Defining the 'chain' in the blockchain- Dive in to learn more about the different types of blockchain chains!
A chain is a substructure built upon an existing blockchain to aid transactions.
Types of chains
Blockchains can be divided into four broad types- Private Blockchain, Public Blockchain, Consortium Blockchain, and Hybrid Blockchain.
Let's look at each type closely! ⬇️
A private blockchain is a permissioned blockchain run by a network administrator and requires network members' permission to participate.
They are open to only some select users; hence, only a few people are allowed to participate in the network.
A public blockchain is entirely decentralized- there are no restrictions, and any number of people can participate in the network.
A consortium blockchain is a network of private blockchains, each controlled by a different entity, working together to share knowledge to enhance current workflows, transparency, and accountability.
A hybrid blockchain is a blockchain system that combines the best features of both private and public blockchains.
Ideally, it's like the best of both worlds! 🥳
L1 chain defined
‘L1 (layer 1) blockchains’ are primary blockchain systems within their ecosystem.
They are essentially the base networks that are already in place. All the blockchain networks you are familiar with- Bitcoin, Ethereum, and Solana, are L1 chains.
L1 blockchains handle all a blockchain's essential functions- transacting and trading in crypto, setting up crypto wallets, formulating smart contracts, etc.
Different blockchain networks employ other consensus mechanisms based on their basic structure.
For example, Ethereum uses proof-of-stake, whereas Bitcoin uses proof-of-work.
Now the fundamental problem that all L1 blockchains deal with is - scalability. Popularly known as the blockchain trilemma, all L1 chains try to balance the same three features defined by -decentralization, scalability, and security. While decentralization and scalability often go hand in hand, maintaining security while increasing scalability remains a significant issue.
A ray of hope for scalability concerns
Sharding is the most commonly used solution to address L1 scalability issues. It breaks down data from a blockchain network into smaller bits called 'shards' to improve scalability and throughput.
Switching up consensus mechanisms
Another way of efficiently increasing scalability is by switching up the consensus mechanism that a network employs. Some are naturally more efficient than others- while proof-of-work ensures security, it takes considerably longer to verify transactions. Many blockchain networks favor proof-of-stake because of its fast, inexpensive, and energy-efficient transactions.
Ethereum, as recently as September of 2022, switched to proof-of-stake from the earlier employed proof-of-work!
Let's give you an idea of the popular L1 blockchain networks in place! ⏬
- Harmony: Harmony is a layer-1, effective proof of stake (EPoS) network that supports sharding. The blockchain's mainnet includes four shards, each generating and verifying new blocks concurrently.
- Elrond: Elrond is a layer-1 network established in 2018 and uses sharding to increase its scalability and performance. Over 100,000 transactions can be processed per second on the Elrond blockchain (TPS).
- Celo: Celo branched from Go Ethereum (Geth) in 2017. However, it has made several substantial adjustments, such as introducing PoS and a distinctive address scheme. With over 100 million confirmed transactions, the Celo Web3 ecosystem consists of DeFi, NFTs, and payment options.
L2 chain defined
An L2 (layer 2) blockchain network enhances the scalability and efficiency of a blockchain protocol by operating on top of it.
L2 networks entail offloading a portion of the transactional burden of a blockchain protocol to a neighboring network, which then manages the bulk of the network's processing and only later reports back to the primary blockchain to finalize its results. The base layer blockchain becomes less crowded— and ultimately more scalable—by abstracting most data processing to auxiliary architecture.
Think of it as allocating work among the different networks- although they work independently to arrive at a consensus, they ultimately contribute to the broader network. 🫂
Different blockchain networks have their unique L2 networks. You can create an L2 network if you want to!
How do L2 networks ensure scalability?
Rollups are layer 2 scaling techniques that carry out transaction processes away from the primary blockchain network while still posting the transaction data onto layer 1.
Rollups ultimately entail users investing in a bond in the smart rollup contract, incentivizing users to confirm and accurately execute transactions.
Rollups are beneficial because they lower costs, speed up transaction processing, and broaden participation. There are two varieties of rollups, each with a distinct level of security.
Optimistic rollups operate on the presumption that transactions are valid by default and only perform computation via a fraud-proof when a challenge is made.
The 'optimistic' label draws attention to an essential characteristic of optimistic rollups: they reveal little on-chain information about transactions and presume that all transactions are genuine. Because they combine numerous transactions into batches before submitting them to the Mainnet, they are known as 'rollups.'
Zero-knowledge rollups carry out the calculation off-chain and send the main chain proof of validity.
A zero-knowledge rollup communicates with different blockchain tiers. Although there are advantages to using the main blockchain, they frequently come with significant transaction costs and slow speeds. With increased speed and affordability, layer 2 blockchains enhance the security of the main chain.
You can build a transaction that functions for both layers using ZK-rollups. A transaction that combines many zero-knowledge proofs into a single bundle is known as a ZK- rollup. This value exchange is a smart contract that can keep its state on Layer 1 and Layer 2 of the blockchain. Without going into too much detail, a ZK-rollup saves time and money by validating data for numerous transactions across various locations.
Zksync is one of the most popular examples of a zero-knowledge rollup network
L1 vs. L2
In what ways is an L1 blockchain differ from that of an L2? Let's find out!
- While layer 1 aims at improving existing blockchain base layers, layer 2 focuses on creating third-party networks on top of an existing blockchain.
- L1 employs sharding and an improvement in consensus mechanism to increase scalability, whereas L2 relies on sidechains and rollups for the same objective.
- Layer 1 networks serve as the source of truth as the final arbiters of transaction settlement. On the other hand, L2 networks provide additional features, such as saving transaction costs while enhancing network performance and programmability.
Is there an L3 network?
L3 (layer 3), also called the application layer, is a layer that enables dApps and other related protocols.
Developing interoperability protocols on a distinct layer makes sense because L2 and L1 solutions are closely related. This understanding inspired the development of L3 services. The main goal of layer 3 solutions would be to achieve true interoperability without relying on external third parties.
An Alternative- Sidechain
A sidechain is a different blockchain network linked to the mainnet or parent blockchain by a two-way peg.
To process transactions as quickly as possible, sidechains can have their block parameters and consensus mechanisms.
Tokens must be secured on the mainchain for sidechains to communicate with it. A sidechain might be either private or public. As a separate blockchain network, each sidechain has its token, protocol, consensus, and security.
Several sidechains may be connected to the main chain depending on how the blockchain is built. Using the mainnet as a relay network also allows for the exchange of information between sidechains.
Blockchain applications called decentralized apps, or dApps, can be operated on sidechains to relieve the mainchain of some of the strain. By including sidechains, blockchain can be grown in this manner. Additionally, sidechains can be combined with various scaling techniques.
Here's a list of sidechains that exist respective to their mainchains:
Although sidechains appear to be a promising option, everything comes at a cost. 😔
For the initial setup, sidechains take significant time and money. They also make the blockchain design more complex. Because sidechains are independent, they can be vulnerable to attack if network power is distributed improperly, necessitating careful design. They can be used to test out new protocols and mainchain enhancements because if a sidechain is compromised, it won't affect the main chain.
Finishing Up ✔️
Scalability is one of the factors preventing crypto from becoming widely adopted in the blockchain industry today. The incentive to develop new blockchain protocols will increase as interest in cryptocurrencies increases. The ultimate solution will be to create a system that can resolve the scalability trilemma because each blockchain level has its own set of limitations.
With this, let's help you create a list of things you must keep in mind while exploring web3!