How Blockchain Layers Work Together

How Blockchain Layers Work Together

Blockchain technology was developed in October 2008, and it is still considered young in relation to its potential. With the first bull runs and DeFi's growth rates increasing rapidly since the early 2020s, scalability has become one of the most important factors of blockchain technology, and again the center of discussion within the crypto community.

From a development point of view, good architecture and frameworks are needed because the underlying code becomes very complex and expensive over time. Large projects need to be easy to maintain in the long run. The overall quality of the network will influence gas fees, speed, security, sovereignty, scalability, and grade of decentralization for users.

We are seeing changes in technology, such as Ethereum moving from proof of work (PoW) to proof of stake (PoS) to become a more energy-efficient and sustainable solution for our environment. This update will certainly not be the last, highlighting the need for good code architecture and best practice development. Good frameworks will also support the security and robustness of the structures used.

READ | The Blockchain Consensus Mechanism Explained

To understand the different architectural concepts of the current blockchain technology, we will dive into the layered architecture and explain it step by step.

What is Layer 1: Protocol Layer

The first layer inherits the blockchain itself, such as Bitcoin, Ethereum, Avalanche, Harmony, Tron, Darwinia, or Reef. It provides the standard base-consensus layer and the core distributed ledger technology (DLT). Emerging projects like Reef can specify their own rules and security features and mustn’t rely on a legacy structure like Ethereum, which comes with many downsides.

What is Layer 2: Middle Layer Services

Layer 2 builds on Layer 1 and does not require any changes within the legacy system, which means it can be built on top. It uses Layer 1 features such as smart contracts and security structures. It also can enhance security by anchoring its state into Layer 1. As the base layer is very slow when it comes to an enormous amount of transactions per second, Layer 2 can speed this up with up to 2-4K Tx/s. Transaction speed is one of the most important factors, especially within the DeFi space.

To give you an idea of the pros and cons of the scalability discussion, we will introduce the scalability trilemma. The scalability trilemma shows that supporting scalability will always trade-off with security or the grade of decentralization, so projects need to be aware of where to put the focus on.

Methods in scalability solutions:

  • Sharding: the process of gathering transactions and building bundles that are computed as a package.
  • PoS: decrease waiting time and need for computing power by the introduction of a different logic than PoW, thus increasing transaction speed and throughput.
  • State channels: State channels are application-specific channels that enable Layer 2 features.
  • Nested blockchains: Nested Blockchains are Layer 2 solutions that increase the capabilities of Layer 1 by handling processes (speed and throughout) off-chain to reduce gas fees and enhance speed.
  • Rollups: Rollups are solutions that execute transactions outside the Ethereum main chain (Layer 1) but publish transaction data on Layer 1.

The graphic shows an example transaction between Alice and Bob using state channels. These transactions are performed on Layer 2 via application-specific state channels that handle microtransactions off-chain. Once the app is closed, the transaction will be displayed on Layer 1, which is in this case the Ethereum legacy mainnet (root chain). The right side shows different side chains that are connected to the root chain such as Polygon. Final transactions will be published on the root chain (source: NEAR).

Layer 2 projects such as Lightning Network, Raiden Network, Trinity Network (payment channels), as well as Celer Network and Counterfactual (generalized state channels) belong to state channel projects. Meanwhile, Plasma, RSK, and Liquid use side chains to solve the problem of scalability for basic blockchain systems.

What is Layer 3: DApps & Market Infrastructure

The application layer inherits the apps that are built on a blockchain and the structures needed to run the apps. This means Layer 3 protocols can be split into two major sub-layers: application and execution (source: coinmarketcap)

READ | DApp Development on Reef Chain


Blockchain technology is still in development and mass adoption can only happen once the scalability problem is solved. The Ethereum community has decided to focus on rollups, but we will definitely see many other solutions in the future like Polygon (Matic) has decided to specialize in Layer 2 solutions that integrate many functions and make Ethereum highly interoperable.

Reef is more scalable than Ethereum mainly due to the more efficient consensus algorithm, which allows for much higher transaction throughput, bigger block sizes, and faster blocks. Currently, Reef Chain is configured for the 50-80x scale of Ethereum. This way it is set to become one of the next state-of-the-art blockchains that offer all the features needed in the future of web 3.0.

Stay tuned with the Reef Roadmap!

READ | Understanding The Layers of The Blockchain

About Reef Finance & Reef

Reef Finance is building Reef Chain, a DeFi blockchain built using Substrate Framework. Reef Chain provides high scalability, enabling almost instant low-cost transactions, and supports Solidity and EVM, allowing developers to seamlessly migrate their DApps from Ethereum without any change in the codebase. Our vision is to make DeFi easy for everyone to invest in and build DeFi applications on top of Reef Chain.

Reef Finance has developed a fast, scalable, and EVM-compatible chain for DeFi applications, Reef Chain. Reef Chain is currently in the canary version of the mainnet and the official mainnet is due to launch in the next couple of weeks. Reef Chain is a customized blockchain that allows developers to build DApps or deploy existing projects from Ethereum.

Learn about Reef’s recent official news: Website | Twitter | Telegram