Rob Behnke
June 10th, 2024
Layer 3 protocols build on the existing blockchain protocol stack to provide various benefits to blockchains and their users. Often, Layer 3s implement application-specific blockchains, providing customized functionality to decentralized apps (DApps) while removing these DApps’ transactions from Layer 1 blockchains.
Layer 3 protocols have the potential to dramatically increase the scalability, throughput, and interoperability of blockchain protocols. They also inherit many of the security benefits provided by building on Layer 1 blockchains like Ethereum.
However, these protocols must also be carefully designed, implemented, and tested to ensure that the additional layer of abstraction on top of existing blockchain solutions doesn’t introduce new security risks.
Originally, blockchains like Bitcoin were single-layer, autonomous systems. However, over time, blockchains have become more interconnected, and new layers have been defined.
From the bottom up, blockchain layers include:
Layer 0: Layer 0 projects provide tools and frameworks for building blockchains. One example of a Layer 0 blockchain environment is Polkadot.
Layer 1: The original blockchains like Bitcoin and Ethereum are examples of Layer 1 blockchain protocols. These implement blockchain consensus algorithms, the digital ledger, and a peer-to-peer network for communicating transaction and block data.
Layer 2: Layer 2 protocols are built on top of Layer 1, typically using smart contracts. Some examples of Layer 2 protocols include state channels (Lightning Network, etc) and rollups like zkSync.
Layer 3: Layer 3 projects are built on top of Layer 2 platforms, such as zkRollups. Some examples of Layer 3 projects include Arbitrum Orbit, zkSync Hyperchains, and Orbs.
Layer 2 blockchain solutions are built on top of traditional blockchains and are designed to enhance blockchain scalability and throughput. Often, these platforms are designed to allow developers to write DApps that run on top of them.
These dApps enable the development of application-specific blockchains that run on top of a Layer 2 protocol. These application-specific chains only process transactions for a particular project, reducing congestion on lower-level blockchains and enabling these app-specific chains to be customized to the needs of the particular project.
The ability to create application-specific chains has benefits for various DApps. Blockchain gaming can benefit from a dedicated blockchain that offers faster transaction resolution than is possible on many Layer 1s. Decentralized Finance (DeFi) DApps can operate custom, scalable, and interoperable chains to enhance performance or unlock new functionality.
Layer 3 projects add another layer of abstraction to blockchain protocols, moving them further away from the Layer 1 blockchains that provide benefits such as immutability and decentralization. This abstraction and the design of Layer 3 protocols offer several different benefits, such as:
Scalability: Layer 3s are an abstracted blockchain layer that runs on top of Layer 2s, which already provide scalability benefits to Layer 1s. Implementing multiple layers of abstraction enables these higher-level protocols to perform large volumes of transactions while placing minimal data on space-constrained Layer 1 blockchains.
Reduced Layer 1 Congestion: Highly successful blockchain projects can generate large volumes of transactions. This has the potential to cause extreme congestion on a blockchain, like what happened with CryptoKitties and Ethereum in 2017. By moving DApp transactions off-chain, Layer 3 protocols reduce congestion on Layer 1, which improves the experience for all users of that blockchain.
Faster Transaction Processing: On a Layer 1 blockchain, transaction confirmation can take minutes or hours, especially if the blockchain is experiencing congestion. These slow confirmations are unworkable for some blockchain applications, such as Web3 games. Layer 3 blockchains offer much greater scalability than Layer 1 protocols and the potential for faster transaction confirmations.
Reduced Transaction Fees: Layer 1 blockchains commonly have transaction fees that users must pay to have their transactions included in a block. These fees can become substantial at times of high usage, which can be problematic for use cases that require frequent transactions like blockchain gaming.
Application-Specific Support: Layer 1 blockchain projects have strictly defined transaction formats and other protocol constraints. These limitations might not be compatible with the needs of a particular DApp, such as a blockchain game. Layer 3 protocols make it possible to create blockchains that are tailored to the exact needs of a particular DApp, offering better support and efficiency than might be available with a more general-purpose platform.
Cross-Chain Interoperability: Many Layer 1 blockchains are designed as independent platforms. However, blockchain users commonly have accounts on several blockchains and may transfer assets between them or use functionality on several. Layer 3 protocols offer the ability to implement cross-chain transactions by taking advantage of the abstraction offered by the Layer 2s that they’re built on.
Accessibility: Layer 3 protocols abstract away many of the details and unique quirks of the various Layer 1 blockchains that they are built on top of. This can make it easier for developers to create DApps that run on a particular Layer 1 blockchain or on several.
Layer 3 protocols are designed to overcome the blockchain trilemma of decentralization, scalability, and security. Layer 1 blockchains provide a strong foundation and are the basis for their security, while their strategic use of abstraction and off-chain data enables greater scalability and customization than is possible with a Layer 1 blockchain.
However, when designing, implementing, and using Layer 3 protocols, it’s important to consider potential security risks and how to address them. Each layer of abstraction adds more complexity to the protocol stack, introducing additional opportunities for vulnerabilities or business logic errors. Additionally, Layer 2 platforms built on different Layer 1s may have slight differences between them due to the underlying platforms that could have functionality and security implications for Layer 3 projects built on them.
Layer 3 protocols have multiple potential benefits for developers, users, and the blockchain community as a whole. However, these projects must be carefully designed and built to address potential security risks.
Layer 3 projects — and any blockchain project — can benefit from design reviews and a comprehensive security audit before launch. To learn more about securing your on-chain project, get in touch with Halborn.