LeoGlossary: Base Layer (Blockchain)

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There are many layers to blockchain infrastructure. At the core of it is the base layer.

It is going to vary based upon the different protocols along with how the architecture is designed.

Basically, Layer 1 is the basis for immutability. Here is where decentralization takes place due to the node system. It also includes block time, the consensus mechanism deployed, programming languages, and rules pertaining to the network's core operations.

When people refer to scaling, they are most often referring to the ability of the blockchain to increase the throughput of transactions. There are other factors that enter the equation including optimization. However, the protocol mechanism is of great impact.

Proof-of-Work (PoW) is known for its inability to scale while Proof-of-Stake (PoS) and Delegated Proof-of-Stake (DPoS) are believed to offer much greater potential in this area.

The basics of the base layer are :

  • Hardware
  • Consensus
  • Network
  • Data

Ethereum also has smart contracts built into Layer 1. Many other blockchains feel it is best to have that operate on Layer 2.

The most basic feature of the base layer is the ledger. Since blockchain uses distributed ledger technology, any cryptocurrency transactions are recorded. Here is where the data posted to blockchain can resemble that of a bank. Wallets are debited and credited based upon the flow of money throughout the system.

Impact Upon Monetary System

The base layer of a cryptocurrency system is very important. It effectively is the monetary system.

A blockchain provides both the accounting and communications necessary for a monetary system to operate. The later is a digital network with nodes located around the world.

In addition to the components, the key feature is settlement. In finance, specifically payments, settlement of transactions is crucial. The time this takes varies depending upon the network. Some of the ones involved in the existing financial system are:

A blockchain will handle all of this since it is a digital network that settles transactions based upon what is written at the base layer. This means that the code is what handles monetary policy.

The coins associated with the blockchain will operate according to the base layer code. This will include the inflation rate, transaction fees, consensus mechanism, block reward, and unit of account. As people interact on-chain, the activities will be within the parameters established by the base layer code.

Tokens tend to be constructed through smart contracts which might be base layer as with Ethereum. It could also be a sidechain or layer 2 solution.

Decentralized Finance

It is easy to see how the base layer can affect decentralized finance (DeFi). To start, if the blockchain is not decentralized, then DeFi is difficult. Many blockchains, due to coin distribution, are actually centralized in their control. This means there is a chance they will have to comply with regulation such as know your customer (KYC) and AML policies.

The scalability of the base layer is also crucial to the success of DeFi. As more applications are built and activity increases, this will result in more transactions. Here is where a network like Bitcoin runs into issues. Many hope that Taproot will solve this issue. Nevertheless, Lightning Network is being build out to handle the medium of exchange aspect.

This is also why Ethereum switched to a PoS consensus mechanism, eliminating the mining process. The goal is to increase the amount of activity that can take place throughout the ecosystem.

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