuals.

Contract Layer

A blockchain contract layer is a layer in a blockchain system that enables the creation and execution of smart contracts. Smart contracts are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein are stored and replicated on a blockchain network.

A contract layer allows users to create and interact with smart contracts on the blockchain. It is typically implemented as a separate layer on top of the core blockchain protocol and provides a high-level interface for interacting with the blockchain. This allows developers to build applications that can leverage the decentralized nature of the blockchain without directly interacting with the blockchain protocol’s lower-level details.

Many different blockchain contract layers are available, each with its features and capabilities. Some popular examples include the Ethereum Virtual Machine (EVM) and the NeoContract virtual machine.

Consensus Layer

The consensus layer of a blockchain refers to the mechanisms used to ensure that all participants in the network agree on the state of the blockchain and the validity of the transactions recorded on it. In a blockchain, the consensus is achieved through consensus algorithms, which determine which transactions will be added to the blockchain and in what order.

Several types of consensus algorithms can be used in a blockchain, each with its benefits and trade-offs. Some of the most commonly used consensus algorithms include:

• Proof of Work (PoW): In a PoW consensus algorithm, nodes (called “miners”) compete to solve a complex mathematical problem, and the first node to solve the problem is allowed to add the next block of transactions to the blockchain.
• Proof of Stake (PoS): In a PoS consensus algorithm, nodes (called “validators”) are chosen to create the next block of transactions based on their stake in the network (i.e., the amount of cryptocurrency they hold).
• Delegated Proof of Stake (DPoS): In a DPoS consensus algorithm, nodes (called “delegates”) are chosen by the network’s users to create the next block of transactions.
• Practical Byzantine Fault Tolerance (PBFT): In a PBFT consensus algorithm, nodes communicate with each other to reach a consensus on the state of the blockchain.
• The consensus layer of a blockchain plays a critical role in ensuring the integrity and security of the blockchain, as it ensures that all participants agree on the state of the blockchain and the validity of the transactions that are recorded on it.

Network Layer

The network layer of a blockchain refers to the infrastructure and protocols used to support the communication and interaction between the nodes that make up the blockchain network. This can include the protocols used to transmit data between nodes and the mechanisms used to ensure the security and integrity of the data as it is transmitted across the network.

In a public blockchain, the network layer is typically decentralized, with nodes being operated by various entities. These nodes communicate with each other using open protocols designed to be transparent and accessible to all participants.

In a private blockchain, the network layer may be more centralized, with nodes owned and operated by a single entity or a group of entities. Private blockchains may also implement additional security measures, such as encryption, to protect the confidentiality of the data as it is transmitted across the network.

Data Layer

The data layer of a blockchain refers to the structure and organization of the data stored on the blockchain. In a blockchain, data is stored in blocks connected in a linear, chronological order to form a chain. Each block contains several transactions, a timestamp and a link to the previous block in the chain.

In a public blockchain, the data layer is typically transparent and accessible to anyone connected to the network. This allows users to view the entire history of transactions on the blockchain and verify the authenticity and integrity of the data.

In a private blockchain, the data layer may be more restricted, with access to the data being controlled by the entity or entities that operate the network. Private blockchains may also implement additional security measures, such as encryption, to protect the confidentiality of the data.

Overall, the data layer of a blockchain plays a key role in providing a secure and transparent record of all transactions on the network. This structure enables blockchain technology’s decentralized and trustless nature, allowing all participants access to a shared, immutable record of all transactions.

Hardware Layer

The hardware layer of a blockchain refers to the physical infrastructure used to support the operation of the blockchain network. This can include the computers, servers, and other equipment used to process and validate transactions and the communication networks and data storage systems used to transmit and store the data on the blockchain.

In a public blockchain, the hardware layer is distributed among many nodes operated by different entities, such as volunteers, businesses, or organizations. These nodes work together to support the network’s operation. They are typically connected to the Internet to allow them to communicate with each other and participate in the consensus process used to validate transactions.

In a private blockchain, the hardware layer may be more centralized, with a smaller number of nodes owned and operated by a single entity or a group of entities. Private blockchains may also be set up to operate on a local area network (LAN) or a wide area network (WAN) rather than the Internet, which can increase security and control.

Blockchain Protocol?Layer

Layer 0: This is the underlying physical infrastructure that supports the blockchain, including the computers and other hardware that make up the network of nodes.

Layer 1: This is the base layer of the blockchain, which includes the protocol and consensus algorithm that govern how transactions are recorded and verified. It is responsible for maintaining the integrity and security of the blockchain.

Layer 2: This refers to protocols that operate on top of the base blockchain, often to improve scalability, privacy, or interoperability. Examples of L2 solutions include sidechains, payment channels, state channels, and Plasma.

Layer 3: This is the application layer of the blockchain, which includes the user interface and the applications that interact with the blockchain. It is responsible for presenting the blockchain to users and allowing them to interact with it.

In summary, the different layers of a blockchain work together to create a decentralized, secure, and transparent system for recording and verifying transactions. Each layer’s functions and features can vary depending on the specific blockchain platform.

Layer 0

In blockchain technology, “layer 0” typically refers to the physical infrastructure that supports the blockchain, such as the computer hardware, internet connectivity, and other technical components necessary for the blockchain network’s operation. This can include the servers and other devices that run the software that implements the blockchain, as well as the communication channels that allow these devices to connect and interact with each other.

Layer 0 is the foundation upon which the other layers of the blockchain stack are built, and it is responsible for providing the necessary infrastructure to support the operation of the blockchain. It is important to have a reliable and secure layer 0, as it forms the foundation for the rest of the blockchain, and any issues at this layer can have cascading effects on the rest of the network.

Layer 1

In the context of blockchain technology, “layer 1” typically refers to the network protocol layer of the blockchain stack. This layer is responsible for defining the rules and standards that govern the operation of the blockchain network, including the consensus mechanism used to validate and record transactions on the blockchain and the mechanisms for communicating between different nodes on the network.

Layer 1 is the foundation upon which the other layers of the blockchain stack are built, and it is responsible for providing the necessary infrastructure to support the operation of the blockchain. It is important to have a well-designed layer 1, as it forms the foundation for the rest of the blockchain, and any issues at this layer can have cascading effects on the rest of the network.

Examples of blockchain layer one protocols include the Bitcoin and Ethereum networks.

Layer 2

In blockchain technology, “layer 2” typically refers to protocols or technologies built on top of a blockchain network (layer 1) to provide additional functionality or scalability. These layer two solutions are designed to work with a layer one blockchain and often rely on the underlying layer one blockchain for security and trust.

Layer 2 solutions are typically used to address scalability issues that may arise on a layer one blockchain. They allow faster and cheaper transactions by taking some of the load off of the main blockchain. They can also be used to add additional functionality to a blockchain network, such as supporting more complex types of transactions or enabling interoperability between different blockchains.

Some examples of layer two solutions include the Lightning Network for Bitcoin and the Plasma protocol for Ethereum.

Layer 3

Layer 3 blockchain is also referred to as the “application layer.” The main task of this layer is to host the DAapps and many other protocols that enable other apps. Here, the blockchain protocol is split into two significant sub-layers: application and execution. It is the most potent solution to separate blockchains with cross-chain capabilities for achieving the target of real interoperability.