Layer 1, Layer 2, and Layer 3 Blockchains: A Deep Dive into the Blockchain Technology Stack

1. Introduction

I’m sure you’ve heard the terms Layer 1, Layer 2, and Layer 3 blockchains tossed around on social media and online forums like everyone knows it. But, in reality, not everyone understands it, and you may like to inquire what they are. Well! You aren’t the only one. You’re just one of millions of newbies who have no idea what these blockchain layers are, and we hope to clarify that in this post.

You must have imagined “blockchain” as a single, complex technology that only the tech-savvy ones or even the government can access. However, blockchain is much simpler than that. It’s a simple, digital ecosystem with different components, all connected to achieve different goals. Think of blockchain as the internet – it has its stack or blocks that work from the ground all the way to the top – from infrastructure to applications. Each stack has its job to do. This is exactly how a Blockchain is designed. It’s a layered architecture that functions as a decentralized, scalable, and secure ecosystem. It powers everything from peer-to-peer payments to the advanced DeFi and gaming applications. 

Understanding these layers isn’t just for curiosity’s sake, but essential for:

• Developers who need to know which layer best suits their decentralized application.
• Investors, who are looking for the next Blockchain opportunity to invest in, amid the wave of adoption.
• Businesses that need clarity on the right stack for their scalability and user experience. 

This article will give a deep dive into Layer 1 vs Layer 2 vs Layer 3 in a Blockchain system. We will help you understand how each works and help the Blockchain ecosystem operate seamlessly and efficiently. 

2. What Are Blockchain Layers?

Blockchain layers, in simple terms, are structural components in a Blockchain system that serve a specific role. Some manage data, others ensure everyone manages consensus, and some handle user applications. Think of blockchain layers as the ground floor, middle floor, and top floor of a skyscraper. The ground floor is the foundation that holds the entire building. The middle is for logistics and operations, while the top is where the offices and meeting rooms are situated. Blockchain layers work together to make the ecosystem work efficiently. 

Before the emergence of Ethereum, blockchains like Bitcoin started as Proof-of-Work (PoW) networks that did everything at once. While this model ensured strong security, it struggled with scalability. Performing multiple things at the same time seemed impossible, as processing times were ultra-slow. Developers looked at this problem and thought of ways to make blockchains faster while retaining security. This birthed layers. A layered Blockchain allowed each component to focus on a specific task, rather than doing everything. One layer handles data flow, another keeps the network secure, while the other improves transaction speed. This separation allows for innovation and adaptability, as developers can roll out dApps the way they want.

Blockchain layers include:

• Layer 1, also known as the base chain.
• Layer 2, also known as the blockchain scalability solutions layer.
• Layer 3, known as the application and interoperability layer.

These layers are designed to handle security, consensus, decentralization, more transactions, and make blockchain more usable and efficient. By splitting these functions across the different layers, developers can create a fully functional, decentralized, scalable, and interoperable application.  

We will explain more about what each of these layers does, provide examples, and discuss features. Before that, you need to know what a Blockchain architecture is. The architecture of a Blockchain is simply what constitutes a decentralized protocol. We call them the technical layers of blockchain, and they are divided into five major segments:

• Hardware Layer: This is the bottom of the stack. It includes the nodes, servers, data centers, mining rigs, etc. They provide the computational power that runs the entire Blockchain system. It’s the backbone of the ecosystem.
• Data Layer: This is where transactions are recorded as an immutable ledger. Transactions are grouped into blocks with timestamps, wallet addresses, and references, and recorded by a distributed ledger technology (DLT). This layer ensures no data is tampered with, thanks to cryptographic tools.
• Network Layer: This is like the blockchain’s nervous system. Nodes communicate with each other, sharing data across the entire network. This layer ensures all participants stay in sync as they validate transactions. 
• Consensus Mechanism: Ever thought of how everyone agrees to execute a transaction? It’s not magic. It is what a consensus mechanism does. It establishes an agreement among nodes before a transaction is validated, preventing double-spending. A consensus mechanism ensures the network is secure and devoid of malicious nodes. Blockchains run on different consensus mechanisms, such as Proof-of-Work, Proof-of-Stake, Proof-of-History, etc.
• Application Layer: This is the layer we interact with. Whether it’s building a decentralized application, buying an NFT, or swapping tokens, this is the layer where it happens. It’s the topmost layer where users interact with dApps and smart contracts. 

Now, let’s talk about the different blockchain layers. 

1. Layer 1 Blockchains: The Base Protocol Layer

Layer 1 blockchains (L1s) are known as the base protocol layer. When you liken it to the skyscraper allegory used earlier, they are the foundation of the Blockchain stack. Layer 1 blockchains are responsible for the running of the consensus mechanism, ensuring security and data immutability, and maintaining decentralization. Without Layer 1, the Blockchain ecosystem can’t function. Ethereum, Bitcoin, Solana, Cardano, and Avalanche are textbook examples of Layer 1 protocols. 

Bitcoin is the first Blockchain network ever built. It was optimized for payments initially, and not for DeFi use. However, the evolution of use cases required that it be adapted to human demands, and that’s why the Lightning Network came to be (more on that later). Ethereum and the rest mentioned above enabled DeFi, NFTs, and games. 

Layer 1 Blockchains have peculiar features like their own native token. Bitcoin has Bitcoin (BTC) as its native token. Ethereum has Ether (ETH), Cardano has (ADA), while Solana has (SOL). When it comes to smart contracts functionality, Ethereum, Cardano, Solana, and Avalanche allow developers to build dApps directly on-chain. 

As blockchain adoption rose, the limitations of L1s became glaring. They ran into bottlenecks, such as scalability, significant energy consumption, and limited customizability. During network congestion or high demand, the transaction speed worsens. In the case of Ethereum, fees surge. An example was the NFT boom in 2017, where gas fees soared to hundreds of dollars per transaction during peak usage. Also, L1s have limited TPS (transactions per second). Bitcoin handled 7 TPS, which is very slow, while Ethereum upgraded to 15 TPS, far below what today’s applications and use cases demand. The reason for the limited TPS boils down to their consensus mechanism. 

Blockchains run on a consensus mechanism to validate transactions. Bitcoin runs on Proof-of-Work (PoW), which is typically slow and energy-intensive. According to a 2024 statistic by Digiconomist, Bitcoin’s annual electricity consumption neared 175.87 terawatt-hours, equivalent to the power consumption of Poland. Ethereum ran on PoW before upgrading to Proof-of-Stake (PoS), thus increasing scalability and reducing energy use. Solana runs on Proof-of-History and Proof-of-Stake, allowing it to process thousands of transactions per second, far more than other blockchains. According to Solana, it processes an average of 65,000 TPS.

Still, L1s lagged, were somewhat rigid, and were unable to meet users’ and developers’ demands. Users and developers clamored for improvements, as they couldn’t tolerate the expensive gas fees and network congestion, which spiked costs. These limitations birthed Layer 2. 

2. Layer 2 Blockchains: Scaling Solutions Built on Layer 1

Layer 2 solutions (L2) are built on top of Layer 1 blockchains to enhance scalability and efficiency. These solutions process transactions off-chain and then settle them on the main chain. L2 aims to improve blockchain efficiency by moving transactions off the main chain. They operate on top of primary blockchains, like Bitcoin and Ethereum, to increase transaction throughput without compromising security. L2s don’t replace the base protocol – they lean on it for security and final settlement, while they bring speed. They need L1 to work.

The idea to develop a Layer 1 scaling solution was conceived by Joseph Poon and Thaddeus Dryja in 2015. They developed the Lightning Network white paper, a scaling solution built on the Bitcoin Blockchain. Lightning Network was built to support faster and cheaper payments by processing transactions off-chain (off the Bitcoin Network). This is done to reduce congestion and ensure near-instant finality. 

Ethereum makes use of two types of Layer 2 solutions, which are Optimistic Rollups and Zk-Rollups. The former assumes all transactions are valid unless altered. An example of Optimistic includes Arbitrum and Optimism. Arbitrum is compatible with Ethereum smart contracts and guarantees low fees, while Optimism focuses on EVM compatibility for straightforward migration. ZK uses cryptographic proofs for instant validation. zkSync is a popular example within this field, offering zero-knowledge rollups that allow thousands of transactions to be bundled into one. This dramatically reduces gas fees and enhances user experience while retaining the security of Layer 1 (Ethereum). Another example of L2 solution is Polygon PoS, independent side chains connected to Layer 1, and plasma for scalable, smaller blockchains. 

While Layer 2s dramatically lowered fees and increased throughput, they had security trade-offs in certain designs and limited interoperability. It can only work with certain chains. Besides, Layer 2 scaling solutions didn’t provide the customizability that developers started craving. Demands changed from wanting faster and cheaper transactions to specificity and customizability. Then came L3 scaling solutions.

3. Layer 3 Blockchains: Application and Interoperability Layer

Layer 3 blockchains (L3 scaling solutions) bring Blockchain to life. They are app-specific protocols built on top of Layer 2s. Rather than being general-purpose like Layer 2, L3s focus on specialized needs, such as applications, interoperability, and UX. If, as a developer, you want to build a custom app for strictly gaming or payments, L3s can help you achieve that. They help Ethereum handle more complexity, which L2s are inequipped to solve. Solana is another widely used platform for building user-specific applications. 

The idea to develop a Layer 3 scaling solution was conceived by Vitalik Buterin in 2015, when demand for scalability, Blockchain interoperability, customizability, and user-focused applications was high. Just as Layer 2 is built on top of Layer 1 and leverages its security and decentralization, L3s use L2s and L1s infrastructure. However, they focus more on specialized environments, leveraging smart contracts and UI to develop a solid, user-specific application. They rely on the scaling features of L2s and the decentralization and security features of L1s.  

Some of L3 use cases include:

• Web3 applications
• DeFi platforms
• NFT marketplaces
• GameFi 
• Cross-chain bridges, such as Wormhole.

Examples of Layer 3 blockchains include: Chainlink (decentralized oracle network), Cosmos IBC, Polkadot Parachains, and Lit Protocol. 

More of Layer 3 here.

2. Key Differences Between Layer 1, 2, and 3

3. Why Layered Architecture Matters in Blockchain

Early blockchains like Bitcoin only focused on data storage, decentralization, and security. When demand for scalability increased, it was thought that it could be handled, however that wasn’t the case. The entire Blockchain ecosystem needed a structural fix. That’s how layered architecture came into existence. 

A layered setup enables each Blockchain component to focus on a specific core task. One layer handles data flow, another ensures security, while the other scales performance. Taking Ethereum as a case study, the Blockchain is fundamentally secure, while the L2s process transactions off-chain to minimize network congestion and gas fees. 

Although each layer can work independently of the other, they must work in harmony to ensure the blockchain’s efficiency. A layered blockchain architecture balances security, decentralization, and scalability, as well as makes blockchain more affordable and adaptable to changing needs, thanks to Layer 2 and Layer 3. Thankfully, developers can choose the right combination for their needs. 

4. Challenges and Limitations of Layered Blockchain Models

Despite the several advantages, a layered Blockchain is still not perfect. Each layer has its limitations, stemming from complexity to security risks. 

You might say that the base layer is secure, but blockchain bridges aren’t. They connect different chains and layers, allowing the exchange of tokens and data. However, they are the most targeted by hackers. Take the Ronin Bridge, for example. In 2022, it was attacked, leading to a loss of $600 million. The Wormhole bridge was also exploited for $320 million. If the bridge’s smart contract is compromised, attackers can swoop in and steal available assets. 

Layer 2 solutions indeed inherit the security feature of Layer 1 blockchains, but not all. The smart contract may contain bugs that lead to loss of funds. Also, many Layer 2 networks have small validators, making them prone to downtime failures if those sequencers fail. So, while we praise them for making transactions faster and more efficient, their centralization doesn’t make them fail-proof.

Despite the promise of interoperability across chains, true cross-chain movement is still a significant issue. For instance, transferring assets from Ethereum to Solana requires several steps that may include wrapped tokens and bridges. This can slow transaction finality times. However, L3 solutions like Cosmos IBC and Polkadot are working to resolve interoperability issues, but adoption is slow. 

There’s also UX fragmentation. Some users have complained that layered architecture is still complicated, with multiple wallets, networks, and fee tokens. For instance, switching from Ethereum to Polygon or even Solana requires manual wallet configuration. In the process, you’d also need different fee tokens to facilitate transactions. It’s all too cumbersome, especially for a non-technical user.  

5. The Future of Blockchain Layers

Blockchain layers are integrating more tightly together, which benefits the entire ecosystem. Convergence means developers can build user-specific applications seamlessly. Although the limitations are apparent, as the ecosystem matures, interoperability will become more seamless between each blockchain. We are heading towards a future where Blockchain layers will become more interoperable, secure, scalable, and user-focused. 

6. Conclusion

The layered blockchain is a sign of a maturing ecosystem. Judging from where Blockchain began, you could tell that these protocols have become more refined and efficient, thanks to the layered model. Now, a single blockchain doesn’t need to be overloaded. Each layer handles its specific job without necessarily involving the other. 

This approach empowers developers, fosters adoption, and lets us develop new applications without distorting existing systems. With millions more users expected to be onboarded, the layered architecture is best prepared to serve their needs better. The emergence of Layer 2 and Layer 3 is a blessing to the blockchain space. 

FAQs

1. What is the difference between Layer 1 and Layer 2 in blockchain?

Layer 1 blockchain is the base layer, while Layer 2 is scaling solution built on top of Layer 1. While Layer 1 focuses on security and decentralization, Layer 2 prioritizes scalability. 

2. Are Layer 3 blockchains necessary?

Yes, Layer 3 blockchains are necessary. They handle usability, customizability, and cross-chain applications. 

3. Which are the best Layer 2 solutions for Ethereum?

Some of the best Layer 2 solutions for Ethereum include Arbitrum, Optimism, Polygon, and zkSync.

4. How do Layer 2s improve blockchain scalability?

Layer 2s improve Blockchain scalability by processing transactions off-chain and submitting proof to Layer 1. This way, it reduces congestion on and gas fees on Layer 1. 

5. Can dApps be built directly on Layer 1?

Yes, but developers will face higher costs and slower speeds.