Crypto 101: The 4 Layers of Blockchain Protocol

Every Blockchain is composed of numerous protocols (rules and procedures) that are embedded in its code.

Consider the blockchain to be a new house under construction. It is built on a solid foundation, the Internet. As with the wooden framework of a house, each blockchain is unique due to its carefully designed protocols.

Blockchain protocols define many characteristics of the network, including security, decentralization, scalability, usability, technology maturity, ecosystem development, and governance.

As with a fully constructed?house, blockchains are composed of multiple structural layers. Decentralized finance (DeFi) protocols have dominated the decentralized applications (Dapps) solutions market, with Ethereum serving as the leading blockchain providing a platform for layer-3 smart contracts and Dapps.

The purpose of this article is to assist you in comprehending the purpose of each protocol and the associated layers.

The Layers of Blockchain Protocol:

Layer-0:

The Network Category Layer,?this layer serves as the primary communication layer for any blockchain. A peer-to-peer network is constructed on the network layer, which includes data transmission protocols.

Layer-1:

The Fundamental Layer,?which contains critical cryptographic protocols that ensure the security of the blockchain. This layer of cryptographic protocols is critical for the integrity of processes, the secure distribution of data, and the blockchain’s consensus mechanisms.

Bitcoin’s Proof of Work (PoW)?and?Ethereum’s Proof of Stake (PoS)?are the two most well-known layer-1 protocols. In its most recent consensus protocol upgrade, Ethereum abandoned PoW in favor of?PoS (Casper). The new layer-1 PoS protocol is significantly faster and less energy-intensive.

The switch to PoS makes attacking the Ethereum protocol much more difficult. To secure the network, validators must stake large amounts of ETH. If the validator tries to attack the network, the protocol will destroy all of their staked ETH. In order to achieve the same result in PoW, the protocol would have to be able to destroy all of a miner’s hardware, which is not possible.

With the upcoming?shard chains update, Ethereum’s security model also will change. The?Beacon Chain?will assign validators to shards at random, making it nearly impossible to attack a specific shard. On a PoW blockchain, sharding is less secure because the protocol cannot control miners.

Layer-2:

The Execution Layer, which may include virtual environments, blocks, transactions, and smart contracts. This layer contributes to the blockchain’s speed and scalability by performing operations such as value transfer, smart contract execution, and block generation.

Layer-2 scaling techniques involve off-chain improvement to increase transaction speed, whereas layer-1 scaling techniques increase the base chain’s throughput. For example: payments are made using layer-1 proof-of-work protocols such as Bitcoin and Ripple. Both protocols employ similar layer-2 scaling solutions (called?Lightning Network?on BTC) by utilizing private payment channels to alleviate blockchain congestion.

Layer-3:

The Applications Layer,?which contains Dapps, Decentralized Autonomous Organizations (DAO), and autonomous agents.

This layer can house a variety of different user-level agents and programs that interact with the blockchain. Users communicate with the blockchain via protocols built into the application. Some of the most popular Layer 3 solutions include?Uniswap,?PancakeSwap,?Polygon, and?LoopRing.

Conclusion

Following a recent surge in demand for?DeFi Dapps, several layer-2 scaling solutions have been launched on the Ethereum blockchain, including rollups, plasma, state channels, and sharding protocols.

However, keep a watch on Ethereum’s competitors —?Mina,?Solana, and?Polkadot?— as they also provide layer-2 platforms, only with the specific goal to simplify the development of?DeFi applications?and?Non-Fungible Tokens (NFTs).

Due to this ever-evolving nature of blockchain technology, it’s important to stay up-to-date on all the latest news and announcements regarding the leading blockchain protocols. That’s why we’re here to help. Click here to?learn more about Tokenplace products’ features!