The settlement layer is the second layer in a crypto network’s architecture built on top of the data or transfer layer therefore providing a higher degree of functionality and flexibility.
In essence, a settlement layer is where transactions are settled and recorded, powered by distributed nodes working together to validate and confirm transactions. This layer is responsible for ensuring that all transactions are valid and parties involved are authorized to do so. Settlement layers can be used to process payments, transfer assets, or even to create and enforce smart contracts. Typically, they are built for speed and security.
Why do we have a settlement layer?
One of the primary advantages of the settlement layer is its increased speed over the data layer. As mentioned earlier, it is where all transactions are settled, recorded, verified, and cleared. Depending on the network, the settlement layer is where smart contracts also execute from. By design this network of nodes is built for security and is where data is held in an immutable state on the ledger. Because of its distribution and reliance on the blockchain, the settlement layer is constantly audited and verified by all parties involved in the transaction. Due to its architecture, the settlement layer is best for large, high-value transactions, suitable for business-to-business (B2B) or business-to-consumer (B2C) transactions.
What are some of the benefits of the settlement layer?
The biggest benefit of the settlement layer is that it’s a decentralized layer on a decentralized architecture where all transactions are settled and recorded. Because it is not decentralized, it’s not controlled by a single entity and concurrently audited and verified by all parties involved meaning data cannot be tampered with. Since the settlement layer holds the actual data, it’s more secure than the data layer. The data layer is used to move information around.
What are some of the drawbacks of the settlement layer?
The biggest drawback of the settlement layer is that it’s not designed for real-time transactions. The settlement layer is designed for high-value, B2B or B2C transactions. They’re made and verified on the ledger and reported in a few days. The settlement layer is also not designed for micro-payments. It cannot be used for frequent, small-value transactions. This is because it’s not designed for real-time transactions.
Project Jasper: A Settlement Layer for Canadian Banks
Central banks and financial institutions across the world are experimenting with various solutions leveraging the distribution and reliability of the blockchain technology. One of them is Project Jasper by the Bank of Canada (BoC).
Project Jasper is a Canadian initiative to create a national blockchain settlement system. It is a partnership between the Bank of Canada, Payments Canada, and several major Canadian banks. The goal is to build a blockchain-based platform that can be used by financial institutions to settle transactions quickly and securely. Project Jasper is still in its early stages, but the partners have already built a prototype platform and are testing it out with a small group of banks. If successful, the platform could be used by any financial institution in Canada, and potentially even internationally.