What is layer 3 blockchain?

Layer 3 blockchain sounds is starting to sound equal parts interesting and complicated. Where does the layered scaling approach end?

What is layer 3 blockchain?

What is a layer 3? Why do blockchain systems need a layer 3? Where does this layering stuff end?

All good questions.

While we might not have answers for all of them, one thing is for sure, layer 3 blockchain tech is definitely having a moment, and just when we were getting a handle on how and why layer 2 systems and protocols exist.

In the last post, we talked about the idea of a superchain and specifically how Optimism is building a rollup-centric “OP stack” enabling rapid development and more efficiency for projects looking to build on the Ethereum Virtual Machine.

That’s all a mouthful and starts to get us away from the core mission of the Open Money project, which is to stay away from jargon and other generally accepted crypto-speak. So, in this post, we’ll try to tackle why layer 3 blockchain exists from a high level.

The key to understanding the costs and the benefits of all the blockchain layering is to just keep in mind why blockchain was created in the first place. And then decide if the risk of layering up is worth the tradeoff of increased complications and more, well, layers.

Layer 1 versus layer 2 versus layer 3

Just a quick recap about how we got to where we are now:

Layer 1

A layer 1 blockchain acts like a settlement layer and is the foundational level for the finality of transactions.

The main concerns and main reason for being for layer 1 blockchains are to maintain overall data security and integrity and act like a single source of truth as a digital ledger. Layer 1 should be decentralized in its governance and operations.

Examples of the most popular layer one blockchain by market cap include Bitcoin, Ethereum, and more recently Solana.

Layer 2

Layer 2 protocols are built on top of layer 1 blockchains to help them scale. Typically, transactions on the layer 1 blockchain like Bitcoin or Ethereum take time and involve transaction fees.

The transaction fees and the rate at which transactions can reach completion are the main reasons for layer 2s to exist. We’ve talked about layer 2s (and the idea of modular blockchain design) in a few different contexts before:

Modular versus Monolithic: A New Era in Blockchain Design
This post looks at the differences between monolithic and modular blockchain design.
What’s a rollup? Scaling blockchains
Rollups are becoming an increasingly popular way to grow and scale blockchains. Rollups promise cheaper and faster transactions.

Layer 3

As the name implies, layer 3 projects are built on top of layer 2 protocols. The goal of layer 3 is to take the increased functionality made possible by layer 2, such as faster or cheaper transactions, and then build something specific on top of layer two.

This is where things get interesting and potentially a little weird. The goal of blockchain is to enable bombproof and highly secure access to an open digital ledger without the need for extra layers or go-betweens.

However, the problem is that layer 1 blockchain is not efficient enough to compete with legacy financial networks in terms of speed or the rate of transactions per second. So that’s where the idea of scaling blockchain via the layer concept comes in.

But the more layers you add, the more complex and potentially insecure blockchain becomes, and so scaling and growing becomes a challenge.

Why create a layer 3 blockchain project and what are some of the costs and benefits?

It’s not a perfect analogy but think of layer 3 as an extension on a browser. Let’s use Google as a comparison.

For our example, Google the company, or the corporate network, is like a layer 1. They control several products and services, but ultimately there is a database somewhere with user credentials, and other apps and services built within the Google ecosystem use that database and user credentialing to make other things possible.

Google Chrome would be like a layer 2. It provides an operating system and a browser as products, but it relies on the underlying Google infrastructure to operate. You couldn’t have Chrome without first having Google.

Chrome can take you pretty far and you can access a lot of other web apps and services. But sometimes it’s nice to have an extension or get a custom app experience accessed via the browser.

This is where a layer 3 type of situation might come into play. For our Chrome example, you might install an ad-blocker extension, an AI spell checker, or a password manager.

All of these things can be customized to your preferences and generally enhance the browser (or layer 2) experience in the way that is best suited for the way that you use the underlying tech.

This same kind of customizable or specific flow is happening in blockchain, and it’s what’s driving the development of layer 3s (and who knows, maybe in the future this stack will keep going to layer n=?).

The big difference between our analogy example and blockchain layering is that blockchain is designed to make fully decentralized environments possible. So, Google scaling from a layer one corporate network to a browser-based operating system is not quite the same challenge as moving from a completely decentralized layer one to a also decentralized and interoperable layer two.

But to grasp all of the layers, hopefully, the Google comparison is helpful.

Layer 3s are like the browser extensions of the blockchain world.

The takeaway

If there is a takeaway here, it’s probably that stacking blockchain layers is likely to continue. Partly some of these scaling developments are demand-driven. And part of them is trying to push the boundaries of new tech (launching memecoins on top of low-cost layer 2s is one example of this).

If I had to guess, I would bet that there will be a lot going on with the scaling stuff — from the superchains to the roll-ups for the next several months (who knows, maybe this cycle will become defined by scaling solutions).

Despite all of the unknowns and all the risk involved, this blockchain scaling moment is an indicator of how far the tech has come — there are use cases to scale — and it demonstrates how successful major milestones like the rollout of Bitcoin layer 2 tech and major Ethereum network upgrades have been.