Layer-3 blockchains, explained
Layer-3 blockchains refer to a layer of blockchain technology built on top of base layers to provide customized application-specific blockchains tailored to users’ needs.
Created on the foundations of layer-1 and layer-2 solutions, layer-3 blockchains offer improved functionality for decentralized applications (DApps), marking a new chapter in the development of blockchain technology. By providing users with a more flexible, effective and user-friendly blockchain ecosystem, L3 blockchains aim to overcome the limitations of L1s and L2s and accelerate the adoption of blockchain technology.
Typically, L2s intend to scale a blockchain network, whereas L3s primarily focus on linking different blockchains, enabling them to communicate smoothly. Layer 3s are designed to offer more comprehensive solutions for scaling, performance, interoperability, customized functionality, security and cost.
The main characteristics of L3 blockchain technology are enhanced transaction throughput, cross-chain communication protocols and smart contract capability, which facilitate intricate DApps and network interactions. In addition, layer-3 blockchains frequently integrate advanced governance mechanisms to ensure efficient decision-making and protocol evolution.
What is the difference between layer 1, layer 2 and layer 3?
Blockchain technology can be described as multilevel building, with L1 reflecting the fundamental architecture, L2 adding functionalities and L3 powering applications.
The consensus mechanism, scalability solutions, transaction speed and security features of each layer vary.
Layer 1 (base layer)
Layer-1 blockchains are where the blocks are added, and the transactions are finalized, providing a secure foundation for a blockchain network. These decentralized networks rely on consensus mechanisms such as proof-of-work or proof-of-stake (PoS) for transaction validation. Layer-1 blockchains are independent of any other network.
L1s ensure security and validate transactions but are often overwhelmed by high volumes of transactions. L1 blockchains also suffer from the blockchain trilemma, which refers to the trade-off between blockchain scalability, decentralization and security to achieve optimal performance and functionality.
Layer 2 (built on top of layer 1)
Built on the foundations of layer 1, layer-2 blockchain solutions are secondary protocols that improve the functionality of the base layer without functioning as separate blockchains. These L2 solutions, which can be state channels, rollups and sidechains, are designed to alleviate the scalability issues with layer-1 blockchains.
Through off-chain computation and periodically settling the transactions on the main chain, layer 2s achieves a higher transaction speed and reduced costs without compromising on security. Nevertheless, while L2s noticeably improve scalability, they may be limited by blockchain interoperability and customization issues.
Layer 3 (application layer)
Layer-3 blockchains act as an application layer, leveraging the functions of base layers. They enhance scalability beyond L2s, enabling higher transaction throughput and tailored applications. Layer 3s foster efficient and cost-effective financial transactions through scalability and a blend of layered consensus algorithms such as PoS and proof-of-authority, ensuring network performance, decentralization and security.
L3s distinctive feature is facilitating seamless communication and interoperability among various blockchain networks without intermediaries. With advanced protocols and cross-chain bridges, layer 3s unlock opportunities in decentralized finance (DeFi), asset tokenization and cross-border payments.
While layer 1 boasts the most decentralized architecture, layer 3 inherits medium decentralization from layer 2, prioritizing inter-blockchain communication through interoperability protocols.
How layer-3 blockchains work
Layer-3 blockchains leverage off-chain computation and novel consensus mechanisms to achieve scalability and interoperability for decentralized applications.
Layer-3 blockchains leverage the security and transactional capabilities of L1s and L2s, adding more sophisticated smart contract features. Layer-2 scaling solutions, such as state channels and sidechains, allowed layer 3s to perform complex off-chain computation and settlement while maintaining the underlying blockchain’s security and high performance.
Layer 3s enhance interoperability by enabling communication between different blockchains through protocols like the inter-blockchain communication (IBC). This also provides smooth communication between different DApps, including DeFi and the nonfungible tokens (NFTs) developed on different blockchains.
Virtual machine environments, which are specialized within L3 architecture, provide the ground for the execution of multiple DApps through the deployment of smart contracts. These environments enable the execution of arbitrary code on the blockchain, allowing the developers to create DApps with advanced functionalities.
Validium, a layer-3 blockchain component, addresses scalability through zero-knowledge proofs to validate transactions off-chain. It allows L3 blockchains to cut expenses and shorten transaction times, but it is dependent on validators for data security. Validium is a solution for applications that require high speed and efficiency but doesn’t provide the same level of security as layer 1s.
Rollups are another critical component of layer 3s that optimize transaction throughput by grouping multiple transactions into a single compressed data structure. By batching the transactions off-chain and periodically committing them to layer 1, rollups improve scalability without sacrificing security.
Layer-3 protocols frequently implement innovative consensus mechanisms such as PoS or delegated proof-of-stake. These consensus algorithms improve the network’s scalability and energy efficiency while preserving the system’s decentralization and security, enhancing the capabilities of layer-3 blockchains.
Use cases of layer-3 blockchains
Layer-3 blockchains offer diverse use cases spanning various applications applicable in multiple industries.
Gaming applications
When operating on layer 3, gaming applications can process a large number of transactions per second and, therefore, provide users with a seamless experience. This results in lower costs for developers and users as there are fewer transaction fees, which is especially important in gaming apps requiring frequent transactions.
DeFi applications
Layer-3 solutions can increase liquidity and drive innovation by building interoperable platforms that connect various DeFi protocols. They support decentralization, security and liquidity in the financial sector by enabling direct asset exchanges between blockchains. In the DeFi sector, this innovative protocol can lower counterparty risk by streamlining cross-chain transactions and growing liquidity pools.
Supply chain applications
L3 solutions can help trace supply chains by allowing cross-chain data sharing and verification, thus improving product provenance, reducing fraud and enhancing consumer trust.
Enterprise applications
Despite being managed by centralized bodies, enterprise blockchains take advantage of the scalability and optimized transaction processing provided by layer-3 protocols. Blockchains can work toward the goal of low-cost and high-volume transactions, thus making them a good fit for many enterprise applications.
DApps development
For developers, a layer-3 solution allows them to create decentralized applications that can be used across different blockchains. Multichain DApps can provide more advanced functionality, scalability and user experience than their single-chain counterparts.
NFT applications
Facilitated by layer 3, multichain cross-chain NFT marketplaces can create new possibilities for gaming assets and digital art, allowing users to trade NFTs across various blockchains.
Secure applications
In DeFi, layer-3 blockchains create a secure and unified identity layer across different blockchains, reducing attack surfaces, enabling granular access control and simplifying fraud detection for enhanced security.
Future challenges and the success of layer-3 blockchains
As the adoption of innovative technologies grows, so do the challenges. One of the biggest challenges is the smooth integration and compatibility with the existing layered blockchain architecture. The joint efforts to create interoperability solutions and common standards will significantly influence adoption and innovation.
In addition to the difficulties in developing and overseeing layer-3 infrastructure, there is also a challenge in preserving security and decentralization while growing to manage a higher volume of transactions and an expanding user base. Maintaining stability and durability requires layer-3 solutions to balance decentralization and performance.
Adopting cross-border regulations for layer-3 blockchains can also be a problem. Cooperation with regulators and stakeholders is essential to creating transparent and flexible frameworks that will be the basis for compliance and innovation.
The success of layer 3s will be determined by the solutions to the scalability and interoperability issues, and the technology’s potential to revolutionize various industries and improve decentralized ecosystems. Educating users and developers on the advantages and disadvantages of layer-3 technology is vital for driving adoption and fostering innovation in DeFi and beyond.
Written by Tobias Vilkenson