One of the fundamental ideas in cryptocurrencies is the ecosystem principle. Just like real-life ecosystems, an ecosystem on the blockchain has different components that work together for efficiency. To understand how cryptocurrency layers work, we should think of it like building a building.
What would be the foundation of the building? When talking about cryptocurrency and blockchain, we refer to it as “layer 0”. It is the foundational project of an ecosystem and all the other projects are built on top of it. Some examples of layer 0s are:
● Polkadot
● Avalanche
● Cosmos
After the foundation, we should plan out the first floor. It is represented by “layer 1”. There can be more floors that act as the first floor though. Layer 1 projects have the task of improving the experience of using the ecosystem. This can take the shape of faster transaction speeds, cheaper fees or protocols that allow more transactions and that help efficiency. Layer 1s are built on top of the layer 0 project, and take advantage of the particular project's technology and mechanism.
We should then build the second floor, which is represented by a layer 2 project. Again, there can be multiple floors acting the second floor. Also, they are built on top of layer 1 projects. These are pretty similar to them, yet they have some differences. Just like layer 1 projects, layer 2s have the task of helping in the improvement in experience when using the ecosystem.
A difference between the two is the fact that layer 2 projects accept something called “state channels”, which means that the transactions are recorded “off-blockchain”. This can help with efficiency by taking some of the load off the main ecosystem and process transactions separately, keeping everything tidy and doing the overall task faster and sometimes cheaper as well.
Finally, we should add a roof, which is represented by the layer 3 projects. These are built on everything below and they have a lot of use cases. Usually, they do very niche tasks, such as decentralized online exchanges, games which use cryptocurrencies or blockchain operations, and so on. Another thing that the layer 3 projects can do is “interoperability”, meaning they can be used to communicate between ecosystems.
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