Blockchain Layers and Architecture

Blockchain Layers

• Helps identify suitable blockchain solutions for specific needs
• Layers have distinct functions separate from infrastructure
• Enables better decision-making about transaction costs and speed for different transaction types
• Informs wiser investment and development choices by understanding how projects tackle scalability, security, and decentralization across layers
• Evaluate and select appropriate dApps and platforms
• Layer 3 applications offer different features and capabilities for specific use cases
• Insight into how blockchain networks can be optimized for performance, helping users choose proper solutions

Blockchain Architecture Intro

• Blockchain architecture is the design structure of a peer-to-peer (P2P) network of computers
• Serves as a backend for applications and systems
• The network acts as a unit (virtual machine)
• No central authority manages node interaction
• Designed to offer a decentralized system to contrast traditional centralized models

Virtual Machine

• Specialized software environment
• Executes smart contracts and decentralized applications (dApps) within blockchain networks
• Serves as the runtime environment where smart contract code executes in a secure, deterministic, and isolated manner
• Ethereum Virtual Machine (EVM) is the most widely recognized implementation, computation engine for the Ethereum blockchain

Blockchain Architecture Key Points

• Blockchain is decentralized, operating as a peer-to-peer network, unlike centralized systems with a single authority
• Transparency and trust comes from multiple computers (nodes) collaborating
• Blockchain provides an unalterable ledger with transactions recorded in blocks, enhancing security and accountability
• Once data is added to the blockchain, it cannot be changed
• Blockchain facilitates transparent and secure transactions across the network
• Blockchain is like a digital version of Google Docs where information is distributed but not copied

Blockchain Types

• Private Blockchain: Accessed by only a limited number of participants
• Public Blockchain: Allows all network participants to do transactions
• Consortium Blockchain: Combination or hybrid of private and public blockchain systems
• Hybrid Blockchain: Visibility limited to validators, viewable to authorized individuals

Core Components

• Node: A computer on the peer-to-peer network, connected to the internet
• Nodes are installed with core software, enabling collaboration across the network
• Nodes update and store the shared ledger, and relay data to other nodes
• Transaction: An entry on the shared ledger of the blockchain
• Block: A cluster of transactions which are processed and approved simultaneously on the shared ledger
• Chain: Linked blocks from the genesis block to the current block creating a secure chain
• Miners: Nodes (machines) performing functions such as relaying data, approving transactions, and storing the shared ledger
• Also refers to the person who acquires, sets up, and runs a node to earn reward

Validators Role

• Validators validate new transactions
• Maintain the security of the blockchain
• Play a crucial role in adding new blocks, verifying transactions, and ensuring the network's integrity and trust

Consensus Protocol

• Set of rules
• Guides computers on the peer-to-peer network to interact
• Forms a consensus on how transactions are processed and stored on a shared ledger or how smart contracts are executed
• The protocol is implemented in the core software that each computer on the network has to install and run

Public vs Private Keys

• Cryptography secures data stored in the ledger
• Public key is serves as the wallet address to receive payment
• Private key is the password they to access and spend the funds or authorize action in a smart contract

Proof of Work (PoW)

• Miners compete to solve complex mathematical puzzles to validate transactions and create new blocks
• The first miner to find the solution adds the block to the chain
• PoW is resource-intensive and widely used in cryptocurrencies like Bitcoin

Proof of Stake (PoS)

• Validators are chosen based on held cryptocurrency (their stake)
• Validators take turns creating new blocks, with the probability of being chosen depending on their stake
• PoS is more energy-efficient compared to PoW

Blockchain Layers Basics

• The layered architecture allows for specialized problem-solving at different levels of the blockchain ecosystem
• Layer 0 provides fundamental infrastructure and cross-chain communication capabilities
• Layer 1 handles core consensus and transaction settlement
• Layer 2 addresses scaling solutions and third-party integrations
• Layer 3 facilitates application development and user interfaces

Blockchain Layers Purpose

• Each layer aims to help the layer below it operate more efficiently
• Enable third parties to improve how blockchains work and scale
• Interdependencies within the four layers means that improvements or issues in one layer can impact the others
• Typically have their own tokens

Smartphone Analogy

• Smartphones broken down into layers
• The first layer is the physical phone
• The second layer is the software or operating system
• The third layer is the apps
• Blockchains are often stacks of applications, or layers, that seek to make the blockchain faster and easier to use

Four Blockchain Network Layers

• Layer 0 (Physical Layer) encompasses the physical infrastructure supporting the blockchain network
• Includes hardware devices (servers, nodes), internet connectivity providers, data centers, and power grid infrastructure
• Ensures reliable and secure physical storing and transmitting blockchain data
• Layer 1 (Protocol Layer) handles the blockchain's architecture and consensus mechanisms, validated transactions, maintains ledger
• Layer 2 (Functionalities) builds upon Layer 1 by adding functionalities and addressing scalability
• Layer 2 Includes solutions like sidechains, state channels, and rollups and enhances transaction speed while maintaining security
• Think of Layer 2 as Layer 1 extension, enabling more efficient and scalable operations Layer 3 (Applications or DApps) hosts applications built on the functionalities provided by Layer 2
• Applications range from decentralized finance (DeFi) platforms to non-fungible token (NFT) marketplaces
• Focuses on scalability, efficiency, interoperability, and performance of complex smart contracts.
• Flexible infrastructure with features like privacy, user friendliness through account abstraction and interoperability across layers

Understand blockchain architecture, its layers, and peer-to-peer network design. Learn about the distinct functions of layers, and how they inform decisions about transaction costs, speed, investment, and development choices.