Bitcoin (BTC) was originally designed as a blockchain that would handle all of its users’ transactional needs through the network’s underlying architecture. In reality, the underlying network is too slow and inefficient for today’s digital solutions.
A new support layer was introduced in the blockchain at this time. When Ethereum (ETH) offered the ability to create decentralized applications (DApps), additional layers on the platform were required.
Understand the concept
Cryptography, game theory, etc. are uniquely brought together in blockchain technology, which has a wide variety of conceivable applications. Cryptography is a branch of mathematics and computer science that deals with the encoding and decoding of information. We speak of “game theory” to study the mathematical models of rational decision-makers interacting in a strategic way. Transparency and security are provided by the blockchain, which removes the need for intermediaries, reduces costs and increases efficiency.
Distributed Ledger Technology (DLT) uses cryptography to verify data among a group of users who have agreed to follow a specific network protocol, without requiring the monitoring of a central authority. The combination of these technologies promotes trust between people or parties who otherwise would have no reason to. They allow blockchain networks to securely exchange currencies and data between users.
Blockchains must be secure since there is no centralized authority. They also need to be incredibly scalable for ever-increasing numbers of users, transactions, and data. When it comes to top-notch scalability and security, layers are the answer.
What is Layer 1?
An underlying bitcoin blockchain with its main components and functions in place is called the first layer of bitcoin. Block verification is performed by network nodes and proof of work, all of which are part of Bitcoin’s first layer (PoW). “Layer 1 Bitcoin”, in a nutshell, is the first Bitcoin network which was launched in 2009. Bitcoin set standards due to the unique technology it employs, which led to the development of a cryptocurrencies with a global market capitalization of more than 1.9T. Indeed, according to the Bitalpha AI platform, the cryptocurrency market “should reach a value of more than 2000 billion dollars over the next few years”.
Although a revolutionary technology, bitcoin has been plagued by slowness and, more recently, exorbitant transaction fees. Five years ago, in November 2016, the average bitcoin transaction cost was just 25 cents. In November 2021, the cost is already close to $5. Additionally, Bitcoin’s Proof of Work (PoW) block verification mechanism is energy-intensive and time-consuming. Since its inception, bitcoin has not been a very efficient network. Layer 2 protocols were created as a result of these inefficiencies.
What is Layer 2?
In the case of bitcoin, the second layer refers to the protocols built on top of the first. Faster processing and lower transaction costs are two of the most common benefits of this extra capacity. By processing most transactions off-chain and then transmitting them in batches to the underlying Layer 1 ledger, Layer 2 systems can achieve significant technology savings.
Above the primary Layer 1 network, Layer 2 protocols can be considered independent networks. Layer 2 solutions abound on Ethereum, the second largest blockchain platform. Therefore, bitcoin has fewer active layer 2 solutions. Lightning Network, Omni Layer, and Liquid Network are three major Layer 2 proposals on Bitcoin.
What is Layer 3?
The application layer refers to layer 3 of the OSI model. DApps and the protocols that run them are housed under this layer. Layer 3 applications are popular on Ethereum and Solana (SOL) but not on the Bitcoin blockchain, which is not designed to support them. Therefore, Layer 3 solutions are furthest from Bitcoin’s core network. Derivative versions of the original Bitcoin network are used by some projects to provide DApp functionality.
If you own bitcoins, you can use services like staking, lending, and cash mining using CakeDeFi. It is based on the DeFiChain fork of Bitcoin. DeFiChain retains an “anchor” to the BTC mainchain for certain functions, but it is still a separate blockchain.
According to several industry experts, the lack of DApp capability of BTC is one of the main drawbacks of cryptocurrencies. The popularity and value of a Layer 3 platform has steadily increased since the introduction of Ethereum in 2015. The number of Layer 3 applications on Ethereum now stands at around 3,000. At the moment As of this writing, a total of $185 billion has been invested in blockchain-based DeFi programs.
Solana, another major blockchain, is home to over 500 Layer 3 DApps, and the network’s DeFi applications are estimated to be worth over $15 billion. BTC, on the other hand, does not have a working level 3 application. Plans to “force” functionality from DApps to BTC continue to be a source of controversy. For some, bitcoin will always be a network created for the transmission of cryptocurrencies, not DApps.
These people point out that the Tier 1 BTC chain has a market value of $1.3 trillion, which dwarfs the overall TVL and market size of all Tier 3 initiatives. bitcoin does not urgently need Layer 3 capability, at least according to financial data.
Conclusion
The three levels of a blockchain platform can be different. The real blockchain, with its architecture and essential features. Level 1 refers to this layer. Blockchains like Bitcoin, Ethereum, and Solana are all examples of Tier 1 networks. Layering Layer 1 networks with Layer 2 protocols allows more functionality to be added to the underlying blockchain. Examples include higher speeds and lower transaction costs.
Layer 2 protocols can enhance their functional capabilities in various ways. The Lightning Network and the Liquid Network are two examples of layer 2 initiatives for bitcoin. A blockchain has three layers: Layer 1, Layer 2, and Layer 3. Unlike several other blockchains, the BTC blockchain does not have layer 3 applications. Using applications built on forks of BTC, several initiatives aim to integrate layer 3 functionality into the BTC ecosystem.
Although these applications are built on their blockchains rather than the main BTC blockchain, they are still under development. Some believe that adding Layer 3 capability is not necessary for BTC to progress further. With the value of BTC being greater than these Tier 3 applications combined, some experts argue that this technology is unnecessary.
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