Blockchain networks are notably difficult to scale. From the block size wars in Bitcoin to inscription spam on EVM blobs, keeping transactions cheap as transaction data size or volume increases is a challenge.

One solution is Layer-2 (L2) chains, networks which run on top of and settle transactions to the base chain. These help free up space by processing data on a separate network and only return the result to the base network for long-term storage. 

But even L2s have seen issues with transaction throughput, such as when blobspace demand spiked following the EIP-4844 upgrade. So what comes next? Layer-3, naturally! Let’s find out what L3s are good for, how they work, and see if we can answer the most pressing question: when L4? 

What is a Layer 3 network?

Layer-3 networks (L3s) operate in much the same way as L2s, but only settle to the second layer. This brings advantages and tradeoffs:

• Fee scaling: reduces transaction costs from a few cents to a few millionths of a cent. 
• Transaction throughput: thousands of L3 transactions can be condensed into one L2 transaction.
• Keeps processing onchain: features which would otherwise be migrated offchain due to cost or other bottlenecks can be kept onchain by using an L3.
• Specialization: Layer-3 crypto networks can be fine-tuned to serve specific applications or use cases, while L2s are more generalized. 
• Security: finalized transactions settle to L2, which is less immutable than L1.

Let’s break it down a few of these points to see how Layer 3 can complement and improve upon existing blockchain use cases. 

Transaction throughput and fees on L3s

Adding layers might not seem particularly revolutionary, as each new layer performs many of the same functions as the previous, but the benefits can compound to create exponential performance improvements. 

Ethereum processes roughly 15 transactions per second but each transaction can contain a bundle of hundreds of L2 transactions. Each L2 transaction can likewise represent hundreds of L3 transactions. So from 15 transactions per second we could go to 1500 by adding a second layer, and 150000 by adding a third! This means more transactions can be created without congesting the network, in turn leading to lower costs.

Chain specialization

Layer-2 chains were initially marketed as an application layer on top of Ethereum, offloading the data-intensive onchain processing and decongesting the network. But looking at the landscape today, there is still enough friction on L2s that microtransactions are prohibitively expensive, and a lot of activity is left offchain. Layer-2 has turned into more of an exchange layer than the application layer we were promised.  

Layer-3 could be the solution for two reasons. Firstly, the transaction throughput and fee improvements make actual microtransactions possible onchain, and secondly, L3s can be built in a bespoke way that reduces the reliance on smart contracts and instead embeds functionality natively into the chain itself.

While a similar promise was once made about L2s, it was never achieved in practice: L2s have focused more on scalability than customization, and most L2s today serve a huge range of use cases. By inheriting and amplifying these scalability improvements almost effortlessly, L3 developers can afford to focus more on optimizing their chain for specific purposes.

Keeping the ecosystem onchain

Creating a complex and performative application on top of a blockchain is difficult. To keep things smooth and responsive, developers need to be selective about what actions get logged onchain and track the rest elsewhere.

With Layer-3 networks, more of this data can be written to the blockchain, helping reinforce trust between users and apps, and prevent corruption (of data, or otherwise). 

By creating this network hierarchy, it becomes easier to imagine a fully onchain ecosystem of apps without needing to cut corners or outsource the majority of their product to web2 cloud providers.

Security pros and cons 

There are two perspectives to Layer-3 security. On the one hand, the use of optimistic rollups to bundle transactions means L3 transactions are subject to less scrutiny than those on L2, which are again less policed than L1 transactions. Each layer erodes some degree of security from the equation. 

On the other hand, an L3 will be significantly more immutable than data stored in a centralized manner. While there may be ways to alter onchain data on a Layer-3, it’s guaranteed to be more costly and complicated to an attacker than compromising a database. 

That means that asset ownership can be brought back into the narrative, and things like web3 gaming becomes much more feasible. While property deeds may be worth securing on an L1, in-game character personalization could also be preserved in perpetuity on an L3. 

Rollup as a service for layer-3 crypto networks

A common approach to creating layer 3 networks is not to build them from scratch but to leverage a rollup as a service (RaaS) model, where development is largely outsourced to a RaaS provider that works with the project team to customize chain parameters to suit their needs.

Rollup as a service is already widely established with many L2s and L3s having been launched this way including Zora and Degen chain. Some of the most popular rollup frameworks are Arbitrum Orbit, OP Stack from Optimism, and ZK Stack, though there are many other examples in use.

As an example of how RaaS is accelerating the L3 ecosystem, let’s take a look at how the recently launched Degen chain managed to attract over $50 million in bridged volume in the first week, and the specific problems it aimed to solve.

Degen layer-3 chain case study

Degen chain is a Layer-3 network that launched at the end of March 2024. It uses Degen token as its native currency, which has no doubt helped to spur adoption as Degen was distributed through a community airdrop by tipping users on Farcaster.

The need for an L3 was first suggested to the Degen team by another Farcaster project, LottoPGF, which had been running a daily onchain lottery on Base called PowerBald, but came to realize that the L2 fees were prohibitively expensive, spending over $300 per day to support thousands of ticket claims. 

Since the LottoPGF team had developed a crypto-first product, they were not willing to compromise by moving things offchain and had already migrated several times before finding a fit in the Farcaster community. Degen lead developer Jacek saw potential in creating an L3 chain that would support onchain claims, portraying it as a “Degen play store” for fun onchain apps, that would nurture the growing interactivity of Farcaster.

In building Degen chain, the Degen team enlisted the help of Syndicate to piece together the infrastructure, which comprises Conduit as the RaaS provider, Decent to bridge Degen from Base and back, and Blockscout as the blockchain explorer. Outsourcing the chain development in this way enabled Degen chain to launch rapidly, and access the expertise needed to make customizations such as precompiled functions that reduce the need for smart contracts, an optimization requested by the LottoPGF team. 

Swap Degen on Matcha!

Degen chain is fairly empty in terms of app offerings and has mostly been used for memecoins. This is expected to change following the upcoming Deploy on Degen hackathon taking place in mid April. With low transaction fees, all paid in Degen, and optimizations geared towards indie developers and onchain gaming, Degen could help bring fun Web3 experiences back onchain. 

Bridging wait times on L2 and L3 chains

One point of friction in the world of second and third layer networks is that it usually takes several days for funds to bridge back to the base layer. This is a security precaution made necessary because of how optimistic rollups operate.

For context, L2 and L3 networks that use optimistic rollups don’t publish validity proofs for transactions, and instead simply assume they are valid (hence the name ‘optimistic’). This poses a problem in cases where transactions are fraudulent or invalid.

The 7-day delay on withdrawals from an optimistic rollup allows sufficient time for invalid transactions to be identified, disputed, and corrected, helping regulate the network’s security with minimal friction. 

Alternative fast bridge services also exist which allow users to bypass the challenge period for a fee, such as Reservoir bridge for Degen, but in these cases the bridge provider funds the withdrawal from their own reserves upfront and must still wait the 7 day period to receive their customers’ collateral.   

What’s next for Layer 3 crypto networks?

Layer-3 networks have become a major talking point since the launch of Degen chain, but it’s only been a couple of weeks! There is clearly potential for L3s to fill the gaps where L2s have become too generalized, enabling low-level customization and keeping transaction costs well below the limits needed to power onchain experiences. All eyes are now on Degen L3 to see if it can fulfill the promise made long ago by L2s.

Getting started with Layer-3

As you can tell from this article, there’s a long road ahead for L3s and not many DEXs support them. At the moment, there is a lot of promise, but it's yet to be seen how they will scale with adoption, or if one day we'll be making the same grand claims about L4s!

For now, you can start to experiment with L3 chains by getting native tokens on Matcha and using the chain-specific bridge to move your funds to the network. 

With over 7 million tokens and growing, Matcha will get you the best price on any new and upcoming chain so you can get involved for less. Try it now at matcha.xyz!