What is Blockchain Layer 0?

Layer 0 is the network infrastructure that runs underneath the blockchain forming the fundament of the technology. The blockchain ecosystem comprises protocols, connectivity, hardware, miners, and other components.

Why is Blockchain protocol Layer 0 Important?

In a nutshell, Layer 0 emerges as a solution to the limitations posed by Layer 1 protocols. As the foundational layer, it addresses various critical issues, encompassing:

1. Scaling:

Layer 0 confronts the challenge of scalability head-on. The lack of scalability has been a formidable hindrance to the sustainable expansion of blockchain-driven solutions. DApps operating atop proof-of-work Layer 1 protocols contend with the limitations of blockchain resources, leading to sluggish transaction speeds.

2. Usability:

Usability stands as a fundamental aspect of any software endeavor. Developers operating at Layer 1 often need to compromise on design and efficiency, as the Layer protocol prioritizes standard use cases over developer utility. Furthermore, developers are confined to a limited range of programming languages. To upgrade conventional Layer 1s, a “fork the network” event must occur, demanding months of effort and potentially causing community fragmentation.

3. Sovereignty:

Sovereignty, even in the realm of software, is a fundamental right. DApps find themselves subordinate to the dictates of the Layer 1 protocol to which they are beholden. In the event of a bug invading the Layer 1 protocol, no action can be taken until the Layer 1 protocol addresses the issue, thus curtailing DApps’ autonomy and functionality.

How Does a Layer 0 Blockchain Work?

Layer 0 encompasses an array of state channels designed to validate data through customized routines. This layer encompasses nodes, connected devices, hardware, servers, and systems. Among its components, state channels stand out as two-way communication avenues that empower users to engage in off-chain interactions that would traditionally occur on the blockchain. This bypasses the need for intermediaries like miners and subsequently reduces waiting times.

Layer 0 serves as a foundation for various consensus algorithms and P2P systems, including:

• Proof of work
• Proof of stake
• Proof of activity

Layer 0 effectively complements the three key attributes of blockchain: scalability, neutrality, and adaptability. To engage with a Layer 0 protocol and establish a business, one typically needs to stake or acquire the platform’s native tokens. In return, participants gain unrestricted access to the Layer 0 ecosystem, incorporating innovative components, products, and data-rich solutions. By acquiring tokens, users unlock the potential to configure reward structures, validate data, generate specialized tokens, and formulate business logic, among other possibilities. Once tokens are obtained, a myriad of avenues for creative and strategic use becomes available.

Use Cases For Layer 0 Blockchain Protocols

Layer 0 protocols present an expansive range of applications, constrained solely by the creative potential of programmers. They cater to diverse purposes, encompassing data validation, digital currency wrapping, cryptocurrency minting, and the development of blockchain ecosystems. Among notable Layer 0 blockchain systems, Cosmos and Polkadot stand out prominently.

Polkadot distinguishes itself as a forward-looking blockchain protocol designed to enable seamless collaboration among primary-function blockchains within a scalable network. Employing blockchain shards termed parachains and parathreads, Polkadot establishes sovereign blockchains interconnected with and secured by the Polkadot relay chain. Through bridging mechanisms, these parachains and threads can engage with external networks like Ethereum and Bitcoin. The native DOT currency occupies a central role across use cases, spanning governance, staking, and bonding.

Polkadot’s distinctive feature empowers individuals to construct application-specific parachains using the Substrate framework. This attribute has gained favor among prominent projects including Acala, Moonbeam, and Efinity, fostering the creation of interoperable blockchains within Polkadot’s ecosystem.

Functioning as the foundational stratum of all blockchain protocols, the Layer 0 protocol seamlessly interfaces with others to establish interconnected value chains. Its versatile applications encompass:

• Data validation
• Establishment of unique incentive structures
• Wrapping digital currency (e.g., ETH to WETH)
• Serving as a foundational layer facilitating interactions among all Layer 1 protocols such as Ripple, BTC, and ETH.

What Are Layer 1 Blockchains and How Do They Work?

The blockchain arena is rapidly expanding with innovative approaches and applications being deployed across various networks. However, many of these networks are grappling with scalability issues, which is one of the three main pillars of the blockchain trilemma, along with security and decentralization, posing a challenge to the widespread adoption and functionality of blockchain networks.

At present, Layer 1 solutions emerge as the primary approach to address the scalability predicament.

A Layer 1 blockchain refers to a collection of solutions that enhance the fundamental protocol itself to enhance the overall system’s extensibility. Two methods exist for implementing Layer 1 solutions:

1. Sharding
2. Consensus Protocol

Prominent Layer 1 blockchain platforms include Ethereum, Binance, and the XRP Ledger.

Types of Layer 1 Blockchain Solutions 

A consensus protocol serves to prevent a single entity from controlling or manipulating the “truth” recorded on a blockchain. A classic example of the risks is double spending, where an entity might attempt to gain control by creating its own variant of the blockchain.

Consensus Protocol

The widely recognized consensus mechanism for Bitcoin and Ethereum is Proof-of-Work (PoW). PoW employs miners to solve complex cryptographic algorithms to achieve consensus and security. However, PoW has two significant drawbacks: it is both slow and resource-intensive. Key components of consensus protocols include:

• Proof of Stake (PoS): PoS is a mechanism that facilitates distributed consensus on the blockchain by allowing users to validate block transactions based on their stake in the network. PoS outperforms PoW in terms of transaction speed and security.

• Proof of Work (PoW): PoW, the traditional consensus mechanism, employs miners to decode intricate cryptographic algorithms to achieve consensus and security. It is slow and demands substantial computational resources, as seen with Bitcoin’s limited capacity of around 7 transactions per second.

Sharding

Sharding is a technique used to make databases more efficient. Although prevalent in many current applications, sharding is relatively new in the blockchain domain. Sharding is particularly vital for cryptocurrencies, as many networks encounter scalability challenges.

This experimental approach involves dividing the network into separate database blocks known as shards, enabling better scalability and efficiency.

In summary, consensus protocols play a pivotal role in maintaining the integrity and security of blockchain networks, with PoW and PoS being widely used methods, while sharding holds promise for enhancing scalability and performance.

Blockchain Layer 1 Vs. Blockchain Layer 2

The foundational blockchain architecture is known as Blockchain Layer-1, while Blockchain Layer-2 functions as an overlay network positioned above the blockchain. A prime example is the relationship between the Lightning Network and Bitcoin. In this case, Bitcoin constitutes Layer-1, while the Lightning Network operates as Layer-2.

Not all challenges can be effectively addressed on Layer 1 due to technological limitations, particularly in terms of scalability. For instance, a blockchain-based game would face impractical transaction times if it were to operate solely on the Bitcoin network. However, the game might desire to leverage the security and decentralization attributes of a Layer 1 ledger. The solution lies in building upon the Layer 1 network with a Layer 2 approach.

Layer 2 solutions are constructed on top of Layer 1 and rely on it for finalizing transactions. A prime illustration is the Lightning Network, which facilitates swift Bitcoin payments off the primary chain. The eventual balance is subsequently recorded back onto the primary chain, akin to consolidating multiple transactions into a single ultimate record. This approach not only conserves time but also optimizes resources.

Blockchain Layer 1 Examples:

Elrond

• Uses sharding to expand performance scalability 
• Processes over 100,000 transactions per second
• Two unique features: Secure Proof of Stake Consensus & Adaptive State Sharding
  • Secure Proof of Stake 
  • Adaptive State Sharding happens via shard splits and merges as the network loses or gains users 

THORChain

• A cross-chain permissionless decentralized exchange 
• Uses the Tendermint consensus mechanism for validating transactions 
• The main objective is to allow for decentralized cross-chain liquidity without the need to peg or wrap an asset
  • For multichain investors, pegging and wrapping adds a risk to the process 
• Determinately, it is a value manager that monitors deposits and withdrawals
  • Helps create decentralized liquidity and removes centralized intermediaries

Layer 2 Blockchain Protocols

Blockchain Layer-2 refers to a network or platform built atop a blockchain protocol to enhance its scalability and efficiency. This scaling technique involves transferring a segment of a blockchain protocol’s transactional load to an adjoining system architecture. This architecture carries out the bulk of network processing and communicates back to the primary blockchain only for finalizing the transaction. By delegating the majority of data processing to this supplementary architecture, the fundamental blockchain layer experiences reduced congestion, leading to enhanced scalability.

An exemplary case is Bitcoin, functioning as a Layer-1 network, while the Lightning Network operates as a Layer-2 solution aimed at accelerating transaction speeds within the Bitcoin network. Similar Layer-2 solutions can also be observed in other contexts.

This approach to scaling entails transferring a part of the blockchain protocol’s transaction processing to a connected system architecture, which subsequently reconciles the outcomes with the main blockchain. The primary blockchain’s efficiency improves as its data processing load diminishes, contributing to greater scalability by shifting most of the data management to an auxiliary system.

Examples of Layer 2 Blockchain Solutions

Nested Blockchains:

A nested blockchain is a unique concept wherein one blockchain operates within another, often sitting atop it. This intricate design involves a core blockchain that sets the framework for a broader network, while execution occurs across interconnected secondary chains. These chains function in tiers, connected through parent-child relationships. The parent chain assigns tasks to child chains, which execute them and relay results back to the parent. The substrate base blockchain remains passive in subsidiary chain operations, intervening only in dispute resolution cases.

For instance, the OmiseGo Plasma Project utilizes nested blockchain infrastructure atop the Layer 1 ETH protocol, enhancing transaction speed and affordability. The underlying principle of Plasma involves a foundational blockchain setting rules and multiple tiers of blockchains built above it. These parent-child links enable efficient delegation of tasks, reducing the load on the root chain and significantly enhancing scalability.

State Channels:

State channels optimize transactional capacity and speed by enabling two-way communication between a blockchain and off-chain channels. Unlike Layer-1 validation, state channels do not involve network nodes. Instead, they employ multi-signature or smart contract mechanisms for protection. Completed transactions or batches of transactions are posted to the underlying blockchain to record the final state of the channel. Examples of state channels include Liquid Network, Celer, Bitcoin Lightning, and Ethereum’s Raiden Network. These channels trade off some decentralization for enhanced scalability within the Blockchain Trilemma framework.

For instance, Ethereum’s Raiden Network facilitates quick off-chain transactions through multi-signature or smart contracts. Once a transaction set is completed on the state channel, the optimal state is directly added to the underlying blockchain, offering high throughput at a minimal cost.

Sidechains:

A sidechain is an adjacent transactional chain connected to a blockchain, designed for large-scale transactions. Sidechains employ self-contained consensus mechanisms to optimize speed and scalability. Their primary role is ensuring overall security, validating batch transaction data, and settling disputes. Sidechain transactions are publicly recorded, unlike state channels, and security breaches do not impact the mainchain or other sidechains. Developing sidechains from scratch can be time-consuming but offers a framework for building interconnected blockchain networks.

For example, Polygon (Matic) is a Layer 2 solution built on the Ethereum network. It addresses Ethereum’s challenges such as community governance and high transaction costs, providing tools to streamline blockchain complexities and enhance transaction speeds.

The Blockchain Trilemma

The concept of the “scalability trilemma,” coined by Ethereum’s founder Vitalik Buterin, revolves around the challenge of maintaining a delicate balance among three fundamental aspects that constitute the core principles of a blockchain: security, scalability, and decentralization.

As per the trilemma, any given blockchain system can only prioritize two of these properties at a time, inevitably sacrificing the third. This results in a perpetual trade-off within existing blockchain technology. A prime illustration of this is seen in Bitcoin. Its blockchain boasts exceptional decentralization and security, achieved through no deliberate shortcomings of its own. However, in this pursuit, scalability has been inevitably compromised, highlighting the constraints imposed by the scalability trilemma.