Potential of Layer 3: Features/Benefits, Expert Opinions, Real-world Examples and Challenges

At the heart of blockchain is Layer 1, the protocol layer.

Then comes Layer 2 with added functionalities for throughput and connectivity. 

It is, however, Layer 3 where applications truly take shape.

In this article, we cover the potential of Layer 3 solutions, including its history, benefits, challenges, and real-world apps in industries like DeFi, gaming, and energy, alongside expert opinions. 

What is Layer 3?

Layer 3, the application layer, is meant to host and manage apps built on Layers 1 (i.e., the consensus mechanism) and 2 (i.e., the performance layer), allowing developers to deploy complex dApps with enhanced features (e.g., cross-chain support and better interfaces). 

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History of Layer 3

Layer 3, a relatively new concept, gained attention post-COVID as the need for more specialized and scalable solutions became evident. Projects like Orbs were among the early ones to introduce an extra layer to improve dApp performance by combining Layer-1 and -2 protocols.

The growth of Layer 3 was further supported by initiatives like the Layer3 Foundation, which emphasizes community-driven governance and highlights Layer 3 as essential infrastructure for connecting multiple blockchains (i.e., omnichain).

“As long as the users care about the infrastructure they are running on (i.e., the bridges, the DEXs, etc.), we will never go mass market.” Christoph Richter - Co-founder @ MC² Finance

What are the benefits (and features) of Layer 3?

The benefits (and features) of the blockchain’s application layer include:

1. Simplified interactions and accessibility
2. Access to deeper liquidity pools
3. Tailored solutions for specific needs
4. Supporting complex and high-throughput apps
5. Enhanced security and privacy
6. Enabling new business models

Simplified interactions and accessibility

Layer 3 secures data with Layer 1 protocols, enhances speed with Layer 2, and enables intent-based transactions that simplify complex actions into a single click.

This is done via smart contract automation, which predefines transaction conditions; cross-chain bridges, which facilitate asset transfers across different blockchains; and user-friendly interfaces that abstract the complexity of underlying processes. 

“We are finally at a point where developers can focus on UX, creating a button you click, and everything just works without the user needing to understand the complexities behind it.” Neil Liew - PR Lead @ zkLink 

Access to deeper liquidity pools

Layer 3 solutions pull liquidity from different places, giving users and developers access to larger pools of funds across various blockchains, making it easier to trade, lend, and do more with their assets.

These include automated market makers (AMMs) that ensure ongoing liquidity, liquidity aggregation protocols that pool resources from various DeFi platforms, and interoperable smart contracts that allow interactions between blockchains.

"As a developer building on this aggregated Layer 3, you have access to a very deep liquidity pool, which reduces limitations when creating new and innovative DeFi strategies, products, and decentralized exchanges (DEXs), ultimately enhancing the overall user experience.” Neil Liew - PR Lead @ zkLink 

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Tailored solutions for specific needs

Layer 3 gives developers the tools to create custom apps by offering a framework that can be adjusted to fit different needs.

It uses modular smart contracts that let developers add specialized functions, customizable middleware that connects apps to the blockchain, and developer toolkits that help create solutions tailored to specific industries.

“For example, with MC² Finance, we drastically simplify how you analyze, discuss, and invest in DeFi. It’s a full intent-driven decentralized platform that simplifies user interaction by treating your wallet like your investment portfolio. This holistic approach gives you personalized options and insights tailored to your specific needs.” Christoph Richter - Co-founder @ MC² Finance

Supporting complex and high-throughput apps

While Layer 2 focuses on making transactions faster and cheaper, Layer 3 goes further by supporting more complex and high-volume apps. 

This is done through technologies like sharding (splitting work across multiple nodes to boost processing power), parallel processing (handling multiple transactions at the same time), data storage (managing large amounts of data), and high-speed consensus methods (quickly and securely validating transactions). 

“One of the most interesting things about Layer 3 is that it allows you to focus on how many users you can market and gain, rather than worrying about where to find the next amount of liquidity to sustain your protocol. It also brings performance and interoperability benefits.” Neil Liew - PR Lead @ zkLink

Enhanced security and privacy

Layer 3 also offers enhanced security and privacy features, which are essential for apps that handle sensitive data or require high levels of confidentiality. 

These include zero-knowledge proofs that validate data without exposing the information, encryption protocols that secure data both in transit and at rest, decentralized identity systems that protect user identities and credentials, and customizable access controls that ensure only authorized parties can access sensitive information.

“What I believe is that the next phase will definitely be about cross-chain simplicity, where you have services optimized for special chains that you can interact with from any other chain.” Christoph Richter - Co-founder @ MC² Finance

Enabling new business models

Finally, Layer 3 drives innovation by offering tools and frameworks to develop new business models and apps. 

This includes developer-friendly APIs for creating custom solutions, interoperable protocols for integration with other blockchains, and decentralized governance models for community-driven development and collaboration. 

“As a modular layer, we also do a lot of research on other layers like layer one, layer two, and also layer three ... to find the best approach for our own project.” Chloe - Co-CEO @ U2U Network

Real-world examples of Layer 3’s potential

Layer 3 is transforming industries such as:

• DeFi 
• Gaming and NFTs 
• Identity and access
• Energy management 
• Decentralized autonomous organizations (DAOs) 

DeFi and beyond

Layer 3 solutions overcome the scalability, liquidity, and user experience challenges faced by DeFi platforms built on Layers 1 and 2 with its advanced infrastructure.

💡 For example: StarkEx, a Layer 3 scaling infrastructure built on Ethereum, overcomes such limitations using Zero-Knowledge Rollups (ZK-Rollups). It processes and verifies transactions off-chain, sending only proof of their validity to the main Ethereum network 

Layer 3 also supports derivatives, lending protocols, and decentralized insurance by managing complex transactions and ensuring they are executed across different blockchain networks. 

💡 For example: Polygon Miden (a Layer 3 scaling solution focused on privacy and advanced cryptography) enhances financial instruments using zk-STARKs, which verify transactions without revealing their details. Its system checks the proof against the rules, confirming it’s correct without needing to see the actual data.

Gaming and NFTs

In gaming, Layer 3 allows for fast and efficient apps that can handle lots of transactions, like in-game trading or multiplayer games in real time.

💡 For example: Arbitrum Orbit (a Layer 3 framework) improves gaming apps via Optimistic Rollups to speed up transactions and reduce fees. It processes transactions off-chain, assuming they’re valid, with a fraud-proof system in place to catch any errors.

Layer 3 is essential for NFTs as well, as it scales and secures the creation, trading, and transfer of digital assets across multiple platforms. 

💡 For example: Celer Network (a Layer-2/-3 scaling solution) uses state channels for Layer 3 NFT management, allowing users to transact directly off-chain. By handling transactions off-chain, Celer Network enables high-volume NFT trading without congesting the main blockchain. 

Decentralizing identity

Layer 3 solutions also help create digital identities that are secure, verifiable, and privacy-preserving, eliminating the need for centralized counterparts. This is particularly beneficial in sectors like finance, healthcare, and government services.

💡 For example: Polygon ID, built on Layer 2 but incorporating Layer 3 features (i.e., application specificity, customizability, and privacy), uses zk-SNARKs (a cryptographic method) to verify credentials by confirming their validity without exposing the actual data. For instance, Polygon ID can prove your age without revealing personal information.

Advancing renewable energy management

Furthermore, Layer 3 is used in the energy sector to manage decentralized grids by allowing real-time monitoring, controlled energy flows, and automated grid balancing. It also supports the trading of renewable energy credits by securely tracking, verifying, and exchanging credits. 

💡 For example: The Energy Web Foundation (EWF) uses its Energy Web Decentralized Operating System (EW-DOS), incorporating Layer 3 features like energy trading modules, identity management, and IoT integration, to manage decentralized grids and enable P2P energy trading. 

Decentralized autonomous organizations (DAOs)

Moreover, Layer 3 is key for developing and managing DAOs by enabling faster and more secure voting, transparent governance with publicly accessible records, and efficient resource allocation through automated smart contracts.

💡 For example: Aragon’s new protocol, while not a typical Layer 3 solution, works similarly by offering a modular setup for DAOs. This “OSx protocol” enables creation and customization of DAOs with features like reduced gas fees, upgradability, flexible role management, and multichain governance support.

The challenges of Layer 3

Layer 3 technology holds great promise, but faces several uncertainties like:

1. Complexity vs. simplicity
2. Overcoming industries’ resistance to new technology
3. Developer adoption and ecosystem support
4. Accessibility

Complexity vs. simplicity

While Layer 3 is designed to simplify interactions by managing Layers 1 and 2, the extra layer could turn off users and developers who see it as just more complexity.

Hence, Layer 3 needs to provide tailored solutions for specific industries, like better security in finance, easy data sharing in healthcare, and efficient management in the energy sector.

Overcoming industries’ resistance to new technology

Another obstacle is getting industries like finance and healthcare to adopt it. Established businesses may hesitate due to concerns about costs, potential disruptions, and the learning curve.

To overcome these obstacles, the value of Layer 3 must be demonstrated through education and real-world examples.

Developer adoption and ecosystem support

For Layer 3 to succeed, it needs strong support from developers and the blockchain community. This means providing easy-to-use tools and building an active community that drives its growth.

Open-source development, hackathons, and community-driven initiatives are thus needed for accelerating Layer 3’s adoption and evolution.

Making Layer 3 accessible

Lastly, to gain widespread adoption, Layer 3 solutions needs to be user-friendly for both developers and non-technical users. 

This means creating intuitive interfaces and clear documentation to help people understand and use Layer 3 applications.

Final thoughts

This application layer is key to making blockchain easier to use, more secure, and open to new business ideas. However, its success depends on tackling issues like complexity, resistance to change, and building a strong community and developer support.

For more insights, listen to our bi-weekly live with Chris and other industry leaders. 

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