A beginner’s guide to understanding the layers of blockchain technology

Key takeaways

• Blockchain technology is organized into layers, each with a specific role in ensuring security, scalability and efficiency.
• Layer 0 provides the infrastructure, while layer 1 — e.g., Bitcoin, Ethereum — forms the base protocol.
• Layer 2 enhances scalability through offchain solutions like sidechains or rollups.
• Layer 3 focuses on applications like DeFi, gaming and smart contracts that bring blockchain to real-world use cases.

Blockchain technology might seem complex at first, but at its core, it’s like a digital ecosystem made up of interconnected components, each with its own job to do. At the heart of this ecosystem is its layered architecture that enables decentralization, scalability and security to work seamlessly together.

Think of blockchain as a stack of building blocks, with each layer adding functionality to the one below it. From infrastructure to applications, these layers work together to power everything from cryptocurrencies to decentralized finance (DeFi) and gaming.

This article explores various layers of blockchain technology and the architecture that ties them together, helping you understand how the system operates seamlessly. By the end, you will not only know what each layer does but also why this architecture is the backbone of blockchain’s success. Let’s dive in!

What is blockchain architecture?

The architecture of blockchain can be categorized into five major segments.

1. Hardware

This is the ground floor of blockchain — the physical infrastructure. Think of servers, data centers and mining rigs. They provide the computational power and storage that blockchain networks need to operate.

Key components:

• Nodes: Computers participating in the network.
• Mining equipment: For proof-of-work (PoW) blockchains like Bitcoin.
• Cloud infrastructure: Used by modern blockchains for storage.

2. Data 

Here’s where the magic of blockchain happens: Transactions are grouped into blocks and recorded in an immutable, transparent ledger. Distributed ledger-based technologies help record transaction data and cryptographic hashes in a tamper-proof manner. 

Key components:

• Blocks: Contain transaction data, timestamps and hashes.
• Merkle trees: Ensure efficient data validation.
• Public ledger: A transparent record of all transactions.

3. Network

The network is like a blockchain’s nervous system. It enables communication between nodes in a blockchain and connects participants in the blockchain ecosystem, ensuring everyone is on the same page. The network is responsible for propagating transactions and ensuring synchronization.

Key components:

• Peer-to-peer (P2P) protocols: Ensure decentralized communication.
• Nodes: Verify and relay data across the network.
• Protocol: Handles how transaction data is distributed.

4. Consensus mechanisms

Ever wonder how blockchains ensure everyone agrees on the same data? That’s where consensus mechanisms come in. It establishes an agreement among nodes on the validity of transactions and the state of the ledger, ensuring trust and preventing double-spending.

Key components:

• Consensus algorithms: Proof-of-work (Bitcoin), proof-of-stake (Ethereum post-Merge), delegated proof-of-stake (Tron), etc.
• Validators: Nodes that confirm transactions and add them to the blockchain.
• Fault tolerance: Ensures the network remains operational despite malicious nodes.

5. Application 

This is the layer you interact with — whether it’s buying a non-fungible token (NFT), swapping tokens or playing a blockchain game. It is the topmost layer where end-users interact with the blockchain through decentralized applications (DApps) and smart contracts. It provides functionality and real-world use cases for blockchain.

Key components:

• Smart contracts: Self-executing programs on the blockchain.
• DApps: Decentralized applications like Uniswap, Axie Infinity and OpenSea.
• Wallets: Interfaces for users to interact with blockchain networks.

These architectural layers come together to tackle the blockchain trilemma: achieving decentralization, scalability and security simultaneously. Each layer has its own challenges but builds on the one before it to create a harmonious system.

Blockchain layers, explained

Now that you have learned the architecture, let’s focus on the four main layers: layer 1, layer 2, layer 3 and layer 0. Each plays a unique role in making blockchain what it is today.

Layer 1

L1 is the backbone of blockchain technology, where the main network operates. This layer manages essential functions such as transaction validation, consensus mechanisms and data storage. It focuses on decentralization, security and immutability.

Bitcoin, Ethereum and Solana are the most well-known L1 blockchains. Bitcoin employs a proof-of-work (PoW) consensus to secure its network, while Ethereum enables smart contracts and DApps to run directly on its blockchain, offering programmability via proof-of-stake (PoS).

Solana, a later entrant, is designed with a proof-of-history (PoH) consensus mechanism and does not have the layered structure as described below. 

Limitations of L1 and the rise of L2

L1 blockchains like Bitcoin and Ethereum have formed the core of blockchain technology since their inception. They are responsible for ensuring security, decentralization and immutability. 

However, as blockchain adoption surged in the last decade, significant limitations of L1 became apparent, highlighting the need for improvements in scalability and efficiency. Some problems with L1s:

• Scalability bottlenecks: L1 blockchains process transactions on a global decentralized network. While this ensures security, it comes at the cost of speed. For instance, Bitcoin processes only about seven transactions per second (TPS), and Ethereum averages around 15–30 TPS, far below what is required for mass adoption.
• High transaction costs: Limited scalability often leads to network congestion, driving up transaction fees during peak usage. This was especially evident during Ethereum’s NFT boom in 2017, where gas fees soared to hundreds of dollars per transaction.
• Energy-intensive mechanisms: Bitcoin’s PoW system consumes significant energy, raising environmental concerns and making it less sustainable. Although Bitcoin miners have increasingly adopted renewable energy sources, this shift highlights the industry’s commitment to sustainability and reducing its environmental footprint.
• Limited customization flexibility: L1 blockchains operate on rigid protocols, making it difficult to introduce changes or optimize performance without risking decentralization or security.

Did you know? As of December 2024, Bitcoin’s annual electricity consumption is estimated at approximately 175.87 terawatt-hours (TWh), comparable to the power consumption of Poland. This substantial energy usage underscores the significant computational power required to maintain and secure the Bitcoin network.

To tackle these challenges, layer-2 (L2) solutions were introduced.

Layer 2 

L2 is built on top of L1 to address its scalability challenges. It introduces solutions to improve transaction speed and reduce costs without compromising the security of the base layer. 

These solutions process transactions offchain or through sidechains, lightening the load on L1. For example, the Lightning Network is an L2 solution for Bitcoin that facilitates faster and cheaper microtransactions. 

Below are the main types of L2 solutions typically seen on Ethereum L1:

1. Rollups: Rollups process transactions offchain and then batch them into a single transaction on L1.
   — Optimistic rollups: Assume transactions are valid by default and only verify them if there is a dispute — e.g., Arbitrum, Optimism.
   — Zero-knowledge (ZK) rollups: Use cryptographic proofs to validate transactions, ensuring faster finality — e.g., ZKsync, Starknet.
2. Plasma: Plasma chains are smaller blockchains that offload transactions from the main chain. They periodically settle the final state to L1, ensuring security. Plasma is particularly suited for microtransactions.
3. Validiums: Validiums are similar to ZK-rollups but store transaction data offchain, improving scalability even further. They are ideal for applications requiring high throughput and minimal onchain storage.
4. State channels: State channels allow participants to conduct multiple transactions offchain, with only the initial and final state recorded on the blockchain. This is commonly used for micropayments and gaming — for example, Lightning Network for Bitcoin.
5. Sidechains: Sidechains are independent blockchains that connect to the main chain via a two-way bridge. They offer customization and faster processing but rely on their own consensus mechanisms.

Each L2 solution caters to specific use cases and industries, collectively transforming blockchain technology into a more scalable and accessible ecosystem.

Layer 0

Before moving on to layer 3, let’s talk about layer 0. It’s the foundation that allows L1 and L2 solutions to connect. Without layer 0, blockchains would remain isolated, unable to share data or resources. 

Layer-0 protocols allow crosschain interoperability between L1 and L2 projects. Without this base layer, blockchains would operate in isolation, limiting their potential. 

Polkadot and Cosmos are prime examples of layer 0 solutions. Polkadot’s relay chain allows multiple blockchains to communicate and share information seamlessly, while Cosmos uses its Tendermint protocol to connect various blockchains in its ecosystem.

Did you know? As of 2024, there are over 40 L2 solutions within the Ethereum ecosystem, each designed to enhance scalability and reduce transaction costs. Collectively, these L2 networks have achieved a total value locked (TVL) exceeding $46 billion, reflecting their significant role in Ethereum’s growth. 

Layer 3

Layer 3 is where blockchain technology comes to life. It’s all about user-facing applications — decentralized finance (DeFi) platforms, NFT marketplaces, games and wallets. This layer bridges blockchain technology with real-world use cases, making it accessible to end-users.

Popular DApps such as Uniswap (a decentralized exchange), OpenSea (an NFT marketplace) and Axie Infinity (a blockchain-based game) operate at layer 3. They rely on L1 and L2 infrastructure for security and scalability while focusing on usability and innovation.

Comparing blockchain layers: L1 vs. L2 vs. L3

To put it all together, here’s a quick comparison of the three main layers:

Each layer serves a distinct purpose, from providing a secure foundation to enhancing scalability and delivering user-facing applications; together, these layers work in harmony to drive blockchain technology toward mainstream adoption.

Written by Shailey Singh