Layer-2 vs Layer-3: What is the Difference?
Blockchain became a thing with the introduction of Bitcoin in 2018, which provides a decentralized and secure way to record and verify transactions without relying on a central authority. Blockchain technology is a decentralized, distributed ledger system that records transactions across a network of computers referred to as nodes. It ensures security, transparency and immutability of data through cryptographic techniques. However, blockchain faces scalability challenges due to its design and consensus mechanisms.
Scalability challenges in the blockchain arise from:
Throughput: The number of transactions processed per second is limited in traditional blockchains, hindering mass adoption and real-time transaction processing.
Latency/Network Congestion: Confirmation time for transactions can be slow sometimes, leading to delays and inefficiency. This happens especially during periods of high network activity, leading to network congestion. In this period of network congestion, transaction fees get very high, which detract from user experience.
Resource Intensiveness: As the blockchain continues to grow, the computational resources required for nodes to validate and store the entire ledger become increasingly demanding, affecting network performance.
Transaction Cost: High transaction fees can discourage users from participating in network activities, particularly when conducting microtransactions. Imagine paying $50 in fees, to send out a token worth $20.
These scalability challenges have led to the exploration of Layer-2 and Layer-3 solutions to improve the performance, efficiency and scalability of blockchain networks.
Why Layer-2 and Layer-3 Solutions?
Before diving into answering the question: Why Layer-2 and Layer-3 Solutions, let’s first draw your attention to the fact that there are some layer-1 blockchains that have high transaction throughput with cheaper transaction fees. So answering the above question will also give an answer to another question: Why not other scalable layer-1 blockchains?
The importance of layer-2 and layer-3 blockchain solutions can be understood through the lens of the “Blockchain Trilemma," which refers to the challenge of achieving decentralization, security and scalability simultaneously. The Blockchain Trilemma states that decentralized networks can only provide two out of the three benefits of blockchain, which are scalability, security, and decentralization. In simpler terms, a blockchain that is secure and decentralized, can not be scalable at the same time, while blockchains that are scalable are either not decentralized or they are not secure. This answers the question: Why not other scalable layer-1 blockchains. Because if they are scalable, it obviously means that one of the other benefits (decentralization or security) is missing.
On the other hand, Layer-2 and Layer-3 solutions play a crucial role in addressing this trilemma by offering enhanced scalability and performance while leveraging on the decentralization and security of Layer-1 blockchains. This means, Layer-2 and Layer-3 blockchains are built to rely on Layer-1 blockchains.
Layer-2 Blockchains
Layer-2 blockchain solutions are secondary protocols or frameworks built on top of existing blockchain networks (layer-1), aiming to address scalability, speed, and transaction cost without compromising the security and decentralization provided by the underlying Layer-1 blockchain. These solutions enable off-chain processing of transactions, reducing the burden on the main blockchain and improving its overall efficiency. Examples of popular Layer-2 solutions are StarkNet, Polygon, ZKSync, XDai chain, ImmutableX, Optimism, and Arbitrum.
Key Aspects of Layer-2 Blockchains
Off-Chain Processing: Layer-2 solutions facilitate the execution and settlement of transactions off the main blockchain (layer-1), reducing congestion and increasing transaction throughput.
State Channels: State channels are a popular form of layer-2 solution that enable parties to conduct multiple transactions off-chain, setting the final state on the main blockchain only when necessary. This can significantly enhance transaction speed and reduce transaction costs.
Sidechains: Sidechains are independent blockchains that are interoperable with the main blockchain. They make possible parallel processing of transactions and can be used to offload specific types of transaction which enhances overall network scalability.
Plasma: Plasma is a layer-2 scaling solution that creates hierarchical tree structure of sidechains, enabling high throughput transaction processing while retaining the security of the main blockchain.
Rollups: Rollups, which includes Optimistic Rollups and ZK-Rollups, aggregate and bundle transactions off-chain, settling the results on the main blockchain. They significantly increase transaction throughput, reduce transaction fees, and maintain the security and decentralization of the underlying blockchain.
Benefits of Layer-2 Solutions
Layer-2 solutions offer improved scalability, faster transaction confirmations, reduced fees, and enhanced user experience, making them instrumental in expanding the practical use of blockchain technology.
Limitations of Layer-2 Solutions
While Layer-2 solutions offer significant benefits, they also come with some challenges such as ensuring proper security and trust assumptions for off-chain transactions, managing interoperability between Layer-2 and Layer-1, and educating users and developers about the nitty gritties of these solutions.
Layer-3 Blockchains
Layer-3 blockchain solutions refer to protocols, frameworks, and technologies built on top of Layer-2 solutions and across multiple blockchains, aiming to address interoperability, scalability, and diversity of use cases. These solutions enable seamless interaction between different blockchains, cater to a wide range of applications and enhance the overall scalability and utility of blockchain networks. Some close examples of Layer-3 blockchains are Orb and Superchain Network.
Key Aspects of Layer-3 Blockchains
Interoperability Protocols: Layer-3 solutions include interoperability protocols that facilitate the transfer of assets and data between different blockchains, enabling cross-chain functionality and communication.
Sharding: Sharding is a Layer-3 scaling solution that partitions the blockchain network into smaller, more manageable parts (shards), allowing for parallel transaction processing and significantly improving scalability.
Cross-Chain Communication: Layer-3 solutions enable communication and data transfer between blockchains, fostering a network of interconnected chains and supporting diverse use cases that span multiple blockchain ecosystems.
Benefits of Layer-3 Solutions
Diverse Use Cases: Layer-3 solutions cater to a wide range of applications, including decentralized finance (DeFi), non-fungible tokens (NFTs), gaming, supply chain management, and more, by providing the necessary infrastructure for diverse and specialized use cases.
Global Scalability: L3s have the potential to scale across geographies and several other use cases, supporting a wide range of applications and use cases, catering to the diverse needs of different users.
Limitations of Layer-3 Solutions
With all the benefits of Layer-3 solutions, some challenges can not be far. They include ensuring seamless interoperability, maintaining security across interconnected chains, and fostering adoption and standardization of cross-chain protocols.
Comparing Layer-2 and Layer-3
Here is a comparison of Layer-2 and Layer-3 blockchains across four different categories:
Key Differences
By now, you might have figured out the differences between Layer-2 and Layer-3 solutions, but for the benefit of doubt, let’s explicitly spell them out.
Scope of Operation: Layer-2 solutions operate within the context of a single blockchain network, while Layer-3 solutions span across multiple blockchain networks, facilitating interoperability and cross-chain functionality.
Primary Function: Layer-2 solutions focus on enhancing the scalability and performance of individual layer-1 blockchains, while Layer-3 solutions provide the infrastructure for cross-chain communication and support for diverse applications.
Use Case Target: L2s target scalability challenges within a single blockchain ecosystem, whereas L3s cater for a broader range of use cases that necessitate interaction across multiple blockchain networks.
Real-World Applications of Layer-2 Blockchain Solutions
Decentralized Finance (DeFi) Platforms: Layer-2 solutions such as rollups and state channels, have been integrated into DeFi platforms to alleviate congestion and high transaction fees on Layer-1 blockchains, enabling faster and more cost-effective transactions for activities like trading, lending and borrowing. Examples of DeFi platforms running on L2 are Ekubo (A decentralize exchange on StarkNet), ZKLend, and Nostra Finance.
NFT Marketplaces: Layer-2 scaling solutions have been deployed in NFT marketplaces to improve the efficiency of minting, trading and transferring NFTs, providing a smoother user experience and reducing the environmental impact associated with high gas fees on Layer-1 blockchains.
Real-World Applications of Layer-3 Blockchain Solutions
Interoperable Decentralized Exchanges (DEXs): Layer-3 solutions enable interoperable DEXs that facilitate cross-chain asset swaps, allowing users to trade assets from different blockchains without the need for centralized intermediaries.
Cross-Chain Asset Transfers: Layer-3 protocols and bridges are used to facilitate the seamless transfer of digital assets, such as cryptocurrencies, tokens, and NFTs, between diverse blockchain networks, fostering greater liquidity and accessibility across multiple ecosystems.
Gaming Application: L3s can enhance the gaming ecosystem by providing scalability, interoperability and efficient asset transfer across different blockchains which can enhance gaming experience and cross game asset utilization.
Conclusion
The comparison between Layer-2 and Layer-3 blockchain solutions reveals distinct yet complementary roles within the blockchain ecosystem. Layer-2 solutions primarily focus on enhancing the scalability and performance of individual blockchain networks, addressing challenges specific to a single ecosystem. On the other hand, Layer-3 solutions are designed to enable interoperability, scalability, and diverse use cases across multiple blockchain networks, fostering a network of interconnected chains and supporting a broad range of applications. Together, these layers contribute to the advancement of blockchain technology, offering solutions for scalability, interoperability, and diverse use cases.