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Understanding Blockchain Layers L0, L1, L2, and L3: What's the Difference?

By Rita
18 Oct 2024
18 min read

When investing in various cryptocurrency tokens, it is easy to get lost in the volatility and market trends. However, many people (especially beginners) forget that investing in a coin is investing in the project behind it. And, as with traditional investing, you need to know exactly where you are investing your money.

In addition to the high-level message a project can provide, it is important to understand how each project fits into the broader ecosystem.

One of the easiest ways to start classifying different coins (and different projects) is the concept of layers. The idea of layers is a categorization of blockchains, necessary for a quick understanding of how a particular project fits into the ecosystem. If the first and second levels are clear to many, then have you ever wondered what the zero and third levels are?

In this blog post, we will analyze what layers L0, L1, L2, and L3 are, why they are needed, tell the difference between different levels, and consider examples.

What is Blockchain?

A Blockchain is a decentralized and immutable digital blockchain that stores data in sequential blocks. Each block contains:

Encrypted transaction information.
Hash (digital fingerprint) of the previous block, linking all blocks in a sequential chain.
A custom hash (timestamp) confirms the uniqueness of the block.

Blockchain is a technology of revolutionary importance that finds application in various industries such as financial services, healthcare, and supply chains due to its advantages of security, immutability, and transparency.

Key Features:

Decentralization: The blockchain is not controlled by a single entity, but is controlled by a network of computers called nodes.
Immutability: once a block is added to the chain, it cannot be changed, deleted, or falsified without the consensus of the majority of nodes.
Transparency: all transactions on the blockchain are open and verifiable, which ensures transparency and accountability.
Security: the data stored in the blockchain is securely protected by cryptographic algorithms and consensus mechanisms.
Usage in Cryptocurrencies: blockchain is the basis of cryptocurrencies such as Bitcoin and Ethereum.

The cryptocurrency blockchain is used for:

Record transactions and enforce cryptocurrency rules.
Preventing double-spending (when the same funds are spent more than once).
Creation and distribution of new coins or tokens.

What are L0, L1, L2, and L3 layers?

Why do we need layers, why can't we limit ourselves to one blockchain? The architecture of the blockchain consists of several levels, each of which performs a specific function:

Layer 0: provides the physical foundation for the blockchain, including hardware, networks, and storage. L0 also defines the rules for data transmission and verification on the network.
Layer 1: the physical layer (L1) provides the physical connection of devices by defining the characteristics of data transmission. Decentralized Registry: L1 stores an immutable transaction log. Consensus mechanism: Layer 1 ensures that all nodes in the network agree on the registry status.
Layer 2: the link layer (L2) is responsible for error detection, media access, and MAC address-based switching. Extensions: L2 improves scalability, privacy, and other core chain features. Bridges: Layer 2 allows interaction between different blockchains. Channels outside the chain: L2 performs transactions outside the main network, increasing efficiency.
Layer 3: The Layer (L3) performs routing between networks based on IP addresses. User Interface: L3 provides users with access to the blockchain through wallets or applications. Developer Tools: layer 3 helps develop and deploy blockchain-based applications.

Dividing the blockchain architecture into layers allows developers to use specialized solutions for each function, providing flexibility and extensibility of the system.

All computer networks rely on data transmission bandwidth, including blockchain networks. However, the latter are more susceptible to the problem of bandwidth scaling than centralized networks.

As already mentioned, blockchain networks consist of nodes (computers on the network that store the entire transaction registry). This means that each node must use significant computing resources to provide access to the registry and maintain consensus (agreement to add a new block of transactions to the registry). The more decentralized the blockchain is, the more nodes it has. While this redundancy is good for network security, it has a bad effect on network speed. This is because many nodes are involved in verifying transactions. In turn, a small number of nodes will increase the vulnerability of the network. By controlling 51% of the nodes, hackers will be able to manage the network as they want.

Thus, it is currently impossible to make a perfectly decentralized, scalable, and secure blockchain at the same time, this problem is known as the blockchain trilemma. The blockchain trilemma: the assumption that decentralized networks can provide only two of the three advantages at any given time in terms of decentralization, security, and scalability.

L-layers in the context of blockchain reflect different levels of architecture and solutions designed to solve the problems of the blockchain trilemma.

What is a Layer 0 solution?

Layer 0 is a fundamental layer on which many blockchains are being built together, and they can all easily interact with each other. Layer 0 technology provides the foundation, both software and hardware, on which the blockchain is built. Imagine nodes and everything else that is required to connect them to transfer data, including protocols and other mining equipment. This layer is often referred to as the "blockchain internet" because multiple blockchains can be built on the same Layer 0 network.


How did L0 solutions appear?


L0 refers to blockchains that provide the infrastructure for creating and interacting between different blockchains or networks. These blockchains provide the basis for the development and operation of interoperable networks. Examples of such blockchains include Avalanche, Cosmos, Polkadot, and Cardano. They provide tools for building bridges and transferring data between different blocks, thereby providing a more flexible and interoperable environment.

Key Features:

Ensures compatibility (i.e. different blockchains built on the same Layer 1 basis can communicate with each other).
Dapps can be "cross-chained" - if two chains are built on the same layer. (That is a huge plus for developers!)




Why Layer 0 is important?


L0 layer developments help blockchains interact with each other, namely:

allow assets to be transferred between different blockchains;
allow developers to develop one application on several blockchains at once (or at least simplify development on several blockchains due to standardization);
fast and cheap transactions on cross-chain exchanges, due to the "communication" protocols used in L0 (for example, IBC).

Layer 0 can also solve the compatibility problem in the ecosystem. There are some solutions (such as blockchain bridges) that allow assets to be transferred between blockchains. However, these bridges may have security issues (like Binance hacking on the BSC Token Hub in October 2022).




What L0 solutions are available on the market?


The zero-level protocol allows you to create different applications based on the blockchain, and new cryptocurrencies and simplifies a scalability solution that does not affect other protocols in a single ecosystem.

In addition, some blockchains belong to the zero level, since they provide the infrastructure for the development of many interconnected networks (Cosmos, Polkadot, Avalanche, and others). For example, the BNB Chain was built using the Cosmos SDK. Cosmos SDK is an open-source blockchain framework by Cosmos Network that enables hassle-free development of high-value public and permissioned blockchains.

1. Polkadot. Polkadot is a protocol that allows you to transfer any type of data or assets between blockchains by "connecting" to the Polkadot "main network" (Relay Chain).



How does Polkadot work?

The Polkadot consensus mechanism is based on the Proof-of-Stake (PoS) principle, in which validators stake their tokens to participate in the consensus-building process. Unlike Ethereum, which uses a Proof-of-Work (PoW) mechanism that requires energy-intensive mining, PoS allows validators to participate in consensus according to the number of tokens they hold.

The main advantages of the Polkadot PoS Consensus:

Energy efficiency: PoS significantly reduces the energy consumption required to ensure network security compared to PoW.
Decentralization: PoS makes participation in consensus more accessible by allowing more nodes to participate in the process.
Scalability: PoS allows the network to process more transactions with less latency compared to PoW.

The Polkadot consensus mechanism plays a crucial role in ensuring the security and scalability of the network. PoS allows you to reach a consensus on the state of the blockchain quickly and efficiently, which makes Polkadot a reliable and high-performance platform.

2. Cosmos. Cosmos is a network of blockchains capable of decentralizing interaction with each other. This is achieved because blockchain networks are created using Cosmos open-source tools Tendermint, Cosmos SDK, and IBC, and can interact with each other.



How does Cosmos work?

The Cosmos ecosystem has a distributed network topology, where diverse, independent blockchains have their own set of Confirmations, and these chains (if necessary) communicate with each other through bridges. This topology is criticized as the least secure approach (when the most secure chain accepts assets from the least secure chain, it becomes less economically secure). However, this makes the universal network sustainable, since there is no single individual chain whose security would be critical for the survival of the entire ecosystem. Cosmos adheres to the "no strings attached" policy, which allows projects such as Binance DEX, Oasis, Terra, Nym, and many others to use Tendermint to develop and launch their application-specific blockchains.

3. Avalanche. Avalanche allows you to create an overlapping network of Confirmators, organized as subnets, in which several chains work, simultaneously verifying the main network. Different networks in the same subnet can transfer assets to each other almost instantly.



How does Avalanche work?

Communication between subnets, that is, one chain in its subnet communicates with another chain in its subnet, it is currently carried out through bridges (using ChainBridge-Solidity contracts for EVM chains).

Currently, there are 3 chains of the main network: X-Chain for transfers, P-Chain for staking, and C-Chain for smart contracts. Other chains and subnets are in the process of creating an ecosystem. In addition, like other platforms, there is the Avalanche-Ethereum bridge, which operates through a trusted federation and is one of the most used among the 60 Ethereum bridges to date.

What is a Layer 1 solution?

L1 blockchains operate at the most basic level and process transactions without the need for external blockchains or systems. These networks, such as Bitcoin, Ethereum, Solana, Binance Smart Chain (BSC), and others, provide a high level of security and decentralization. However, they face a scalability issue, which limits the number of transactions they can process per second.




How did L1 solutions appear?


L1 is the world's Bitcoin and Ethereum coins, which represent the blockchain as you probably know it. L1 uses the L0 toolkit for long-term data transfer. Each L1 has its structure, including consensus mechanisms, ledger systems, and coding language, and often has its token. L1 is the place where all the work on performing the main functions of the blockchain takes place, which takes the most energy.

Key Features:

First of all, these are the three main characteristics of the blockchain: decentralization, open source, and anonymity.
Layer 1 has a structure that defines how the chain works, and how data is transmitted and recorded.
Definition of the level/standard for supporting decentralized applications (Dapps). Examples: Bitcoin, Ethereum, Solana, Cardano, Tezos, Algorand.




Why Layer 1 is important?


The L1 blockchain plays a key role in the development of decentralized applications and infrastructure. It provides transparency, security, and reliability of transactions, which makes it an ideal tool for creating various decentralized services, including financial instruments, digital asset management, and more.

The blockchain of the first layer includes blockchains that can conduct transactions without the participation of another network. The blockchain of the first layer suffers from the trilemma of the blockchain, and usually, only two properties of thrillers out of three (decentralization, security, and scalability) are well implemented. There are L2 solutions to solve this problem. It is also important to note that due to the growing number of first-level blockchains, there is a problem of transferring assets from one blockchain to another, there is an L0 layer for this problem.




What L1 solutions are available on the market?


The first-level network (Layer 1) is the basic blockchains, such as Bitcoin or Ethereum, Solana, Cardano, and many others.

1. Bitcoin

One of the most famous examples of the L1 blockchain is Bitcoin. The entire Bitcoin network is based on the L1 blockchain, where each block contains information about Bitcoin transactions and a link to the previous block.

2. Ethereum

Another example of the L1 blockchain is Ethereum. Ethereum also uses the L1 blockchain to perform basic transactions and operations, including executing smart contracts and creating decentralized applications.

What is a Layer 2 solution?

Layer-2 is a third-party integration that is built on top of L1 chains to increase efficiency (system throughput) or scalability. Layer 2 transactions are considered "off-chain".

Key Features:

Not to be confused with applications, Layer 2 solutions are mainly created to solve the problem of L1 congestion by taking some of the transactions off the chain.
Greater flexibility for L2 nodes (i.e. they can be any number of servers owned by a company or an individual, rather than decentralized).
Rely on the chains of the first layer to ensure safety.




How did L2 solutions appear?


Layer 2 blockchains were created to increase the scalability of first-level blockchains. They process transactions faster and cheaper instead of L1 blockchains and then return the results of data processing to L1 blockchains. Examples: Base, Polygon, Arbitrum, Optimism, opBNB, Scroll, zkSync, Linea, StarkNet.




Why Layer 2 is important?


The L2 layer is usually referred to as third-party integrations with L1, which solve one of the problems of the blockchain thriller for L1. Most often, this is a scaling problem.

L2 solutions are aimed at solving the problem of scalability by transferring part of the tasks from the main blockchain network to the second level. This allows you to speed up the processing of transactions and reduce their cost while maintaining security and decentralization.




What L2 solutions are available on the market?


Examples of L2 solutions include:

State Channels. Provides two-way communication between the main blockchain and transaction channels outside the blockchain, which increases both performance and throughput. These state channels do not require verification of Layer 1 nodes. Instead, they rely on isolated networks using multi-signature mechanisms and smart contracts. When transactions are executed in a state channel, the final "state" of the channel and its modifications are sent to the underlying blockchain. Among such channels: are Liquid Network, Raiden Network from Ethereum, Celer, and Bitcoin Lightning. For example, thanks to the Lightning Network, where transactions are conducted outside the main blockchain, and only the final results are recorded in the blockchain, the number of Bitcoin transactions can reach several thousand, instead of 7 in the main network.
Sidechains. These are separate blockchains that work in parallel with the existing layer 1 and are connected by a two-way bridge for the level 1 root token. The sidechain uses its own protocols, consensus algorithms, block parameters, and administration to process transactions, but uses level 1 tokens. This means that the ETH sidechain will trade with ETH without other tokens and any Dapp developed on the sidechain will be easily integrated into the tier 1 network. Examples of sidechains: are WAX (EOS), Ronin (Ethereum), and Polygon (formerly Matic Network), which work in parallel with the main blockchain network and process a large number of transactions before they are finally committed to the main network.
Nested Blockchains. This is a blockchain that is located inside or rather under another blockchain. It includes a basic blockchain that manages the parameters of a larger network. Execution takes place within an interconnected network of sidechains. They are connected to the main blockchain through the root contract. This contract records the current state and sets the rules for the child chains. An example of Layer 2 solutions using nested blockchains is Plasma (OmiseGO), which functions as an L2 blockchain for Ethereum L1, providing additional scaling capabilities and improved performance.
Rollups. These are solutions that combine multiple transactions into one, thereby reducing gas fees and the load on the L1 blockchain, by compressing information and increasing the efficiency of the blockchain. Instead of processing each transaction separately on the blockchain, rollup combines a group of transactions and processes them on a secondary network. After processing transactions, a summary of their status is published on the main network, ensuring their security and integrity. This significantly saves costs, since only the necessary information is transmitted and recorded in the main blockchain. There are two types of roll-up solutions: optimistic rollups and ZK rollups. The optimistic ones assume that the transaction data sent to the main blockchain is correct. When an invalid transaction appears, the dispute is resolved. ZK-rollups do not have a dispute resolution mechanism. They use zero-knowledge cryptographic proof technology. In this model, each batch of transactions is confirmed by a contract deployed on the main network. Optimistic rollups: Optimism, Arbitrum, MetisDAO. ZK-rollups: Immutable X, StarkNet, zkSync, Polygon Miden, and others.

What is a Layer 3 solution?

Layer 3 is often referred to as the application word. This is the layer that hosts decentralized applications and protocols that ensure the operation of applications.

Key Features:

Adding ease of use of blockchain technology.
Providing clear usage scenarios for the everyday end user.

The L3 level includes decentralized applications that are built on the blockchain. Example: Uniswap, Aave, Curve, PancakeSwap, and SyncSwap.




How did L3 solutions appear?


Third-level solutions (Layer 3 or L3) are a common name for protocols deployed based on existing L2 solutions. As in the case of L2, the third layer of networks is designed to scale and expand the functionality of the main blockchain.

The concept of such developments has been around for more than eight years. Vitalik Buterin, the founder of Ethereum, was one of the first to formulate the idea of multi-level scaling of blockchains in 2015. The greatest popularity of this concept was brought by the development of StarkWare, published at the end of 2021. Mainly the design of third-level solutions is centered around the Ethereum blockchain.




Why Layer 3 is important?


L2 solutions are designed to scale the underlying blockchain. They eliminate the problem of low bandwidth and high transaction fees. In turn, L3 has two fundamental values that are difficult to implement at the second level:

Configurable scalability. The third level of the blockchain makes it possible to implement individual settings for individual applications. For example, calculations other than EVM or the use of other data formats.
Customizable functionality. L3 will allow you to create separate applications and networks with unique precise settings. For example, you can implement a confidential transaction function without displaying any data at the second level.

L3 can be thought of as a layer for running individual unique applications or networks linked by L2 standards.




What L3 solutions are available on the market?


The L3 solutions market has just begun to form. The main development is led by teams of L2 solutions on the Ethereum blockchain, including Optimism, Arbitrum, and zkSync. Each of them has its vision.

Hyper chains. Matter Labs, the company behind zkSync, expects to create a network of interconnected blockchains using zero-knowledge proof. To implement this plan, the team released a technology stack for ZK Stack developers. The architecture will allow the deployment of "hyperchains" both parallel L2 solutions and third-level protocols. As part of Hyperchains, the Pathfinder L3 solution test has already been launched. In early 2024, a hybrid GRVT crypto exchange is expected to be released, combining the interface of centralized Robinhood exchanges and non-custodial asset storage functions, like Uniswap.
Superchain. This is the Ethereum scaling concept from the Optimism L2 solution team based on the OP Stack technology stack. So far, the team's idea is to create parallel L2 solutions that operate independently of each other, with the subsequent possibility of developing L3. The OP Stack accumulative client from one of the largest venture crypto companies a16z is already operating within the Super chain. In August 2023, the American Coinbase exchange launched the second-level Base network based on the Optimism architecture. Other L2 have also shown interest in migrating their networks to Superchain. So, the cLabs company, the developer of the Celo L2 network, offered the community to switch to the OP Stack architecture.
Orbit. The Offchain Labs team, responsible for the L2 solution of Arbitrum, in June 2023 released its set of tools for developers aimed at implementing L3 solutions based on Arbitrum. Orbit is aimed at creating L3 applications with a high degree of individual settings. The L3 ecosystem at Arbitrum is already represented by a dozen projects, including Web 3 games, financial daps, and NFT projects.




What other solutions are called L3?


L3 solutions can be called any network and infrastructure projects built on top of existing L1 and/or L2, but not competing with them. They will perform complex calculations, work with third-party data, and propose new use cases. For example, an L3 solution can bring real-world data to the blockchain to use it at the first and second levels in DeFi.

L3 includes the decentralized Chainlink oracle network, responsible for supplying the correct off-chain data to execute smart contracts at all levels of the blockchain.

Third-level solutions also include infrastructure projects like Orbs, which works as an add-on to different networks with excellent consensus and architecture. Orbs works with Ethereum, TON, Polygon, BNB Chain, Avalanche, and Fantom, providing developers and companies with additional functionality and compatibility for their applications.

Solutions from Polkadot, known as Parachains, are located in the same area. It is this functionality that creates an additional layer for the interaction of Web3 applications, simplifying the exchange of data and assets.

What is the difference between L0, L1, L2, and L3?

You've most likely heard of these different layers in relation to the solutions they provide. Because there is so much data to process on the first layer, speed and scalability are difficult to maintain. This is especially relevant since to increase scalability, it is necessary to sacrifice security or decentralization (as mentioned before that is called the "blockchain trilemma" by Vitalik Buterin). As more and more people join the blockchain community, L1 is becoming more and more difficult to keep up with transactions. As a result, users either pay astronomical fees or wait for hours or even days for their transactions to be confirmed.

Conclusion

Each of these Layers provides its unique methods to increase the efficiency and scalability of blockchain networks, providing a balance between security, decentralization, and the ability to process a large number of transactions.

Of course, such categorization is not always convenient, because some applications may fall into several layers. For example, the OmniLayer platform, created for trading custom digital assets and currencies, built on top of Bitcoin, can be attributed to both the L2 and L3 layers. Nevertheless, categorization by layers allows you to estimate the place of the project, which you are hearing about for the first time, in the blockchain ecosystem.


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