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BLOCKCHAIN LAYERS

BLOCKCHAIN

What are the six layers of Blockchain technology?

An organized way to categorize the complexity of blockchain technologies

Cryptocurrencies, led by Bitcoin was the first successful application of blockchain technologies, an ingenious combination of several mature technologies, namely cryptography, peer-to-peer technology, and game theory. Blockchains process and share transaction records across a network of users. Transactions can be verified by each user and tied together using cryptography that makes the altering of records almost impossible. Blockchains bring immutability, transparency, efficiency, auditability, and security resulting in lower costs across a wide range of industries and applications.

Because of the multitude of issues that blockchains can potentially address, academics have been increasingly researching Blockchains, its applications and implications on the status quo. Several academics have also tried to categorize different aspects of blockchain technologies such as the technology layers, generations, and types, amongst others.

Many are taking a ‘wait and see’ approach to Blockchain technologies

While there has been a tremendous amount of hype surrounding blockchain technologies, many industries are watching developments closely to see how the technology evolves.

Two industries that have been taking action lately in the form of investments and pilot projects are also the ones with the most to lose – the financial services and banking industries. Recent research has found that there are billions of dollars in cost savings to be realized by the sector in the form of productivity gains, reduced back office operations, reduced overhead and compliance costs and more. These same studies have found that finance executives previously taking a “wait and see” approach are now actively pursuing projects and are expecting to realize significant ROIs. In some cases, close to a 20% return.

While there are industries making significant investments, many more are taking a ‘wait and see’ approach before ‘jumping on the bandwagon. Examples of such industries include stock exchanges and the energy industry.

Reasons for not investing in Blockchain technologies

There are several reasons to take a ‘wait and see’ approach. The first such reason is a lack of trust, at this point in the technology. ‘Decentralization’ and ‘trustless’ environments are still relatively new concepts and require more research before committing time and resources.

A second reason is that many industries have made significant investments in current technologies, workflows, and processes that have been built around a number of regulations. As a result, such a transition to blockchain technologies would necessitate not only a significant investment but also scrapping some of what is already in place.

While Bitcoin and blockchain technologies have been around for almost ten years now, they still have years, if not decades before they are fully integrated into our social and economic fabric. There are significant technical hurdles that need to be solved as well. Even then, there is no guarantee that the blockchain technologies of today will be the blockchains of tomorrow.

Examples of hurdles that have yet to be addressed include transaction throughputs, governance, and security. While solutions to these problems are emerging, there are just too many unanswered question for many.

To guide the research and development process regarding blockchain technologies, models are emerging to guide the collection of knowledge.

Blockchain properties

Blockchain strive to attain the following three properties:

Decentralization

Blockchains are naturally decentralized, do not rely on a trusted third party and provide censorship resistance for data and dapps. Additionally, blockchain data should be anonymous and confidential in a trustless environment.

Consistency

The blockchain should be exactly identical at all nodes at all times. Previously committed transactions should be immutable. The entire history of the blockchain should be verifiable and all queries should be identical on all nodes on the network.

Scalability

Performance, capability, and availability of the system should increase as the number of resources allocated to the network increases. This includes the number of nodes on the network and computational power. The system should be able to easily accommodate additional demands in the form of concurrent users, smart contracts, transactions and queries.

Currently, blockchains can attain only two of the three properties listed above. Public blockchains such as Bitcoin and Ethereum can attain primarily decentralization and consistency at the expense of scalability.

In contrast, private blockchains such as Hyperledger and Ripple attain consistency and scalability at the expense of decentralization. However, the goal remains to create a blockchain that can attain all three properties – decentralization, consistency, and scalability at the same time.

Generations of Blockchain technologies

As blockchain technologies continue to be developed, classification schemes enable new projects to be easily categorized. Current blockchain projects can be categorized into generations, as follows:

Blockchain 1.0 – Cryptocurrencies

These are cryptocurrencies applications. Decentralized ledgers are used to store transactions as exchanges of digital assets between the wallets of multiple clients. Processes such as governance and the consensus algorithm are hard-coded into the system.

Blockchain 2.0 – Decentralized Apps (DApps)

Blockchain 2.0 are decentralized ledgers using smart contracts that support decentralized applications. DApps serve a specific purpose for their users such as buying and selling event tickets.

Blockchain 3.0 – Widespread Apps

Widespread apps involves decentralized ledgers that are specific to the needs of a particular industry and the public sector. This includes blockchains for the healthcare industry, international trade and local governments.

The development of different generations of blockchains is taking place concurrently. Since Blockchain 1.0 projects have been around the longest, those in development are much further along. To help clarify, Bitcoin is an example of a Blockchain 1.0 project whereas Ethereum is an example of a Blockchain 2.0 project.

Six layers of blockchain technology

Blockchains are currently very complex requiring years to develop. To simplify and better understand them, it helps to break down the different parts making up a blockchain into technology layers. The layers making up blockchain technology include, the:

Application layer

The application layer focuses on developing blockchain solutions for use across different applications and industries.

Modeling layer

The modeling layer facilitates smart contracts. This layer is responsible for establishing workflows and defining how the user will interact with the system.

Contract layer

Whereas the modeling layer has to do with workflows, the contract layer has to do with the contract itself. Since there are financial repercussions to a poorly defined or executed contract layer, great care must be utilized to ensure that the contract is issued correctly and free of potential weaknesses. The software also needs to be verifiable, secure and reliable., the contract must be executed correctly and be free of potential weaknesses. The software needs to be verifiable, secure, and reliable.

System layer

The system layer consists of core components that are needed to maintain the blockchain itself. This includes such systems as the consensus protocol and associated subsystems.

Data layer

The data layer is the management of information stored both on the blockchain (on-chain) and within the database (off-chain) itself.

Network layer

Blockchains operate over a network, a peer-to-peer network. Peers share information about the state of the network. Privacy and security is included in the network layer.

While the technologies underlying blockchains are not new, how they are integrated to create a potentially decentralized and trustless systems is. As a result, a great deal of research and experimentation is needed to fully understand the technology and its implications.

Hopefully, this serves as a way to start the process of organising the research and development that is needed to fully realize the potential of this revolutionary new technology.

Putting it all together

While some of the buzz surrounding cryptocurrencies has died down since early January when Bitcoin hit an all-time high, the excitement has in no means died down. On the contrary, it may be increasing slightly with the promise of security tokens.

According to experts, there are three properties of blockchain technologies, including:

Decentralization

Consistency

Scalability

Currently, three generations of blockchain technology has been defined which are defined herein.

Lastly, academics have identified six layers of technology making up blockchain, specifically the:

Application layer

Modeling layer

Contract layer

System layer

Data layer

Network layer

This information will hopefully be helpful in categorizing new developments of blockchain technologies as they emerge. Hopefully, we have identified the six layers of blockchain technology

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