What are Layer 3s and how do they improve scalability?

Authors: Hwee Yan, CoinGecko, Compiler: Song Xue, Golden Finance

Main points of the text:

• L3 is built on top of L2 to host application-specific decentralized applications.
• L3 can solve various problems such as scalability, interoperability, customization, etc.
• Some examples of L3 protocols include Orbs, Arbitrum Orbit, and zkSync Hyperchains.

What is Layer 3 in Cryptocurrency?

The L3 protocol is built on top of L2 to provide enhanced scalability so that developers can create customized application-specific blockchains based on their needs.

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How do L1, L2, and L3 work together?

L1 is the underlying blockchain where blocks are added and transactions are finalized. However, L1 faces three major blockchain challenges that must sacrifice scalability, decentralization, or security. Blockchains like Bitcoin and Ethereum prioritize decentralization and security over scalability, and these networks have low transaction speeds as the number of network users increases.

That’s where L2, which solves scalability problems, comes in. **L2 is an off-chain vertical scaling solution that runs on top of L1 such as Ethereum for scalability, providing users with faster transactions and lower gas fees. They can be in the form of rollups or validations, as is the case with Polygon 2.0. Many L2 solutions, such as Polygon, zkSync, and Arbitrum, have released solutions that enable developers to create application-specific chains built on top of Layer 2, which brings us to L3.

**L3 is an advanced protocol built on top of existing L2 solutions that provides interoperability and application-specific functionality. This means that L3 is highly customizable, able to meet the specific needs of developers, such as providing solutions to target issues such as privacy, or supporting a large number of transactions, while still inheriting the security of the L1 blockchain. Currently, most L3 is built on Ethereum, and at the time of writing, there are blockchains (such as Bitcoin) that are not suitable for hosting L3 applications.

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What problem does Layer 3 solve?

Now, with an understanding of how L1, L2, and L3 work together, let’s take a closer look at L3 and how they can scale the blockchain further.

1. Scalability

**L3 is designed to enhance scalability beyond the capabilities of current L1 and L2 with extreme scalability. As a result, the network will be able to handle a larger volume of transactions while supporting a wider range of complex applications.

2. Sophisticated dApp support

Layer 3 provides the necessary infrastructure for the development of more complex decentralized applications that require more advanced functionality. This may help improve the web design, include more advanced features in the app, and make it easier for the layman to use. Depending on the developer’s needs, L3 can also facilitate more complex smart contract designs, which L1 and L2 can’t handle due to limited scalability.

3. Blockchain interoperability

L3 also solves interoperability issues. L3 can act as a bridge between different blockchains so that transactions and data can flow across different platforms. ** This means that L3 dApps have the ability to connect to different blockchains, such as Ethereum and Solana.

4. Customization

L3 can also be customized to the unique needs of developers. For example, developers can introduce application-specific mechanisms that only allow the execution of private transactions and contracts, thus only allowing certain data to be revealed. Because L3 is highly customizable, developers can tailor the governance, rules, and functionality of the dApp to their needs.

Arbitrum Orbit allows developers to customize different aspects of their chain. For example, developers can customize and choose which tokens are accepted as transaction fees on their chain. This gives developers the flexibility to choose and possibly include the platform’s native tokens, allowing developers to tailor the functionality of the dApp to their unique needs. In addition, developers can customize their dApps to ensure users have more consistent and reliable gas fees. Developers can also launch their own blockchain networks with specific features, such as Arbitrum’s Nitro-powered blockchain network and Stylus for EVM+ compatibility. Some of the other customization features offered by Arbitrum Orbit include privacy, permissions, fee tokens, governance, and many more.

5. Cost-effective

Since the L3 network processes some transactions and operations off-chain, this helps to reduce network congestion, which can significantly reduce transaction fees. This cost efficiency helps reduce the cost of entry and makes it easier for developers and users to use.

For example, the Xai network is a gaming network that specializes in powering Web3 games. Built through Arbitrum’s L3 network, the Xai network introduces parallel processing to improve efficiency and scalability while further reducing costs.

6. Accessibility

L3 can also become more accessible to the masses and easier to implement. For example, Arbitrum’s L3 Arbitrum Orbit allows anyone to build and deploy their own L3 on Arbitrum Nitro without approval. In contrast, launching L2 requires recommendations around its trust model and how to achieve full decentralization.

Use cases for Layer 3

Now that we understand what L3 solves, here are some possible use cases for L3:

1. Game Apps

One of the use cases for L3 is blockchain gaming. By running on L3, it enables applications to run on a dedicated blockchain, allowing a larger volume of transactions to be processed at a faster rate. This is especially important for gaming apps to help developers maintain a seamless in-game experience for their users.

Gaming apps tend to handle many of the most expensive microtransactions. As a result, running applications on L3 allows developers to ensure cost efficiency for users due to the lower transaction fees on L3.

2.Decentralized finance applications

Another possible use case for L3 is decentralized finance applications. Running on L3 is ideal because it enables decentralized finance applications to be tailored to the needs of the application. This means developers will be able to customize the privacy settings and different features of the app.

In addition, L3 is extremely scalable, which ensures that a large number of transactions can be processed quickly, which is extremely important for real-time transactions. L3 also allows for interoperability between various blockchain networks, allowing users to transfer assets across different networks.

L3 example

While the concept of Layer 3 is still considered a relatively new development in the crypto space, here are some notable projects:

1.Orbs

Orbs works in conjunction with existing L1 and L2 protocols and is an L3 blockchain focused on solving the scalability problems faced by the Ethereum blockchain. According to their website, Orbs sees their L3 as “enhanced execution,” which allows developers to develop their smart contracts by operating as a decentralized serverless cloud.

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This means that developers are able to write and deploy their smart contracts on Orbs’ own decentralized network without having to worry about the network’s underlying infrastructure. This also provides developers with the convenience of not having to maintain physical servers. Currently, Orbs works with a number of L1 and L2 protocols, including Ethereum, BNB Chain, Avalanche, Polygon, and more.

2.Arbitrum Orbit

In 2023, the Arbitrum Foundation also released a new feature – Arbitrum Orbit, which is conceived as an L3 blockchain built on top of the Arbitrum Nitro platform. In addition to lower transaction costs and enhanced scalability, developers are able to create their own self-managed dedicated blockchains on the Arbitrum Nitro platform. This allows developers to use a customized blockchain based on their specific needs.

3.zkSync Hyperchains

The zkSync superchain launched by the zkSync team can become an L3 that uses L2 for settlement. The zkSync Superchain is powered by the same zkEVM engine available on the ZK Stack, where all ZKP circuits remain the same and inherit the security of L1, regardless of who deploys them. One benefit is that L3s based on the same L2 will enable faster messaging between each other and interoperability across the broader ecosystem.

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Summary

The development of L3 is an interesting innovation in the cryptocurrency space. It improves on our previous features by bringing together the best parts of L1 and L2, such as making the network more scalable and at the same time more secure. Still, it’s important to remember that each layer plays a vital role in the blockchain ecosystem and doesn’t compete with each other. At the moment, L3 is still in development, but I think it’s clear that L3 will play a key role in shaping how we leverage blockchain technology in the future to make it easier for blockchains to handle high transaction volumes.