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Understanding Layer 3 Blockchains

Scalability has become an even more pressing issue as the crypto sector experiences increased customer demand. Many of us have come across terms like “layer one” and “layer two” protocols in the blockchain world.

Blockchains must be very secure due to the lack of a centralized authority. They must also be incredibly scalable to cope with growing users and transactions.

Today we will learn more about layer three solutions, a technology aiming to provide scalability while maintaining top-notch security.

A Look into Multi-Layer Blockchains

If you’ve spent any time in the crypto world, you’ve probably heard of the “blockchain trilemma.” Simply said, present blockchains can only satisfy two of the three attributes listed below:

  • Decentralization: the exclusion (either partial or complete) of a centralized entity in the system.
  • Scalability: a blockchain’s capacity of accommodating a larger volume of transactions.
  • Security: a blockchain’s capacity to protect data from various forms of attacks or double-spending.

As a result, all blockchain initiatives must sacrifice one area to flourish in the other two. This is a typical trade-off, with traditional blockchains (ETH or BTC) betting on decentralization and security.

On the other hand, a system like Solana relies on security and scalability with a less decentralized framework.

The scalability trilemma only becomes an issue when blockchain systems require all three attributes on their first layer. A system that cannot go beyond its first layer (or L1) will need to sacrifice one of the features.

As a result, blockchains’ multi-layer structure provides a cost-effective solution to the scalability trilemma. Theoretically, a well-designed system can achieve security, decentralization, and scalability.

Why Does the Market Need Layer 3 Solutions?

Creating a new layer (L2) can enhance the feature sacrificed by L1. In this context, one may wonder why we need an additional layer. We will keep the reasoning simple so that everyone can follow it regardless of their technological knowledge.

The blockchain trilemma is not the only fundamental issue affecting crypto traders. Interoperability refers to the capacity to observe, access, and share information between computer systems.

It implies two blockchains with different ecosystems (like ETH and BTC) may connect and interact without a centralized intermediary.

It is not feasible to shift BTC to Ethereum and use it across numerous decentralized finance (DeFi) apps. Several initiatives have constructed bridges between BTC and Ethereum on the first layer. However, they often include trusted intermediaries or some sort of centralization (e.g., centralized custodians).

On the one hand, L2 solutions overcome the scalability difficulties of conventional chains. On the other hand, the increase in the number of new L2 solutions makes system interoperability a greater issue.

While Uniswap and SushiSwap are both on Ethereum, they are working on independent L2 solutions (Optimism and Polygon, respectively). Consequently, taking a token from one swap portal to another will require an intermediate passage.

Anyone labeling this matter as “trivial” should probably know better. Inefficient processes result in increased prices and longer processing times. Ironically, this is precisely the problem L2 solutions planned to solve.

Therefore, interoperability between multiple blockchains and layer-two solutions is a significant issue. The trick invented by some developers is to introduce another layer (L3) to the system.

What Is a Layer 3 Blockchain?

Layer-three solutions supercharge separate blockchains with cross-chain capabilities to achieve real interoperability. At this point, it’s essential to underline that the whole system does not rely on any custodian or intermediary.

Because L2 and L1 solutions are closely related, creating interoperability protocols on a different layer is a reasonable idea. This intuition led to the creation of L3 services.

Without useless overcomplication of the matter, think of L3 protocols as a way to simplify all the layers. They act as the messenger between L1 and L2 systems, disregarding most of their operating differences.

Real-life Examples

We often see multi-chain interoperability teams mention the potential of L3 technology. While all this may sound very theoretical, we already have a few L3 examples on the market.

Think, for example, of Cosmos’s Inter-Blockchain Communication Protocol (or IBC). We can see Cosmos as the merge of three layers:

  • Tendermint Core
  • Cosmos-SDK
  • IBC

Any application that relies on dependable and secure inter-module communication can use IBC. Cross-chain asset transfers and multi-chain smart contracts are only a few examples of this technology’s potential.

One could argue that Ripple’s Interledger Protocol (ILP) is the most famous L3 solution on the market. Ripple proposes the following structure:

  • Layer 1: blockchain ledgers
  • Layer 2: LANs (Local Area Networks)
  • Layer 3: Interledger Protocol

ILP aims to constitute an L3 system to guarantee faster and cheaper transactions on Ripple.

We could go on with other examples, but, in general, the pattern is pretty straightforward. Developers build a new layer on top of existing systems working with L1 and L2 technology.

Final Thoughts

L3 protocols have a lot of ambitions, and they may transform the way blockchains function in the digital market.

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L3 technology aims to achieve full interoperability, avoiding a future of complex and incompatible blockchain systems. Behind a seemingly technical concept, we find the future of blockchain and cryptocurrency mass adoption.

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