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8. March 2023  • clock 5 min •  Daniel Mitrovsky

Architecture and Blockchain Layers. What Are They, and What Is Their Purpose?

Blockchain technology has brought a massive revolution in the field of information storage and transmission. It is widely acknowledged to be one of the greatest innovations of the 21st century, with the potential to impact a variety of industries and sectors – from finance, commerce, logistics, and digital media to medicine and digital identity.

However, many people are still wondering what blockchain even is. Blockchain can be described as a kind of decentralised yet distributed database that allows information to be stored and processed on a computer network. Besides decentralisation, the main advantage is that a blockchain database can store an ever-increasing number of records. Blockchain works on the principle of blocks, where each block contains information such as transactions or any other data. The blocks are interconnected and form one big chain, which is what we know as blockchain.

Source: DecBC

Blockchain is also designed to be secure and independent, with no one central point of control. It works on a peer-to-peer system, so no individual or organisation controls the information stored on the blockchain. Instead, control is distributed across all network nodes, increasing the system’s security and trustworthiness as a whole. The blockchain is also transparent, meaning anyone can look up and view any transaction made on the network.

The first publicly known use case of this technology is Bitcoin, in which the blockchain acts as a public ledger. Individual transactions made on the Bitcoin network are distributed among the network nodes that verify the transactions, and then the transactions are stored in blocks and forever stored on the blockchain.

The Architecture of Blockchain Technology

The architecture of blockchain technology consists of five basic layers. Each of these layers performs specific functions, forming a consistent and functional technology solution for storing, managing and transmitting data. 

Hardware Layer 

The hardware layer of the blockchain represents the physical devices and technologies on which the blockchain is implemented and operated. This layer includes computers, servers, network devices and other hardware that together form the blockchain network. Data stored on the blockchain is hosted by data servers, and computers in the blockchain network can share this data with each other. This leads to a P2P network in which information is verified by individual network nodes. 

A peer-to-peer network can be thought of as a large network of computers located around the world that share data with each other. Simply put, blockchain is a network of peer-to-peer computers that computes, verifies and records transactions in an orderly manner in a shared ledger. The result is the creation of a distributed database in which all data, transactions and other relevant data are stored.

Data Layer

The blockchain’s data layer represents the data stored in blocks on the blockchain system. This data includes information about transactions, smart contracts, and other applications running on the blockchain.

The data layer is the foundation of the blockchain and ensures its decentralisation, independence, transparency, and security. All transactions are recorded in blocks in the data layer, each linked to the previous block. The exception is the so-called Genesis block, which represents the very first block on the blockchain and does not contain the hash of the previous block.

To protect the security and integrity of the data contained in the blockchain, transactions are digitally signed. Transactions are signed with a private key, and anyone with a public key can verify the signer. Since the data on the blockchain is not only encrypted but also digitally signed, any attempt to tamper with this data will invalidate the signature.

Network Layer

The blockchain’s network layer is responsible for data transmission and communication between the nodes in the blockchain network. This layer includes protocols for communication between nodes in the peer-to-peer network, allowing them to inform each other about new blocks and transactions in the system. It enables them to find each other and interact, propagate, and synchronise to keep the blockchain network up-to-date and legitimate.

The network layer is crucial for the efficiency and effectiveness of the blockchain system, but also for the security of the system as a whole. The network layer is also commonly referred to as the propagation layer.

Consensus Layer

The consensus layer of a blockchain is the mechanism by which agreement is reached on the current state of the network. The goal of the consensus layer is to ensure that all nodes in the network are aligned with the current state of the blockchain and that they are able to operate on the same data.

In practice, there are many variations of consensus algorithms that can be used within blockchain networks. The most well-known ones include Proof of Work (POW), Proof of Stake (POS) and Delegated Proof of Stake (DPoS). Each of these mechanisms has specific characteristics and certain advantages and disadvantages. Consensus algorithms are mostly selected based on the requirements and needs of each specific blockchain.

The consensus layer is crucial for maintaining the security of the system and for ensuring that all nodes in the network have the same and up-to-date blockchain state. This layer is also very important for maintaining the decentralisation of the system, the essence of which is that no node has control over the network.

Application Layer

The application layer of the blockchain represents the layer that enables the use of the blockchain for its specific applications in practice. This layer provides a programming interface for application developers who can create applications on the blockchain for various purposes.

The application layer can be used for a variety of use cases, such as e-commerce, identity and authentication, healthcare, financial services, and others. The application layer allows developers to leverage blockchain features such as transparency, security, or decentralisation to develop next-generation applications and services.

Source: Cointelegraph

Blockchain Layers

Users in the world of cryptocurrencies often encounter terms like layer zero, layer one or layer two blockchains. What are the differences between them, and what is their essence?

Layer 0

Blockchain technology itself can be thought of as layer zero, which provides the basic infrastructure for layer one blockchains. This layer encompasses the components necessary for Bitcoin or Ethereum, for example, to actually function. This includes, for example, the internet, the necessary hardware and other connections that will enable the smooth operation of Layer 1 blockchains.

In practice, however, some crypto projects are referred to as Layer-0 blockchains. These include Polkadot or Cosmos, for example, which help solve the problems faced by layer one networks built with monolithic architectures, such as the Bitcoin or Ethereum networks. These projects aim to create a more flexible underlying infrastructure that will allow developers to create interoperable (communicating with each other) purpose-specific blockchains.

Layer 1

Layer 1 blockchains include, for example, Bitcoin, Ethereum or Cardano. These blockchains perform basic activities such as recording transactions, producing blocks or ensuring adequate network security. In addition, these blockchains are in charge of processes related to consensus, blocking or rules and parameters that define the functionality of the blockchain network.

Layer 1 blockchains are often designed to extend the functionality and capabilities of layer zero blockchains, such as supporting smart contracts and enabling the creation of decentralised applications (dApps) or fungible and non-fungible tokens.

Layer 2

Earlier blockchains, such as Bitcoin or Ethereum, inherently do not scale well, which can be reflected in slower block production, longer transaction times or higher fees.

For this reason, so-called Layer-2 solutions, such as the Lightning Network on Bitcoin or Optimism on the Ethereum blockchain, are becoming increasingly popular. These Layer-2 solutions function as standalone blockchains that remove the limitations of Layer-1 blockchains, such as low scalability and high fees. They achieve this by processing transactions outside of the underlying blockchain (off-chain), with only data about individual transactions being sent to the underlying blockchain.

Second-layer blockchains communicate regularly with the underlying blockchain when carrying out their activities to ensure that both blockchains have the same security and decentralisation guarantees. This makes it unnecessary to make changes to the Layer 1 blockchains, as Layer 1 will take care of security, data availability and decentralisation, while the Layer 2 blockchains will solve the scaling problem and send the finished transaction evidence to it. This also contributes to layer 1 blockchains becoming less congested.

Layer 3

Referred to as the application layer of blockchains. It is made up of various blockchain-based applications that we can interact with today, such as Uniswap, Balancer or Decentraland.

Source: Medium

Final Thoughts

Although blockchain technology is very complex and perhaps too complicated for someone to fully understand, with a little effort, anyone can realise its great benefit and usefulness in everyday life. That is why many companies, including Visa, IBM and Walmart, are now using blockchain technology in their business. Over time, more and more world-famous companies will almost certainly join them.

Thanks to Fumbi, virtually anyone can invest in cryptocurrencies. Our diversified Fumbi Index Portfolio combines the best of all areas from the world of cryptocurrencies – from layer zero blockchains to layer three blockchains. Index Portfolio makes investing in cryptocurrencies simple, secure and intuitive.

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Daniel Mitrovsky


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