Scaling New Heights: Layer 3 Blockchains And the Future of Crypto

Introduction

Compared to the preceding two years, 2023 presents a unique opportunity to establish an entirely novel foundation upon which blockchain technology can expand. That’s because this year will be marked by the blockchain’s application layer, bringing in an array of new scaling options. At this level, the Web3 community can work on improving the blockchain’s underlying technology and its approach to addressing some of the crypto industry’s most common issues. Therefore, layer 3 blockchain will drive innovation and mass acceptance. 

The cryptocurrency market is changing swiftly, but the exponential expansion in their use has created new challenges for Blockchains and Layers 1 and 2. Is there anything we can do to fix these issues? Yes, it’s Layer 3! What exactly is a Layer 3 crypto? What’s its purpose? Can I profit from Layer 3? Continue reading on, and you will uncover the answers. This guide will explain the core concepts and provide insights into this emerging technology. Stay tuned to learn more.

Understanding Layer 3 Blockchains

“Layer 3” is the common terminology for the application layer. This layer supports decentralized network applications (DApps) and the underlying protocols. While other blockchains like Ethereum and Solana (SOL) can host a diverse ecosystem of Layer 3 applications, Bitcoin is designed for something other than that purpose.

These examples highlight that layer two solutions differ the most from the Bitcoin network’s foundation. Through forks of the core Bitcoin network, some initiatives aim to include DApp capabilities into the Bitcoin ecosystem.

For example, CakeDeFi is a Defi program facilitating staking, lending, and liquidity mining for BTC coin owners. CakeDeFi is based on the Bitcoin fork known as DeFiChain. DeFiChain is a separate blockchain that continues to “anchor” to the main Bitcoin network for use cases.

One of the biggest problems with Bitcoin is that it can’t be used to create decentralized applications, say several experts. Layer Three platforms’ popularity and financial significance have skyrocketed since Ethereum’s debut in 2015. There are around 3,000 blockchain layers on Ethereum, all three applications deep.

Solana, another major blockchain, hosts over 500 layer 3 DApps, with a total Defi application value of nearly $15 billion.

However, BTC needs a layer three application that is both practical and well-recognized. The value of efforts to “forcibly integrate” features from DApps into BTC is a topic of ongoing debate. Some experts believe Bitcoin will always be a network more suited for cryptocurrency transactions than decentralized applications.

The Blockchain Trilemma, the reason Layer 3 exists

When discussing layer three solutions in the blockchain, the most pressing question on everyone’s mind is whether or not they are essential. Any blockchain enthusiast knows about the blockchain trilemma. When these three major factors intersect, blockchain networks often cannot decide which to ignore. Surprisingly, the trilemma inspired the development of blockchain layers, indicating that blockchain networks may meet just two of the three criteria at best.

The Blockchain Trilemma is a conflict between the three fundamental features of blockchain technology: decentralization, scalability, and security. You can’t maximize all three in the same way that you can’t simultaneously pull a rope in three different ways.

When these three major factors intersect, blockchain networks often cannot decide which to ignore. Surprisingly, the trilemma inspired the development of blockchain layers, indicating that blockchain networks may meet just two of the three criteria at best.

Therefore, blockchain projects frequently need to make compromises. Bitcoin prioritizes decentralization and security at the expense of transaction speed. Even though it prioritized scalability and security, Ripple’s design sacrificed decentralization. Solana prioritized scalability but had security and downtime.

No blockchain technology has “solved” the trilemma completely. The various levels become relevant here. They all reflect unique ways of striking a compromise between the costs and benefits.

The Problem with Blockchain

The blockchain trilemma consists of the three interrelated issues of decentralization, security, and stability. Nearly every blockchain project must sacrifice one of these criteria to improve the other two. Examples such as Ethereum and Solana highlight the costs and benefits involved.

The scalability trilemma is a major obstacle to combining the three components of a layer one blockchain. Solana prioritizes stability and security, while Ethereum and Bitcoin prioritize security and decentralization. For this reason, a multi-layer architecture may be a practical and economical way to provide scalability, security, and decentralization.

It’s important to consider whether layer 3 Blockchain protocols are necessary when layer 2 protocols already exist. Why might someone think they need a third layer?

Interoperability in the Blockchain

The key justifications for employing multi-level architecture in blockchain networks prove it to be the optimal answer to scalability issues. Layer 2 blockchain technologies can help solve scaling problems. So, why bother with layer 3 Blockchain initiatives? In reality, the blockchain trilemma is just one of several basic problems the crypto sector faces. Also, layer two methods don’t solve compatibility issues. Layer 2 methods didn’t let computer systems view, access, or share data.

The term “cross-chain functionality” is used in the blockchain ecosystem to describe interoperability. This means that two blockchain networks, each with its ecosystem, can interact with one another and conduct business without needing to resort to trusted third parties. Virtually all dApps and DeFi solutions that facilitate cryptocurrency trading involve centralized management. It isn’t easy to, for example, transfer Bitcoin to the Ethereum blockchain or use Bitcoin in a variety of DeFi apps.

The need for layer three blockchain protocols becomes apparent when considering common DeFi apps. The decentralized exchange Serum and the lending technology Aave operate on blockchain networks. No one can use these sites’ features. Because of this incompatibility, layer three solutions are being implemented for blockchains.

Key capabilities and benefits of layer 3 Blockchains

Scalability: Layer 3s take computation and data off-chain using advanced encryption like zero-knowledge proofs. This lets them handle thousands of transactions per second, while Ethereum can only handle 10–20.

Lower fees: Layer 3s greatly reduces user delays and fees by letting users change how fast transactions happen. Fees can be fractions of a cent instead of dollars on layer 1.

Faster finality: On base layer networks, transactions conclude in seconds instead of minutes or hours. This improves the customer experience.

Privacy: Keeping computations off-chain helps privacy because only a small amount of information is sent to layer 1. ZKPs hide the details of a deal.

Interoperability: Layer 3s can work with more than one Layer 1 and are not limited to a specific blockchain. This gets rid of financial problems that were caused by silos.

Modularity: They let developers make scalable dApps with a user experience like that of layer two while using the security of layer 1.

Composability: It’s easy for applications on the same layer three chain to work together, which makes the whole system work better.

Maintain decentralization: Unlike centralized layer two rollups, layer three networks remain decentralized. Protection against censorship continues to exist.

Backward compatibility: Backward compatibility means that dApps don’t have to be completely rewritten. Existing dApps built on Ethereum can be moved to layer 3.

Layer 3s could enable the next generation of blockchain apps like DeFi, NFTs, metaverse, and web3 to work by scaling throughput tremendously while keeping decentralization.

Real-World Use Cases of Layer 3 Blockchains

Decentralized Finance (DeFi): Layer 3s like StarkNet allow DeFi protocols like lending/borrowing, trading, derivatives, insurance, etc., to grow while staying decentralized.

Non-Fungible Tokens (NFTs): NFT minting, trading, fractionalization, and loans can happen faster and cheaper on layer 3.

Metaverses and Gaming: Layer 3 scalability enables handling the huge amounts of data needed for metaverse worlds and blockchain gaming.

Payment Networks: Web3 native economies can be supported by building scalable micropayment networks for businesses on layer 3.

Identity Management: Users’ identities, reputations, and credentials can be handled privately and securely on-chain.

Advertising Platforms: Layer 3s are being used to build the next generation of digital ad platforms to reduce intermediary fees.

Decentralized Autonomous Organizations (DAOs): Governance, voting, and managing the organization’s funds are made easier for global DAOs.

Supply chain: Scalable layer three contracts make it possible to make supply chain easier to track, more transparent, and easier to automate.

By allowing exponentially more throughput while keeping the same security guarantees as Ethereum, layer 3 increases the number of businesses that can use decentralized applications. Adoption is still new, but many ways to use it are growing quickly.

Impact on Major Blockchains

Layer 3 scaling options could be very helpful for Ethereum. Ethereum’s throughput could grow rapidly to 100,000 TPS or more while maintaining its security guarantees by processing and executing transactions outside of the blockchain. This allows global dApp adoption. StarkNet and zkSync lead the top Ethereum layer three projects.

In addition to Bitcoin’s robust foundation layer, layer three technology might be used to support more complicated smart contracts and applications. Stacks is a layer three initiative built on Bitcoin.

Alternative layer 1s like Solana, Polygon, and BNB Chain could improve scaling and interoperability by integrating with layer 3s. Omnichain is building layer three infrastructure to work with more than one chain.

Cross-chain bridges and the ability for layer 3s to work together could make a real multi-chain ecosystem possible in the future. Users could use their favorite layer one while using layer 3’s cross-chain features to connect with apps on other chains.

With this interconnected, multi-chain future, developers can build on layer 1 of their choice while still having access to liquidity, users, and powers across the entire crypto ecosystem. Layer 3 solutions are the bridge between scale and composability that will get us there while keeping the network decentralized.

List of Layer-3 Blockchains

• The Interledger Protocol (ILP) by Ripple is an example of a Layer-3 blockchain that performs a similar role to that of the Internet Protocol (IP) by connecting disparate payment networks to enable faster and cheaper transactions.

• Quant Network is based on Overledger, which paves the way for blockchains, business systems, mobile apps, and devices to communicate with one another and share data in a streamlined manner.

• Cosmos has developed the Inter-Blockchain Communication Protocol (IBC) Protocol to facilitate asset transfers between chains and multi-chain smart contracts, which provides robust and secure inter-module communication.

Challenges and Risks for Layer 3 Blockchains

Layer 3s are just now emerging, and as such, several issues and barriers need to be overcome to bring them to the next level. 

Lack of standardized infrastructure: One of the main challenges is the need for standardized infrastructure for L3s. Since L3s are built on top of L2s, they require a standard infrastructure to operate efficiently. With this standardization, L3s may achieve their full potential, making it easier for developers to build applications on top of them.

More work needs to be done on ZK-rollup technology: Another challenge is the need for more development in ZK-rollup technology, the underlying technology for L3s. ZK-rollups are the basis for layer 3s, but they must be optimized and made easier for developers to use. ZK-rollups have the potential to improve the efficiency and scalability of L3s significantly. Still, more work needs to be done to optimize this technology and make it more accessible to developers.

Need for zero-knowledge tools to improve: Zero-knowledge proofs require innovations to maximize their effectiveness and scalability.

Standardization and improvements to ZK will help solve problems. If these problems are solved, layer 3s can reach their full potential and drive innovation across sectors.

Education for developers: Many developers are still learning what layer three can do compared to layers 1 and 2. The information must spread.

Protocol Maturity: Many layer three protocols are still in the testnet and need to be fixed before they can be used on a large scale on the mainnet.

Maturity of the ecosystem: The tools, infrastructure, and services serving layer 3s are still in their early stages and need to grow.

Standardization: Core layer three technologies like zero-knowledge proofs don’t have any norms. This can make it harder to work together.

Clarity about the rules: Uncertainty is caused by the fact that the rules about cryptocurrencies and blockchain use must be clarified.

Network effects: It takes time for new layer 3s to get enough network effects and liquidity. There are problems with scaling.

User experience (UX) must improve across wallets, apps, and software tools if the general public uses layer 3s.

Concerns about decentralization: Early-stage layer 3s sometimes give up decentralization for scale. There needs to be a balance.

Security proofs: There needs to be a lot of security testing and proofs, especially for the new cryptographic methods that layer 3s use.

L1 congestion: High fees and congestion on layer 1s like Ethereum make it less appealing to look into scaling options for layer three.

The Web3 ecosystem is developing new and improved zero-knowledge technologies and infrastructure for layer 3s. By standardizing infrastructure and continuing to innovate in ZK technology, we can overcome these small challenges facing L3s and bring them to the forefront of blockchain scaling solutions, driving innovation and widespread adoption across every industry.

With continued technological development, teaching, and the creation of standards, these barriers can be overcome to help layer three become more popular over time.

Conclusion

Layer 3 blockchains are a major innovation in cryptocurrency because they provide superior, specifically designed networks for certain use cases. These networks improve the effectiveness and adoption of decentralized apps (DApps) by allowing for scalability, interoperability, and customization. 

Layer 3 blockchains can boost transaction speeds, lower costs, and provide a better user experience by focusing on the needs of a single DApp. They also serve as a foundation for quick innovation by empowering programmers to develop programs focusing on individual users.

Layer 3 blockchains can influence the industry’s future by stimulating innovation, broadening the scope of blockchain technology, and increasing the number of people using cryptocurrencies and decentralized applications (DApps) despite concerns about network security and general acceptance.

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