Layer 3 (L3) Blockchain

What is Layer 3 Blockchain in Crypto?

Layer 3 blockchains (L3) are highly customizable and application-specific blockchains built on top of layer 2 (L2) protocols. 

They are used by decentralized applications that require customized functionality such as privacy or hyper-scalability. L3 blockchains may prioritize scalability at the expense of decentralization to fulfill their application-specific needs.

Let’s explore the true meaning of layer 3 blockchain and understand its role in the blockchain scaling stack.

What Problems Do Layer 3 Solve?

The key problems that L3 blockchains are solving are:

1. Hyper-Scalability: Scalability has been a key bottleneck for the cryptocurrency industry. Using L3 blockchains, applications can now focus on producing high transactional throughput and low gas fees even if it comes at the cost of decentralization.
2. Control: L3 blockchains are highly customizable giving app designers better control on how the blockchain and application will function together.
3. Privacy: L3 blockchains can be customized to carry out privacy-preserving transactions.
4. Cheaper Interoperability: Moving crypto assets between L2s and L3s in the same ecosystem will be cheap.

How Does Layer 3 Work?

Let’s briefly discuss the relationship between layer one (L1) and layer 2 blockchains to understand the definition of layer 3 blockchains.

L1 and L2 Blockchains

L2 blockchains exist on top of L1 blockchains like Ethereum (ETH), Solana (SOL), Cardano (ADA) and BNB Chain (BNB). An L2 blockchain is designed to help L1 blockchains scale by reducing gas fees per transaction, increasing transactional throughput, and decreasing time-to-finality. The L2 anchors itself to the L1 chain for security while focusing on scalability. 

Every transaction on the L2 chain is made available on the L1 chain for users to access and verify the state of the L2.

L3 Blockchains

L3 blockchains function in a similar manner. L3s anchor themselves to L2 blockchains for security. A smart contract that tracks the state of the L3 blockchain will exist on the connected L2 chain.

For a validity-proof (zk-proof) L3 blockchain, a separate verifier smart contract will exist on the connected L2 chain, verifying the validity of transaction proofs submitted by the L3 to the L2.

Additionally, a bridge will connect the L3 to the L2, facilitating the transfer of cryptocurrencies and tokens to/from the two blockchains.

How Do Layer 1s, Layer 2s, and Layer 3s Work Together?

As mentioned earlier, the relationship between two adjacent blockchain layers is very similar in an L1-L2-L3 blockchain setup. 

L1 blockchains give security to L2 blockchains, which provides higher scalability in return. 

Similarly, L2 blockchains provide L3 chains with security to focus on providing hyper-scalability and high customizability to decentralized applications (DApps).

Each layer is connected to the adjacent layer with smart contracts and bridges. Here is a diagram to understand how L1s, L2s, and L3s work together:

Use Cases of Layer 3

Here are some use cases of layer 3 crypto blockchains:

• App-specific Blockchains: L3 blockchains are tailor-made for decentralized finance (DeFi) applications that require high transactional throughput to process thousands of incoming orders and cancellations. Similarly, L3 can be optimized to prioritize transaction finality and throughput required for improved user experience in blockchain gaming apps.
• Enterprise Blockchains: L3 blockchains can be used to create enterprise blockchains that are highly scalable but are operated by a centralized party. These blockchains have lower grades of security and decentralization but can be optimized to process cheap and high-volume transactions.
• Canary Networks: L3 blockchains can be used to create test networks called canary networks that complement the primary chain. Canary networks test new upgrades and changes before being made to the public on the primary chain.

Examples of Layer 3s

Here are some of the best layer 3 protocols to watch:

Challenges and Opportunities of Layer 3 Blockchain

L3 blockchains have the potential to help the crypto industry reach more people and solve more problems with its application-specific approach. It gives developers the option and users the choice to choose speed over decentralization and low cost over security when the situation arises.

However, finding the balance between hyper-scalability, customizability, decentralization, and security is the biggest challenge for developers using L3 blockchains for their applications. 

Furthermore, the emergence of L3 blockchains risks fractionalizing a blockchain’s ecosystem into numerous L2s and thousands of L3s. Blockchain fractionalization threatens global crypto adoption due to its negative effect on user experience.

Future of Layer 3 Blockchain

According to Ethereum co-founder Vitalik Buterin’s September 2022 blog on L3 blockchains, a three-layer blockchain scaling architecture that “consists of stacking the same scaling scheme on top of itself generally does not work well.” Instead, Buterin argued that L2s and L3s with different purposes “can work.”

As things stand, the future of L3 blockchains is still up for debate as the technology is still nascent. We will have to monitor the development within Ethereum L2s such as Arbitrium, StarkNet, and Optimism which are becoming hotbeds of L3 development.

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