Layer 3 is a blockchain protocol that is built on top of Layer 1 and Layer 2 to provide additional functionality, interoperability, or performance enhancements to the underlying blockchain infrastructure.^[1][13]

Overview

The concept of Layer 3 blockchain networks comes from the need to build a more secure, interoperable, and scalable blockchain infrastructure.^[1] Layer 3 blockchains act as an application layer, leveraging the functions of base layers. Layer 3s foster efficient and cost-effective financial transactions through scalability and a blend of layered consensus algorithms such as PoS and proof-of-authority, ensuring network performance, decentralization, and security.^[11]

At their core, Layer 3 blockchains are designed to enable seamless communication and interaction between disparate blockchain networks, as well as to facilitate advanced smart contract functionalities, decentralized applications (DApps), and complex transaction workflows.^[8]

Features

• Built on Layer 2: Layer 3 protocols are constructed on top of Layer 2 solutions, which in turn are built on the foundational Layer 1 blockchains like Ethereum.
• Enhanced Scalability: They provide enhanced scalability by allowing developers to create customized, application-specific blockchains based on their needs.
• Interoperability: Layer 3 blockchains facilitate interoperability, enabling different blockchains to work together smoothly.
• Customization: Layer 3 offers a high degree of customization, allowing developers to tailor solutions for targeted issues like privacy or supporting a high volume of transactions.
• User-Friendly: The aim is to create a more adaptable, efficient, and user-friendly blockchain ecosystem that can power complex applications used across multiple chains.

In essence, Layer 3 blockchains act as a bridge between Layer 1 and Layer 2, providing the tools necessary for dApps to operate efficiently and interact with one another across different blockchain platforms. They are highly customizable and scalable, making them suitable for a wide range of applications.^[11]

Key Differences Between Layers 0, 1, 2, and 3

	Layer 1	Layer 2	Layer 3
Definition	Foundation of the blockchain	Built on top of Layer 1s like Ethereum	Hosts application-specific dApps
Primary Role	Secure and run the network	Reduce Transaction costs and improve the scalability of Layer 1	Highly customizable applications that can solve targeted issues
Scalability	Limited scalability	Improved scalability as compared to Layer 1	Extremely scalable
Interoperability	Usually works alone	Able to work with limited chains	Enables different blockchains to work together
Transaction Fees	High	Low	Lower depending on the application
Use Cases	Basic blockchain functions	Advanced transactions with more efficiency	Complex applications that can be used across multiple chains
Examples	Bitcoin, Ethereum	Arbitrum, Polygon	Orbs, Arbitrum Orbit, zkSync Hyperchains
Pros	High security, decentralized, well-established.	Improved scalability, faster transactions, and lower fees.	User-friendly, extensive functionalities, potential for mainstream adoption.
Cons	Limited scalability, slower transaction speeds, and higher fees.	May compromise on security, and complexity can deter new users.	Still in its nascent stage, dependent on the security and stability of underlying layers

Layer 3 is an advanced protocol built upon existing Layer-2 solutions, which offer interoperability and application-specific functionalities. This means that Layer 3 is highly customizable and is able to suit a developer’s specific needs, such as enabling solutions for targeted issues like privacy, or supporting a high volume of transactions, all while still inheriting the security of the Layer-1 blockchain. As of April 2024, most Layer 3s are built on Ethereum, and there are blockchains, such as Bitcoin, which are not suited to host Layer 3 applications.^[8][10]

Examples of Layer 3 Protocols

Orbs

Working in conjunction with existing Layer 1 and Layer 2 protocols, Orbs is a Layer 3 blockchain that focuses on addressing the scalability issues faced by the Ethereum blockchain. According to their website, Orbs view their Layer 3 as an ‘Enhanced Execution’ which allows developers to develop their smart contracts by operating as a decentralized severless cloud.

This means that developers are able to write and deploy their smart contracts on Orbs’ own decentralized network and do not have to worry about the network’s underlying infrastructure. This gives developers the convenience of not needing to maintain physical servers as well. Currently, Orbs works with a few Layer 1 and Layer 2 protocols, including Ethereum, BNB Chain, Avalanche, Polygon, and more.

Arbitrum Orbit

In 2023, Arbitrum Foundation also released its new feature – Arbitrum Orbit, which is envisioned as a Layer 3 blockchain built on top of the Arbitrum Nitro platform. Other than even lower transaction costs and enhanced scalability, developers are able to create their own self-managed specialized blockchains on the Arbitrum Nitro platform. This allows the developers to utilize customized blockchains according to their specific needs.

zkSync Hyperchains

Launched by the zkSync team, zkSync Hyperchains can become Layer 3, which uses Layer 2 for settlement. zkSync Hyperchains are powered by the same zkEVM engine available on the ZK Stack, where all ZKP circuits remain identical and inherit the security of Layer 1, regardless of who deployed them. One benefit is that Layer 3 which settles on the same Layer 2 will have faster messaging between each other and interoperability within the wider ecosystem.

Cosmos (IBC Protocol)

The Cosmos Inter-Blockchain Communication (IBC) protocol is a Layer 3 solution that enables interoperability and secure communication across different blockchains within the Cosmos network. It allows the smooth exchange of information and assets, such as tokens, between connected blockchains, thereby enhancing the potential of decentralized applications (dApps) by enabling them to utilize functionalities and assets from various blockchain platforms.^[9]

Degen Chain

Degen Chain emerges as a cutting-edge Layer 3 blockchain platform on the Base blockchain specifically designed to enhance the functionality and utility of the DEGEN token. It is further complemented by a diverse ecosystem of tokens, including Degen Swap (DSWAP) and Degen Pepe (DPEPE), each contributing to the platform's dynamic and expanding utility.^[9]