It will be easier to understand the categories of blockchains with a firm grasp of what blockchain means at a fundamental level. While there are varieties of blockchain networks, each network belongs to a unique category, as we shall explain in this article.
What is a Blockchain?
Think about four friends, Bob, Alice, Charlee, and Lee, who meet for dinner and decide to split the bill. Bob, Alice, and Charlee send their money to Lee, but the transaction doesn’t go through. At this moment, Lee realized the multiple ways a transaction could fail. Banks can experience technical difficulties; accounts can be hacked, there may be transfer limits during certain periods, and transfer charges may be extremely high.
Cryptocurrencies were developed to resolve these problems. Cryptocurrencies are a form of virtual or digital currency that is based on a technology called a blockchain. They are immune to counterfeiting, don’t need a central authority, and are protected by a sophisticated encryption algorithm.
Going back to our illustrative scenario, Bob, Alice, and Charlee use the Bitcoin blockchain, for example, to send their payments to Lee. A record is created between the sender and receiver, including the balance, the amount sent, and the transaction recipient.
The record created is a set of computer-readable information with which the state of a network can be updated. All records of transactions on the Bitcoin networks are linked to all previous transactions on the network. The term “blockchain” describes this linking of transaction information in blocks to all previous blocks.
All participants in the blockchain network have a copy of the shared ledger, which works like an account book but is more like a system of connected computers. Hence, blockchain is a distributed, trustless, and immutable public ledger of connected transactions secured mathematically through special aspects of cryptography that prevent compromise and ensure that the network continues to work according to the instructions in the original code.
No one controls blockchains. Everyone can see everyone else’s transactions, but they cannot alter completed transactions. The decentralized nature of the blockchain also prevents a single point of failure, and there is no reliance on a third party to complete the transactions.
Types of Blockchains
Aside from the hardware, data, network, consensus, and application layer, which forms the basic architecture of the blockchain, blockchains can also be categorized according to the layers they belong to. Most blockchains are either layer 0, layer 1, or layer 2 by default. There are mentions of further layers in the crypto media, but keeping it this way is more intuitive.
Layer 0
Layer 0 blockchains supply the fundamental infrastructure for a blockchain network. A typical layer 0 blockchain consists of the necessary internet hardware and a network of computers. These work together to enable the proper functioning of the data, consensus algorithm, interconnection, and user-side application.
Layer 1
The original setup under layer 0 is maintained under layer 1 of most blockchains. Transactions are validated and finalized on layer 1, and the network relies on nothing else to complete initiated transactions. However, they inherit all the problems with layer 0, making it hard to scale as the network’s bandwidth demand increases. Hence, developers are moving to layer 2, a scalable alternative that exists on or works separately from layer 1 blockchains.
Layer 2
Layer 2 solutions are overlaying networks on the base layer 0 blockchains. The primary objective of layer 2 solutions is to resolve the scalability issues on the main blockchain. Several layer 2 solutions, like optimistic and zero-knowledge rollups, have been built or are under development on the Ethereum blockchain. Polygon, for example, is a software development kit for building decentralized applications as sidechains on Ethereum and connecting these applications to the main blockchain. Arbitrum and Optimism are optimistic rollups that check the validity of transactions after the fact, while Loopring and ZkSync are ZkRollups that establishes validity beforehand. However, it is difficult to make ZkRollups EVM compatible, which ZkSync is working hard to achieve.
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Conclusion
In conclusion, blockchain technology came to the limelight for its unparalleled ability to improve the current slow and inefficient global financial system. Without third parties, fees, and the need for trust, people can freely send money to one another across the globe. Censorship can also be avoided since the government cannot randomly withhold funds belonging to individuals using banks as tools.
For most blockchains to work effectively, they must have a hardware layer, a network layer, a consensus layer, and an application layer. Aside from these layers, another way to classify blockchains is based on whether they provide the basic infrastructure or rely on a base layer. Blockchains providing the basic infrastructure, such as Bitcoin and Ethereum, are layer 0 blockchains. Layer 0 blockchains are also layer 1 blockchains, provided that they can validate and finalize transactions without relying on anything else. Layer 2 are scaling solution for layer 1 blockchains that work as an overlying layer but rely on certain properties, such as the security of the base layer for finality.
These materials are for general information purposes only. They are not investment advice, a recommendation, or solicitation to buy, sell, or hold any digital asset or engage in any specific trading strategy. Some crypto products and markets are unregulated, and you may not be protected by government compensation and/or regulatory protection schemes. The unpredictable nature of the crypto asset markets can lead to loss of funds. Tax may be payable on any return and/or on any increase in the value of your crypto assets, and you should seek independent advice on your taxation position.
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