Layer-3 refers to the blockchain networks built on top of Layer-2. These are highly scalable and cost efficient networks which lets users do several times more transactions at a much smaller fee.
This article explores Layer-3 networks in general and seeks to explain their meaning, working, advantages and disadvantages.
Introduction
The layers in a blockchain refers to the degree of independence which they have when settling transactions. Layer-1 has the highest degree and does not need any other protocol or blockchain to execute transactions. Layer-2 has cheaper transactions but is scalable only to an extent. Layer-3 networks have the highest scalability and cost almost zero to transact.
This aspect of Layer-3 helps in enhancing the user experience with highly scalable, faster, and cheaper transactions.
What are the Layers of a Blockchain?
In our general usage, we encounter three layers of blockchain technology, namely Layer-1, Layer-2, and Layer-3. Sometimes, there might be an additional Layer-0 to represent the base infrastructure for building blockchains.
Layer-1
Layer-1 refers to the independent blockchains that execute transactions on their own. These blockchain networks do not rely on any other protocol or layer for their day to day activities. They are more decentralized and are the most secure layer.
The core function of a Layer-1 blockchain is to settle transactions in a safe, secure, immutable and permanent way. This is done through a consensus mechanism that prioritizes security over speed and hence many Layer-1 blockchains are slower than other layers.
Examples of some Layer-1 blockchain networks are Solana, Bitcoin, Ethereum, Shardeum, etc.
Layer-2
Layer-2 blockchain networks are those which typically aim to scale Layer-1 blockchains. These are built on top of Layer-1 blockchains and process Layer-1 transactions on their own blockchains.
Though they are less secure than layer-1 blockchains, these Layer-2 chains are a lot faster and cheaper. This is achieved through limiting the number of validators. An example is Ethereum with a 1000 TPS has 1.3 million validators while Polygon has just 100 validators but achieves a TPS of 65,000.
With the introduction of Zero Knowledge solutions like zk-rollup and optimistic rollups, these Layer-2 solutions have become even faster.
Some examples of Layer-2s are Polygon, Lightning Network, Optimism, Base, etc.
Layer-3
The layer-3 is built on top of the scaling layer. Typically the work of this layer is to settle transactions within a single application such as Uniswap. Unlike layer-1 or layer-2 which provide broader functions to all kinds of transactions, Layer-3s are built for specific purposes such as gaming, swap, dex, Web3 social media and a lot more.
How does Layer-3 Work?
Layer-3 networks are built on top of Layer-2 networks and rely on them to post transactions. Usually a bundle of transactions are posted on the Layer-2 network in the form of rollups.
These rollups are verified as a single transaction and therefore do cost the gas fees of a single transaction. Since little to no transactions are of high value in this layer, the authenticity of a single transaction is of lower priority than its speed.
However, that does not mean that these networks are unsafe. The rollups are composed in a such a way that even if someone tampers with a single transaction, the entire block will become invalid and would not process further unless that tampered transaction is identified. This process of identification and removal is done through Merkle Trees.
This way, the costs are kept at a level while providing the highest transaction throughput and speeds.
Read More: Zero-Trust Architecture: A Guide To Blockchain Security
Features of Layer-3
High Scalable
Layer-3 provides methods using which DApps, DEXs, games, DeFi protocols and other applications can scale as much as possible.
Low Cost
The transaction costs in a Layer-3 solution is kept under check so that DApps are able to do a lot more transactions at cheaper rates. This helps them reduce costs.
Interoperability
Layer-3 networks are also used by several cross-chain platforms such as UniSwap.
High Performance
Since most of the crypto transactions occur at low volumes, this layer networks are perfectly suited for such needs and offer a high performance.
Decongesting the Main Layer
Since most of the low value transactions are handled by Layer-3 and some by Layer-2, this helps decongest the main chain. Ethereum’s gas fee climbed down less than $1 within a few weeks after it let Layer-2 and Layer-3 use “blob” space.
Some Applications and Examples
DeFi Platforms
DeFi platforms like UniSwap use Layer-3 technology to build a DeFi dapp that works on 8 blockchains including Ethereum.
NFT Marketplaces
NFT fees are very high on Ethereum and therefore Layer-3 solutions are much needed in this space. Binance NFT is one of those Layer-3 applications which lets users buy and sell NFTs for almost zero fees.
Cross-chain Interoperability
Cross-chain protocols like UniSwap, Multichain, Chainlink’s CCTP and several other platforms rely on layer-3 technology.
Blockchain Games
Blockchain games too generate a lot of transactions as users play. These transactions are of low value and generally require a cost effective way to write them on a blockchain. Layer-3 networks help blockchain games achieve the security of blockchain while doing so in a fraction of Layer-1 cost.
Direct and Indirect Benefits of Layer 3 Solutions
Enhanced Scalability
How Layer 3 improves transaction speeds and system throughput. Since most Layer-3 solutions prioritize speed in the blockchain trilemma, their costs are just a fraction of Layer-1. This allows projects to become highly scalable.
Increased Privacy
Use of advanced methods of scaling such as zero-knowledge proofs at Layer 3 help remove details of individual transactions thereby increasing the privacy of a user. Otherwise, there were several tools which used to document all transactions and reveal who did what transaction on a Layer-1.
User Experience
Layer-3s are easy to use once the user gets a hold on them. The availability of guides, how-tos and short explainer videos help users know the best way to use a Layer-2 network.
Challenges and Limitations
Technical Complexity
Though layer – 3 networks solve most of the issues that plague Layer-1 and Layer-2s, however, they are difficult to understand for the common user.
There is also a lack of sufficient information on how these technologies even work. This was one of the main motivations behind creating this article.
Security Concerns
Most of the crypto hacks and scams that have taken place in the recent past occur on Layer-3 networks. A few examples are
- $200 million hack in Mixin Network
- $197 million hack in Euler Finance
- $125 million hack in Multichain
- $100 million hack in Atomic Wallet
- $99 million hack in Heco Bridge
The Future
Layer – 3 technology would be very helpful in the following industries if they are implemented in a proper way.
Metaverses
Metaverses could be a major application of Layer-3 technology. Since metaverse lets users do a lot of transactions, it would need a solution like Layer-3 networks to do so in a cheaper way.
Retail
Retail cashbacks are often small and using Layer-1 or Layer-2 solutions does not make much sense here due to the high fees. A Layer-3 solution would be the perfect fit for such cases.
Conclusion
Layer-3 solutions help cheaper, faster and more efficient transactions where the speed and cost of transactions matter more than their security. However these networks need to become a lot safer and user friendly before they get wider adoptions into projects like Metaverses, DeFi DApps, Retail markets and a lot of other potential applications.
