Layer 3, which is becoming more and more popular, where is it sacred?

[TL；DR]

1. The popularity of Degen Chain and others has brought Layer 3 into people's field of vision, and the emergence of this technology will bring higher scalability and interoperability to blockchain networks, providing customized solutions for different application scenarios.

2. Among the emerging Layer 3 use cases, Arbitrum Orbit and Starknet are the most prominent, and may shine in the fields of game and DeFi.

3. If Layer 3 wants to break out of the circle, it is not only necessary to continue to improve the technology, but also to seek more large-scale adoption applications to support the breakthrough of the technology.

Introduction

On the day before April Fool's Day this year, some crypto projects took the opportunity to make some humorous jokes about Layer 4 and Layer 5, including dYdX's joke that "the new version will be built on top of L4", which even misled some media into spreading as real news.

And this joke is naturally based on the growing popularity of Layer 3. As for Layer 3, the general concern is whether it is an interchain nesting doll or a custom extension, and whether it really has the potential for scalability, and this article will focus on this controversy for readers.

Layer 3 is out of the circle, and the community is hotly debated

Recently, Layer 3 has seen a significant increase in popularity, attracting a lot of attention.

In particular, the outstanding performance of Layer 3 tokens such as Degen Chain, such as DEGEN's short-term increase of more than 150%, and Aavegotchi's transformation into a Base-based Layer 3, GHST price also hit a record high, further highlighting the potential of Layer 3.

Figure 1 Source: degen.tips

In the traditional definition, Layer 2 is considered a scalable settlement network on the Ethereum mainnet. Layer 3, on the other hand, is built on top of Layer 2 and relies on Layer 2 for settlement, with a higher scalability network.

The idea for Layer 3 was first proposed by the Starknet (then StarkWare) team in the article "Fractal Scaling: From L2 to L3". In Starknet's vision, Layer 2 virtual machines maintain a high degree of composability as a decentralized general-purpose computing layer, while Layer 3 should serve as an application-specific chain that flexibly meets the unique needs of various applications. Turing completeness provides a solid foundation for this hierarchical structure, and in theory, any possible application can be built on top of Turing completeness.

The idea was based on the fact that Starknet had developed the Cairo language and CairoVM in order to generate proofs more efficiently, but these were not fully compatible with Ethereum. That's where Layer 3 chains come into play, providing the security needed for these applications. In this way, Layer 3 becomes an effective means to solve the limitations of Layer 2, further advancing the development of blockchain technology.

From a technical perspective, Layer 3 goes beyond existing L1 and L2 solutions by anchoring the blockchain network to L2, enabling greater security and potentially exponential scalability benefits. However, since both Layer 2 and Layer 3 rely on the mainnet for settlement, their data compression and synchronization mechanisms are the focus of discussion.

In a Layer 2 scenario, transaction data is packaged, compressed, and synchronized to the Ethereum network. Similarly, Layer 3 will use a similar mechanism to compress and synchronize their transaction data to the Layer 2 network.

However, this approach, which is similar to adding a rollup on top of a rollup, has been met with some skepticism and criticism. Because if we continue to envision higher-level networks such as Layer 4 and Layer 5 with this architecture, we will face the problem of data compression, because data cannot be infinitely compressed all the time.

For example, some organizations such as Polygon Labs have made it clear that they will not develop Layer 3, and dYdX has even teased the whimsy of Layer 3 by developing Layer 4. Even Vitalik recently said that Layer 3 doesn't magically increase processing power. These voices reflect the industry's cautious approach to the viability and practicality of Layer 3 technology.

Figure 2 Source: @VitalikButerin

Take stock of those Layer 3 instance projects

Layer 3 seeks to solve the problem of interoperability between blockchains and meet the customized needs of developers, while being easy for the masses to use and implement, including governance mechanisms, rules, and features. By processing transactions off-chain, Layer 3 can further reduce network congestion and transaction fees on top of Layer 2, improving cost efficiency.

At present, among the emerging Layer 3 use cases, Arbitrum Orbit and Starknet are the most prominent, and may shine in the fields of gaming and DeFi.

Arbitrum Orbit

In 2023, the Arbitrum Foundation launched a new feature – Arbitrum Orbit, a Layer 3 blockchain built on the Arbitrum Nitro platform. In addition to providing lower transaction costs and greater scalability, Arbitrum Orbit allows developers to create self-managed, proprietary blockchains on Arbitrum Nitro.

Starknet Stack

In stark contrast to the simple stacking approach, Starknet assigns different responsibilities to L2 and L3 in the newer L3 framework. It emphasizes that L3 should focus on providing custom features, such as privacy protection or application-specific optimizations, rather than simply pursuing scalability.

Figure 3 Source: Starknet

In February of this year, Starknet officially announced a partnership with Celestia to jointly build a high-throughput Layer 3 network. However, given Starknet's unique zk-STARK attestation technology, which is relatively immature at the moment, it will take time for the Starknet Stack to become available.

Orbs

Orbs is a new Layer 3 blockchain designed to solve Ethereum's scalability problem, working in tandem with existing Layer 1 and Layer 2 protocols.

Orbs' Layer 3 is seen as an "enhanced execution" layer that allows developers to run and develop smart contracts on a decentralized server cloud. This means that developers can focus on writing and deploying smart contracts without worrying about the underlying network infrastructure and maintaining physical servers.

Currently, Orbs supports working with multiple Layer 1 and Layer 2 protocols such as Ethereum, BNB Chain, Avalanche, Polygon, etc.

zkSync Hyperchains

Another notable technology is the zkSync Hyperchains launched by the zkSync team, which can be considered Layer 3 and utilize Layer 2 for settlement.

These Hyperchains are powered by the same zkEVM engine on the ZK Stack, ensuring consistency across all ZKP circuits on the platform and inheriting Layer 1 security.

A significant advantage of this architecture is that it enables faster messaging between Layer 3s settled on the same Layer 2 and facilitates interoperability within the broader ecosystem.

Summary

Layer 3 mainly solves the problems of blockchain scalability, complex dApp support, blockchain interoperability, customization, cost-effectiveness, and accessibility.

Not only does it enhance the scalability of blockchains and support complex dApp development, but it also acts as a bridge between different blockchains to enable the cross-platform flow of transactions and data. At the same time, Layer 3 allows customization according to the needs of developers, reducing transaction fees, improving cost performance, and making blockchain technology more accessible to the masses.

However, from the perspective of cryptographic evolution, Layer 3 cannot achieve a performance leap with simple stacking, and while customization can bring specific advantages, the loss of versatility limits the feasibility of stacking.

Figure 4 Source: LK Venture

Many critics argue that the current overlay is not sufficient and leads to a dramatic increase in system complexity.

On the other hand, Layer 3 interoperability is better than traditional heterogeneous chains, but it cannot achieve direct migration of ecological traffic. For example, contracts on Arbitrum One cannot be called directly on Orbit Chain, and DEX liquidity on zkSync cannot be directly imported into ZK Stack.

The current situation is similar to that of high-rise shopping malls, but there is a lack of tenants and customers on the upper floors. Despite the busy ground floors, people are still reluctant to go to the upper floors because of the insufficient number of high-rise merchants.

In other words, if Layer 3 wants to break out of the circle, it not only needs to continue to improve its technology, but also should seek more popular applications to support the breakthrough of this technology.

In conclusion, the development of Layer 3 is an innovation in the crypto space, which combines the best features of Layer 1 and Layer 2 to improve the scalability and security of the network. While each layer has its own role in the blockchain ecosystem and is not competing, it remains to be seen that Layer 3 is still in development and is expected to play a key role in the future utilization of blockchain technology.

by Carl Y.

This article represents the views of the author only and does not constitute any trading advice.

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