Understanding the basics of a blockchain is the building block for success in the crypto space.
As of 2021, $6.6 billion has been spent on blockchain solutions. The technology is not only underpinning the global cryptocurrency market, but also offers unique benefits to other sectors such as healthcare, logistics and real estate.
A blockchain is a decentralized digital ledger made up of blocks that record data over a peer-to-peer (P2P) network. Once information is stored in this ledger, it is nearly impossible to erase, alter, and hack. It is this unique property of blockchain that has inspired many to start their own blockchain-based businesses.
But before thinking about how to use blockchain in your business, it’s important to understand how it works. Let’s take a look at the different layers of blockchain technology to get the most out of what it has to offer.
Understand the blockchain
When we talk about the layers of blockchain, it’s important to note that there are two ways to understand blockchain technology. The first way is to understand how the 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 the protocol. Protocol refers to the set of rules that govern a network. The blockchain protocol consists of four layers – Layer 0, Layer 1, Layer 2 and Layer 3. Let’s look at each of these categories separately.
1. Blockchain Architecture
The hardware layer
The first layer of the blockchain consists of hardware, such as network connections, the computers within the network, and data servers. The data stored in 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 in which information is validated by individual nodes (or computers) in the network.
The data layer
The second layer of this house is the data layer, which is where information stored on the network is managed. This layer consists of blocks of information, each block being linked to the previous one. The only block that is not connected to another is the Genesis block (the first block in the network).
Every transaction written on these blocks is protected by a private key and a public key. A private key is a digital signature known only to the owner to authorize a transaction; A public key is used to verify who signed for the transaction. To put it simply, when someone sends you crypto, they need to know your public key; In order for you to receive the crypto, you must use your private key to verify the transaction and prove your ownership of your blockchain wallet.
The network layer
This layer facilitates communication between the different nodes within the blockchain network. Blocks are also created and added to the blockchain at this layer. Therefore, this layer is also called the propagation layer.
The Consensus Layer
This layer ensures that network rules are effectively enforced to maintain consistency across the network. A node cannot simply add a transaction to the blockchain; To do this, all nodes within the network must agree on it. This level of verification reduces the risk of fraudulent transactions being added to the blockchain.
The application layer
This layer makes it easier to use the blockchain for a variety of purposes. It consists of smart contracts and decentralized applications (DApps). This layer acts as the front end of the blockchain and is essentially what a user typically encounters when operating on a blockchain network.
2. Blockchain Protocol
At the first level, the network hardware (the Internet and the connected devices) coexist. It is the foundation upon which the remaining layers are built.
The first layer of the protocol consists of the various blockchains (such as Bitcoin, Ethereum, and Binance Smart Chain) that can process transactions. This layer of the protocol ensures the security of the blockchain with various consensus mechanisms, such as Proof of Work and Proof of Stake, being part of this layer.
This layer is also known as the execution layer. As a blockchain grows, so does the number of transactions performed on it. 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 issues within the first layer of the protocol. These solutions do not hinder the properties of the first layer, but rather complement them.
This is the application layer of the blockchain protocol. It consists of the various blockchain-based applications (Dapps and decentralized autonomous organizations [DAOs]) that we see in the market today, such as Decentraland and CryptoKitties.
In summary, blockchain technology is made possible by hardware such as 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 within the network within the network layer and verified within the consensus layer. Finally, in the application layer, real-world value is provided to the blockchain with the help of additional applications and tools.
Unlike the layers of the blockchain architecture that keep the network running, the protocol layers focus on enhancing the utility of the blockchain. Layer 0 lays the foundation for the rest of the protocols on which various blockchains are built. To address issues in these blockchains, scalability solutions are added at layer 2, and layer 3 is how users interact with the blockchain.
The global blockchain market is exploding and is expected to be worth $67.4 billion by 2026. The increasing relevance of blockchain makes it crucial for people to learn more about this field. Considering these subcategories together should help you gain a basic understanding of this technology.
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