When investing in colorful crypto projects, it’s easy to get lost in the volatility and trends of the requests. Still, what numerous people forget( particularly those new to the space) is that investing in a coin is really investing in the design behind it.
And, as with traditional investing, you should know exactly where you’re putting your money. Away from the high-profile messaging a design may put out, it’s essential to understand how each design fits into the broader ecosystem.
One of the easiest ways to begin grading different coins( and, in turn, different systems) is via the layering concept. You might have heard of subcaste 1 and subcaste 2 results, but what do “subcaste 1” and “subcaste 2” actually mean in the first place — or “subcaste 0” and “subcaste 3” for that matter?
Let me break down the functional differences between each layer
Layer 0, in the context of blockchain technology, refers to the foundational layer that provides the infrastructure for building blockchains. It encompasses both software and hardware components that enable the connectivity and transfer of data between nodes. Layer 0 is often referred to as the “Internet of Blockchains” because it allows for the creation of multiple blockchains on a single network.
The key features of Layer 0 include:
1. Interoperability: Layer 0 facilitates interoperability between different blockchains built on the same layer 1 foundation. This means that these blockchains can communicate and interact with each other, enabling the transfer of assets and data across chains.
2. Cross-chain dApps: With Layer 0, developers can build decentralized applications (dApps) that can operate across multiple chains. This capability opens up new possibilities for creating applications that leverage the strengths and features of different blockchains.
3. Integration with traditional networks: Layer 0 technology allows for the integration of blockchain networks with traditional networks, such as the internet. This integration enables seamless communication between blockchain networks and existing infrastructure.
Some examples of Layer 0 projects include:
1. Polkadot: Polkadot is a multi-chain platform that aims to enable interoperability between different blockchains. It provides a framework for building custom blockchains and allows them to interoperate and share data.
2. Avalanche: Avalanche is a decentralized platform that utilizes a consensus protocol called Avalanche consensus. It offers a high-throughput network and supports the creation of custom blockchains with interoperability features.
3. Cardano: Cardano is a blockchain platform that uses a layered architecture approach. Layer 0 in Cardano’s architecture consists of the Cardano Settlement Layer (CSL), which handles the accounting and balance ledger for the native ADA cryptocurrency.
4. Cosmos: Cosmos is a network of interconnected blockchains that provides tools and protocols for building scalable and interoperable blockchains. It enables the transfer of assets and data between different chains within the Cosmos ecosystem.
These projects focus on providing the underlying infrastructure and protocols to enable the development of scalable, interoperable, and cross-chain applications within the blockchain ecosystem.
Layer 1, in the house analogy, represents the first floor of the house and is where the prominent blockchains like Bitcoin and Ethereum exist. Layer 1 blockchains utilize the infrastructure provided by Layer 0 to transfer data. Each Layer 1 blockchain has its own unique structure, including consensus mechanisms, ledger systems, coding languages, and often has its native token. This layer is where the core functions of a blockchain are executed, requiring significant computational power and energy consumption.
The key features of Layer 1 are as follows:
1. Decentralization, Open-Source, and Immutability: Layer 1 blockchains embody the fundamental characteristics of a blockchain, including decentralization, open-source nature, and immutability. These features ensure that the network operates in a distributed manner, allowing participants to validate and secure transactions without relying on a centralized authority.
2. Independent Operation: Each Layer 1 blockchain can operate independently of any other chain. They have their own set of rules, protocols, and governance structures that determine how the blockchain operates, how transactions are validated, and how data is recorded.
3. Protocols and Standards for DApps: Layer 1 blockchains define protocols and standards that support the development of decentralized applications (DApps). These protocols enable developers to build applications on top of the blockchain and leverage its functionalities. DApps can interact with the blockchain’s native features and utilize smart contracts to execute programmable actions.
Examples of Layer 1 blockchains include:
1. Bitcoin: Bitcoin was the first and most well-known cryptocurrency and blockchain. It operates on its own Layer 1 blockchain and utilizes the proof-of-work (PoW) consensus mechanism.
2. Ethereum: Ethereum is a programmable blockchain platform that introduced smart contracts, enabling the development of decentralized applications. It operates on its own Layer 1 blockchain and is in the process of transitioning from proof-of-work (PoW) to proof-of-stake (PoS) consensus.
3. Solana: Solana is a high-performance blockchain platform designed for decentralized applications and cryptocurrencies. It features a scalable Layer 1 blockchain with fast transaction processing and low fees.
4. Cardano: Cardano is a blockchain platform that aims to provide a secure and sustainable infrastructure for the development of decentralized applications and smart contracts. It operates on its own Layer 1 blockchain and uses a unique proof-of-stake (PoS) consensus mechanism.
5. Tezos: Tezos is a self-amending blockchain platform that utilizes a proof-of-stake (PoS) consensus mechanism. It allows stakeholders to vote on proposed upgrades to the protocol, making it adaptable and self-evolving.
6. Algorand: Algorand is a blockchain platform that focuses on scalability, security, and decentralization. It utilizes a proof-of-stake (PoS) consensus mechanism and aims to provide a platform for building decentralized applications and financial infrastructure.
These Layer 1 blockchains serve as the foundation for various applications and ecosystems within the blockchain space, each with its own unique characteristics and value propositions.
Layer 2, in the house analogy, corresponds to the second floor and represents third-party integrations built on top of Layer 1 chains. Layer 2 solutions are designed to enhance the efficiency and scalability of Layer 1 blockchains by offloading some of the transactions from the main chain. These transactions are considered “off-chain,” meaning they occur outside of the Layer 1 blockchain but still rely on it for security.
The key features of Layer 2 solutions are as follows:
1. Off-Chain Transactions: Layer 2 solutions aim to alleviate congestion on Layer 1 chains by moving certain transactions off-chain. By doing so, they can increase the system throughput and reduce transaction fees, allowing for faster and more cost-effective transactions.
2. Congestion Relief: Layer 2 solutions are primarily developed to address scalability challenges and congestion issues faced by Layer 1 blockchains. By leveraging techniques such as state channels, sidechains, or plasma chains, Layer 2 solutions can process a high volume of transactions off-chain while still maintaining the security guarantees provided by the Layer 1 chain.
3. Flexibility in Node Structure: Layer 2 nodes have more flexibility compared to Layer 1 nodes. They can be operated by companies or individuals and can consist of any number of servers. Unlike the decentralized nature of Layer 1 nodes, Layer 2 nodes may exhibit a more centralized or semi-centralized structure.
It’s important to note that Layer 2 solutions do not refer to applications or dApps built on top of Layer 1 blockchains. Instead, they focus on improving scalability and efficiency by utilizing Layer 1 chains for security purposes.
Examples of Layer 2 solutions include:
1. Lightning Network (built on top of Bitcoin): The Lightning Network is a Layer 2 solution for Bitcoin that enables fast and scalable off-chain transactions by creating payment channels between participants. It allows for near-instant and low-cost transactions while leveraging the security of the underlying Bitcoin blockchain.
2. Plasma (built on top of Ethereum): Plasma is a framework for building scalable decentralized applications on the Ethereum blockchain. It operates as a network of sidechains that can process transactions off-chain, reducing the load on the main Ethereum network while retaining the security guarantees of the base layer.
3. Optimistic Rollups: Optimistic Rollups are Layer 2 solutions that aim to increase Ethereum’s scalability by batching transactions and processing them off-chain. They utilize the main Ethereum chain for security and periodically submit a summary of the transactions to be verified on Layer 1.
These Layer 2 solutions provide additional scalability and efficiency to Layer 1 blockchains, offering potential solutions to the scalability trilemma (scalability, security, and decentralization) faced by many blockchain networks.
Layer 3, in the house analogy, represents the rooftop and outer landscape, symbolizing the user-facing applications and interfaces built on top of Layer 1 and Layer 2 solutions. Layer 3 focuses on creating decentralized applications (DApps) that leverage blockchain technology to provide practical use cases for everyday users.
The key features of Layer 3 are as follows:
1. User-Friendly Interface: Layer 3 applications aim to add ease of use to blockchain technology by providing user-friendly interfaces and intuitive interactions. They strive to abstract the complexities of blockchain technology in order to create a seamless and familiar experience for everyday users.
2. Practical Use Cases: Layer 3 applications are designed to showcase clear and applicable use cases for end users. They demonstrate how blockchain technology can be utilized in various domains, such as finance, gaming, decentralized exchanges, NFT marketplaces, and more. These use cases highlight the benefits of decentralization, immutability, and transparency in solving real-world problems.
3. Mass Adoption: Layer 3 applications play a crucial role in driving mass adoption of blockchain technology. By offering compelling use cases and user-friendly interfaces, they help bridge the gap between blockchain enthusiasts and the wider audience. Mass adoption of Layer 3 applications is instrumental in bringing blockchain technology to the mainstream and realizing its full potential.
Examples of Layer 3 applications (DApps) include:
1. Uniswap: Uniswap is a decentralized exchange (DEX) built on the Ethereum blockchain. It allows users to trade ERC-20 tokens directly from their wallets without the need for intermediaries. Uniswap utilizes automated market-making algorithms to provide liquidity and enable peer-to-peer token swaps.
2. Curve: Curve is another decentralized exchange protocol built on Ethereum. It focuses on stablecoin trading, providing low-slippage and low-fee swaps between different stablecoin assets. Curve aims to optimize for stablecoin liquidity and offers a user-friendly interface for traders.
3. OpenSea: OpenSea is a decentralized marketplace for non-fungible tokens (NFTs). It allows users to buy, sell, and trade digital assets, including collectibles, artwork, virtual real estate, and more. OpenSea provides an accessible platform for creators and collectors to interact and transact in the NFT space.
These Layer 3 applications demonstrate how blockchain technology can be integrated into various industries and provide practical solutions and experiences for end users. They showcase the potential of decentralized applications and contribute to the broader adoption of blockchain technology.