Understanding blockchain technology for beginners

10 min read

16 Feb

16Feb

Understanding the layers of a blockchain

You've undoubtedly come across phrases like layer one and layer two protocols if you've looked into cryptocurrencies or blockchain. Are you interested in learning more about these levels and why they exist? In this post, we'll look at the later architecture of the blockchain. Blockchain technology is a one-of-a-kind combination of various contemporary technologies, such as cryptography and game theory, with a wide range of applications, including cryptocurrencies. Cryptography is a mathematical and computer discipline that entails encoding and decoding data.

By offering transparency and security, blockchain removes intermediaries, decreases costs, and enhances efficiency. Distributed ledger technology (DLT) preserves information verified by cryptography among a group of users who agreed through a specified network protocol without the control of a central authority. By combining these technologies, persons or parties who would normally have no reason to trust each other are encouraged to do so. They enable blockchain networks to safely exchange currency and data between users. Blockchains must be very secure because of the lack of a centralized authority. They must also be incredibly scalable in order to cope with growing numbers of users, transactions, and other data. It created layers in response to the need for scalability while maintaining top-notch security.

What is the definition of blockchain scalability?

In blockchain technology, the term "scaling" refers to increasing the system throughput rate, which is measured in transactions per second. Blockchain layers are now necessary to increase network security, record keeping, and other tasks, as cryptocurrencies become more widely adopted in everyday life. "Throughput" refers to the number of transactions handled by a system per second. While Visa's Visa Net electronic payment network can manage over 20,000 transactions per second, the primary chain of Bitcoin (BTC) can only handle seven transactions per second. A decentralized ecosystem's initial layer is the blockchain.

Layer two is a third-party integration that works in tandem with layer one to increase the number of nodes and hence the system throughput. Many layer two blockchain technologies are being used right now. These systems employ smart contracts to automate transactions. As Bitcoin becomes a more major force in the business sector, blockchain developers are striving to widen blockchain administration. By creating blockchain layers and enhancing layer two scalability, they intend to cut processing times and improve TPS.

The trilemma of the blockchain

The blockchain trilemma refers to the widely held belief that decentralized networks can only deliver two of the three benefits in terms of decentralization, security, and scalability. In the 1980s, computer scientists came up with the consistency, availability, and partition tolerance (CAP) theorem to represent one of the most critical of these issues. According to the CAP theorem, decentralized data storage, such as blockchain, can only provide two of the three guarantees described above at the same time. In today's distributed networks, this theorem has evolved into the blockchain trilemma.

According to popular belief, public blockchain infrastructure must forego security, decentralization, or scalability. As a result, creating a network with unbreakable security across a globally decentralized network while still supporting internet-scale transactional throughput is the holy grail of blockchain technology. Let's define scalability, security, and decentralization in basic terms before digging into the trilemma's dynamics:

1. The blockchain's scalability refers to its ability to handle a higher volume of transactions.

2. Security refers to the ability to secure data on the blockchain from various types of assaults and the blockchain's defense against double-spending.

3. Decentralization is a type of network redundancy that ensures that fewer entities do not control the network.

Scalability, security, and decentralization are all intertwined.

The network must first agree on the transaction's legitimacy before they can settle it. If the system has a big number of participants, agreeing may take some time. As a result, we can prove that when security parameters are similar, scalability is inversely proportional to decentralization. Assume that two proof-of-work blockchains have the same decentralization and that security is the hash rate of the blockchain. As the hash rate increases, the confirmation time lowers, and scalability increases as security improves. As a result, continual decentralization correlates with scalability and security. As a result, a blockchain cannot concurrently optimize for all three essential properties, requiring it to make trade-offs. The most recent illustration of the trilemma in action is Ethereum.

Because of the emergence of decentralized finance (DeFi) apps this summer, the Ethereum platform has experienced a surge in usage. Ethereum can only increase in value up to a certain point. Transaction costs have escalated because of the increasing demand, to where some users cannot use the blockchain. Increased Ethereum fees showed the trilemma, since we can see that Ethereum did not expand without losing security or decentralization. Ethereum's focus was on decentralization and security, with a restriction on the number of transactions per second (scalability).

Users pay greater fees to encourage miners to prioritize their transactions. In Bitcoin, decentralization and security have been prioritized over scalability. It's no secret that blockchains like Bitcoin and Ethereum are currently constrained in terms of scalability. As a result, a worldwide community of start-ups, companies, and engineers works feverishly on layer one and layer two solutions to overcome the trilemma of blockchain.

They built layer one blockchain networks to be fast, secure, and expandable. Layer two refers to technical advancements and solutions that may scale current blockchain networks. Getting the right mix between the two levels might be a game-changer for blockchain acceptance and decentralized network expansion. Developers are attacking the problem from several angles. Bitcoin Cash block size was an attempt to improve Bitcoin's scalability. However, there is no sign that it is gaining popularity.

By adding a layer to the current blockchain layer, Bitcoin hopes to solve the problem. According to the notion behind scaling solutions, layer two solutions will bundle several transactions together and only query the base layer blockchain once in a while. With sharding scaling the base layer blockchain and the community, expecting various layer two solutions to enhance throughout Ethereum is pursuing a hybrid approach.

The blockchain architecture's tiered structure

Each network participant monitors, approves, and updates new entries on the blockchain architecture's distributed network. The structure of blockchain technology is a collection of blocks with transactions in a pre-defined order. It may store these lists as a basic database or a flat file (in txt format). The architecture of a blockchain might be public, private, or consortium-based. Blockchain's layered design is divided into six tiers.

Hardware infrastructure layer

The blockchain's content is stored on a server in a data center somewhere on this lovely globe. Clients request content or data from application servers while browsing the web or using any apps, which is known as the client-server architecture.Clients can now connect with peer clients and share data. A peer-to-peer (P2P) network is a large group of computers that share data. Blockchain is a peer-to-peer network of computers that computers, validates, and records transactions in an orderly manner in a shared ledger. As a result, a distributed database is created, storing all data, transactions, and other pertinent data. A node is a computer in a P2P network.

Layer of data

It described the data structure of a blockchain as a linked list of blocks in which they arrange transactions. The blockchain's data structure comprises two basic components: pointers, and a linked list. A linked list is a collection of linked blocks that include data and links to preceding blocks. A linked list is a list of chained blocks with data and pointers to the preceding block, and pointers are variables that refer to the location of another variable.

The Merkle tree is a hash binary tree. Each block includes the Merkle tree's root hash and information such as the hash of the previous block, date, nonce, block version number, and current difficulty target. A Merkle tree offers security, integrity, and irrefutability for blockchain systems. Merkle trees, cryptography, and consensus algorithms form the foundation of the blockchain system. The genesis block, or first block, does not include the reference because it is the first in the chain. They digitally signed transactions to ensure the security and integrity of the data in blockchain. To sign transactions, a private key is utilized, and anybody holding the public key may verify the signer.

The digital signature detects information manipulation. Because the data that is encrypted is also signed, digital signatures ensure unity. As a result, any manipulation will render the signature invalid.The data cannot be discovered because it is encrypted. It cannot be tampered with again, even if they caught it. A digital signature also protected the sender's or owner's identity. As a result, a signature is legally linked to its owner and cannot be disregarded.

Layer of the network

The network layer, which is also known as the P2P layer, handles inter-node communication. The network layer is in charge of discovery, transactions, and block propagation. We also known this layer as the propagation layer. This P2P layer guarantees nodes can discover each other and interact, disseminate, and synchronize in order to maintain the blockchain network's integrity. A peer-to-peer (P2P) network is a computer network in which nodes are spread and share the network's workload in order to accomplish a shared goal. Nodes carry transactions on the blockchain out.

Consensus layer

For blockchain systems to exist, the consensus layer is required. Whether it's Ethereum, Hyper-ledger, or another blockchain, the consensus layer is the most important and crucial layer. The consensus layer is in responsible for verifying, ordering, and ensuring that everyone agrees.

Application layer

The application layer includes smart contracts, chaincode, and decentralized apps (DApps). The application and execution layers are differentiated from the application layer protocols. End-user apps that interface with the blockchain network are part of the application layer. It includes scripts, application programming interfaces (APIs), user interfaces, and frameworks. These apps interface with the blockchain network via APIs, which acts as the backend technology. The execution layer includes smart contracts, underlying rules, and chaincode. A transaction is verified and performed at the semantic layer, even though it goes from the application layer to the execution layer. The execution layer, which performs transactions and preserves the blockchain's deterministic nature, receives instructions from applications.

The layers of the blockchain are described.

Layer Zero

Layer zero of the blockchain is made up of components that help make blockchain a reality. It's the software that makes Bitcoin, Ethereum, and other blockchain networks work. The internet, hardware, and connections that enable layer one to work properly are all layer 0 components.

Layer one

This is the foundation layer, and its immutability ensures its security. When individuals mention Ethereum, they're referring to the Ethereum network, or layer one. Consensus methods, programming languages, block time, dispute resolution, and the rules and parameters that keep a blockchain network running are all handled by this layer. The implementation layer is another name for it. A layer one blockchain, such as Bitcoin, is one example.

Problems with layer one

When used together, these scaling techniques increase network throughput. Layer one, however, looks to be falling short as the number of blockchain users grows. On the layer one blockchain, the old and cumbersome proof-of-work consensus procedure is still in use. While this method is more secure than others, it is time-consuming. Miners must use processing resources to solve cryptographic algorithms. As a result, in the long term, more processing power and time are required. In addition, as the number of users has grown, the strain on layer one blockchain has increased. As a result, processing rates and capacities have slowed.

The solutions

Ethereum 2.0 will use proof-of-stake as an alternative consensus. This consensus mechanism verifies fresh transaction data blocks based on network participants' staking collateral, resulting in a faster process. Sharding is a solution for the layer one blockchain problem's scalability. Simply said, sharding breaks down validating and authenticating transactions into smaller, more manageable parts. As a result, the workload may be divided over the network to take use of the computational power of more nodes. Multiple transactions can be performed both sequentially and concurrently since the network processes these shards in parallel.

Layer two

L2 solutions are the overlapping networks that lie on top of the base layer. Layer two is used by protocols to improve scalability by separating some interactions from the base layer. As a result, smart contracts on the principal blockchain protocol only deal with deposits and withdrawals, as well as ensuring that off-chain transactions adhere to the rules. A layer two blockchain, such as Bitcoin's Lightning Network, is one example. So, what's the difference between blockchain layers one and two? A decentralized ecosystem's initial layer is the blockchain. Layer two is a third-party integration that works in tandem with layer one to increase the number of nodes and hence the system throughput. At the moment, many layer two blockchain technologies are being deployed.

Layer two scaling solutions

Layer two protocols have gained a lot of traction in recent years, and they're proving to be the most effective way to solve scalability problems in PoW networks in particular. The sections below discuss several layer two scaling strategies. Blockchain that is nested On top of one another, a stacked layer two blockchain operates. In a nutshell, layer one defines the parameters, while layer two executes the operations. There might be many blockchain levels on a single main-chain. Consider it a standard business model. Rather than delegating all the work to one person, the manager assigned it to subordinates, who then reported back to management after it completed them.

As a result, the effort of the management is decreased, while scalability is enhanced. For example, the OMG Plasma Project acts as a level two blockchain for Ethereum's level one protocol, making transactions cheaper and quicker. Channels of government A state channel increases total transaction capacity and speed by allowing two-way communication between a blockchain and off-chain transactional channels through a variety of methods. The miner does not need to be involved straight immediately to validate a transaction through a state channel. Instead, it's a network-adjacent resource with a multi-signature or smart contract method to defend it. When a transaction or batch of transactions on a state channel is completed, the "channel's" final "state" and all its inherent transitions are broadcast to the underlying blockchain.

Bitcoin Lightning and Ethereum's Raiden Network are two instances of state channels. State channels offer up some decentralization in exchange for enhanced scalability in the trilemma tradeoff. Sidechains are a type of a transactional chain that runs parallel to the blockchain and is used for large-scale transactions. A utility token is typically used as part of the data transfer mechanism between side and main chains, and sidechains have their own consensus technique that may be changed for speed and scalability. The primary role of the main chain is to offer general security and dispute settlement. Sidechains differ from state channels in a number of ways.

To begin with, sidechain transactions are not private between participants; instead, they are recorded in the ledger and made public. Furthermore, sidechain security breaches have no impact on the mainchain or other sidechains. Building a sidechain from the ground up takes a long time and a lot of effort. Rollups Rollups are layer two blockchain scaling methods that execute transactions outside of the layer one network before uploading the transaction data to the layer two blockchain. Because the data is on the base layer, layer one can keep rollups safe. Rollups benefit users by increasing transaction throughput, allowing for more open participation, and lowering gas costs.

Layer three

Layer three, or L3, is the name given to the application layer. The L3 projects serve as a user interface while concealing the communication channel's technical elements. As mentioned in the layered structure of the blockchain architecture, L3 apps are what give blockchains their real-world applicability.

Can they solve the blockchain trilemma?

The problems with distributed data storage that led to the development of blockchains were handed down to blockchains. The term "blockchain trilemma" was established to aggregate these obstacles and associated issues in order to better understand them. Despite the fact that the term "trilemma" has survived, the blockchain trilemma is only a hypothesis. Based on preliminary evidence, this idea appears to be correct, although it has yet to be proven or rejected. Even though layer one and layer two solutions have had some success, further study is needed.

Last but not least

Scalability is one reason why crypto mainstream acceptance is currently unachievable in the blockchain industry. The impetus to broaden blockchain protocols will increase as the demand for cryptocurrency develops. Because each level of the blockchain has its own set of constraints, the ultimate answer will be to create a system that can overcome the scalability trilemma. Because it serves as the foundation for decentralized systems, layer one is crucial.

Layer two protocols solve the underlying blockchain's scalability difficulties. Unfortunately, most layer three protocols (DApps) presently only run on layer one, ignoring layer two. It's understandable if these systems aren't operating as well as we would want. Layer three apps are critical because they aid in the development of real-world blockchain use cases. In contrast to traditional networks, they will not capture nearly as much value as its core blockchain.

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article by Amit Caesar: