Understanding the basics of a blockchain is the building “block” of success in the crypto space.
As of 2021, US$6.6 billion has been spent on blockchain solutions. The technology not only underpins the global cryptocurrency market but also provides unique utility for other sectors, like healthcare, logistics and real estate.
A blockchain is a decentralized digital ledger made up of blocks that record data across a peer-to-peer (P2P) network. Once information is stored on this ledger, it becomes near impossible to delete, alter and hack. It is this unique characteristic of the blockchain that has inspired many to create their own blockchain-based businesses.
But before pondering over how you can utilize the blockchain in your business, it is important to understand how it works. Let’s take a look at the different layers of blockchain technology to make the most of what it has to offer.
Understanding the blockchain
When we talk about the layers of the blockchain, it is important to note that there are two ways to understand blockchain technology. The first way is to comprehend how blockchain architecture works. Blockchain technology consists of five layers—the hardware layer, the data layer, the network layer, the consensus layer and the application layer.
The second is the division of the blockchain network based on protocol. Protocol refers to the set of rules that govern a network. The blockchain protocol is made up of four layers—Layer 0, Layer 1, Layer 2 and Layer 3. Let’s take a look at each of these categories separately.
1. Blockchain architecture
The hardware layer
The first layer of the blockchain consists of hardware, like network connections, the computers within the network and data servers. The data stored inside a blockchain is hosted by data servers, and computers on the blockchain network can share this data with each other. This leads to the creation of a P2P network where information is validated by individual nodes (or computers) on the network.
The data layer
The second layer of this house is the data layer, where information stored on the network is managed. This layer is made up of blocks of information with each block connected to the previous one. The only block that is not linked back to another is the genesis block (the first block in the network).
Each transaction written on these blocks is protected through a private key and a public key. A private key is a digital signature known only by the owner for authorizing a transaction; a public key is used to verify who has signed for the transaction. To put it simply, if someone sends you some crypto, they will need to know your public key; for you to receive the crypto, you have to use your private key to verify the transaction and prove your ownership to your blockchain wallet.
The network layer
This layer facilitates communication between the different nodes within the blockchain network. It is also in this layer that blocks are created and added to the blockchain. As a result, this layer is also referred to as the propagation layer.
The consensus layer
This layer ensures that the rules of the network are effectively enforced to preserve uniformity within the network. One node cannot simply add a transaction to the blockchain; to do so, all nodes within the network need to agree on it. This level of verification lowers the risk of fraudulent transactions being added to the blockchain.
The application layer
This layer facilitates the use of the blockchain for a wide variety of purposes. It is made up of smart contracts and decentralized applications (DApps). This layer acts as the front end of the blockchain and is essentially what a user would typically encounter when operating within a blockchain network.
2. Blockchain protocol
Layer zero is where the network hardware (the internet and connected devices) coexist. It is the foundation on which the rest of the layers are built.
The first layer of the protocol consists of the different blockchains (like Bitcoin, Ethereum and Binance Smart Chain) that can process transactions. This layer of the protocol ensures the security of the blockchain with different consensus mechanisms, like proof of work and proof of stake being a part of this layer.
This layer is also known as the execution layer. As a blockchain grows, the number of transactions being performed on it increases. To support the increased number of transactions, we need scalability (ability to handle the increased load) Layer 2 solutions. Often, off-chain (or third party) solutions are implemented to address any issues within the first layer of the protocol. These solutions don’t hamper the features of the first layer but rather add to them.
This is the application layer of the blockchain protocol. It is made up of the different blockchain-based applications (Dapps and decentralized autonomous organizations [DAOs]) that we see on the market today, such as Decentraland and CryptoKitties.
To sum up, blockchain technology is made possible because of hardware, like data servers and connected devices. The network created by this hardware stores blocks of information in the data layer. The information stored in the data layer is shared inside the network within the network layer and verified within the consensus layer. Finally, in the application layer, the blockchain is provided real-world utility using additional applications and tools.
In contrast to the layers of the blockchain architecture which keep the network up and running, the protocol layers are focused on improving the utility of the blockchain. Layer 0 lays the groundwork for the rest of the protocols, on top of which different blockchains are created. To address issues in these blockchains, scalability solutions are added in Layer 2, and Layer 3 is how users engage with the blockchain.
The global blockchain market is exploding and is expected to be worth US$67.4 billion by 2026. The increasing relevance of blockchain makes it crucial for people to learn more about this space. Looking at these sub-categories collectively should make it easier for you to get a basic understanding of this technology.
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