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Like a sandwich, web3 is formed of a series of layers which, when artfully combined, have the ability to delight the consumer. The blockchain itself lies at the base layer, providing the foundation – essentially the bread – for the filling provided by the middleware.
But the construction of blockchain base layers is not uniform. In fact, there is significant diversity in the nature of the architecture that constitutes the first layer of the web3 sandwich. From L1s to L2s and now L3s, there are many different breads to work with. So how do L3s fit into all of this and what do they bring to the banquet that existing blockchain technology cannot adequately provide? Roll up your sleeves and let’s dig in.
Sometimes referred to as the application or service layer, L3 describes a blockchain that’s been optimized for one specific task. That might be payments, NFTs, perps trading, or gaming. Often, the Layer 3 network is the preserve of a single web3 project rather than being shared with a wide range of dapps and users. It’s an attempt to ensure that service isn’t degraded by the actions of other entities while retaining the benefits of a public blockchain in terms of security, decentralization, and transparency.
Some projects have migrated to L3 after finding the L1 they began life on to be too crowded; notable examples include dYdX, which moved from Ethereum to a dedicated chain built using Tendermint, and Aavegotchi, which went from Polygon to its own L3.
But not all L3s are born out of a desire to flee the crowds and find a new home where the block space is plentiful and the fees nominal. An increasing number of projects are building on L3 from day one to deliver key services to existing protocols operating on L1 and L2. And there are two products in particular that they’re piping: data and liquidity.
Just as it wasn’t possible to release the Godfather III before the first two movies had seen the light of day, L3s couldn’t have been developed before the layers that went before them. Because Layer 3s are therefore newer, they also benefit from inheriting newer blockchain technology, particularly in terms of interoperability.
Many of the L3s seeing action today have been designed to provide composability across different protocols, allowing for seamless interaction between financial products and services across multiple blockchains. They aren’t beholden to any one ecosystem or programming language. On the contrary, they’ve been engineered to support as many networks as possible regardless of architecture, consensus, and language.
To visualize what this concept resembles in reality, one need only look to Orbs, the L3 intent on routing liquidity to DEXs on multiple blockchain networks. Its Layer 3 is solely used as a decentralized back-end for funneling liquidity to where it’s needed, allowing DeFi users to enjoy better pricing and tighter spreads. Not only does the use of a purpose-built L3 allow Orbs to deliver liquidity from other blockchains but it can also route it from centralized sources. This capability has helped it to become the most widely integrated L3 for DeFi trading.
The second great L3 use case – data – is fulfilling a similar role by bringing the web3 ecosystem closer together. Through collecting data for events that happen on far-flung blockchain networks and presenting it in an easily queryable format, data layers allow dapps to execute functions based on pricing and trading events that occur on other chains. Layers such as SQD are proving their worth at uniting data across all the chains and packaging it into an easily digestible format that can be accessed quickly and efficiently.
While some of the characteristics that define an L3, such as being optimized for a single use case, were outlined earlier, it’s worth noting that Layer 3 is a broad tent. Some projects that technically meet the criteria of an L3, such as SQD, don’t describe themselves as such, in the same way that many metaverse projects now avoid the term altogether now that it’s fallen out of favor.
In other words, pay less attention to the description a project gives to its blockchain network and give more heed to what it does. If it’s designed for a specific use case or onchain vertical, is highly interoperable, and can be integrated into existing L1s and L2s, it’s a Layer 3. If it walks and talks like an L3 – despite its creators swearing blind that it’s an appchain or a service layer – it’s a Layer 3.
As for whether L3s are the last word in blockchain design, the answer is almost certainly no. Just as Gillette has shown a remarkable ability to continue adding more blades to its disposable razors in the quest for the perfect shave, it wouldn’t be surprising to see additional layers added to the blockchain stack.
But in the here and now, L3s have become one of the primary drivers between the reduction in blockchain congestion and enhanced data and liquidity delivery we now enjoy. They’re allowing GameFi to flourish without playing experience being impaired by slow and costly transaction settlement; liquidity to flow to DEXs and L2s to satisfy the demands of DeFi traders; and powering the creation of data-rich dapps that soak up multichain data.
Even if you’ve never bridged funds onto one, the odds are you’ve indirectly interacted with an L3 without knowing it. Which is exactly the way they’re meant to work: as the backbone of the cryptoconomy, quietly delivering data and liquidity to where it’s needed.
