L1s vs L2s vs L3s: Can Layer 3s Win The Layer Wars?
There’s a reinvigorated and multi-faceted debate about the future development and application of blockchain technology — and what direction the industry will take on its next path towards attracting greater adoption. Moreover, there’s a notable separation in the consensus about whether the infrastructure that’s currently in place is even strong enough to facilitate this adoption. There’s also disagreement about what infrastructure is best and what blockchains (L1s/L2s), architectures (monolithic/modular), and technologies (ZK) should be implemented to achieve these adoption goals.
The industry is growing more complex with the rise of multiple Layer 1s, Layer 2s, Layer 3s, modular infrastructures, middlewares, and cross-chain interoperability protocols. However, taking a macro view of this debate, it’s essentially split into multiple factions — those who believe Layer 1s are sufficient, those who believe Layer 2 Rollups with modular designs are sufficient, and those now postulating that adding another layer such as a Layer 3, may be needed.
In this article, we’ll dive into the different blockchain layers, analyze their strengths and weaknesses, and put forward our views on why Layer 3s are the next stage for Ethereum and Layer 2 Rollups — and why Layer 3s will win the “Layer Wars.”
Layer 1s: The Foundation
Regarding Layer 1s, many still maintain that Layer 1s such as Bitcoin, Ethereum, Solana, BNB Chain, Avalanche, Polkadot, and Cosmos are the correct paths forward to pursue in fostering increased adoption and providing an alternative to the centralized Web2 industry. On the other hand, many acknowledge that these Layer 1s are faced with an unsolvable dilemma: the blockchain trilemma, and are thus incapable of facilitating mass Web3 adoption on par with Web2, and consequently, incapable of realizing the original aspirations of decentralized blockchains.
For example, while Bitcoin has cemented itself as the king of decentralized cryptocurrencies, the “digital gold,” it’s simply not able to serve as the network to host the global unit of account. Moreover, while Ethereum is the world’s largest smart contract platform with the most DApps, Ethereum is plagued with high gas fees and is unable to scale at mass.
While Solana can facilitate high TPS and transaction throughput, making DApps affordable to use, when faced with intense demand, Solana has frequently experienced network shutdowns. Most recently as of late March and early April 2024, Solana was unable to process transactions and the network stopped working.
Others such as BNB Chain, Avalanche, Polkadot, Tron, and Cosmos face similar issues at different edges of the blockchain trilemma and simply lack the popularity, network effects, developer talent, and liquidity that Ethereum possesses.
Not to mention, Layer 1 blockchains lack native interoperability with each other and thus cannot facilitate the seamless transfer of data, assets, and information across chains due to their different technology stacks, architectures, and consensus mechanisms. Essentially, Layer 1s are isolated ecosystems living on disconnected islands.
Therefore, in recognition of these issues, the blockchain developer community realized that solutions other than Layer 1s were needed.
Layer 1 Verdict: Lack Scalability & Interoperability
While Bitcoin and Ethereum were great inventions, their TPS, scalability, interoperability, and functionality limitations require additional layers and infrastructure improvements.
Layer 2s: An Innovative Leap Forward
Due to Ethereum’s popularity, friendly developer tools, large user base, market cap, liquidity depth, and security, many developers decided to build Layer 2 scaling solutions and Layer 2 Rollups to effectively scale the network, bring transaction costs down, and allow users to interact with EVM-compatible DApps for DeFi, gaming, and many other use cases.
The growing popularity of Layer 2s has been unprecedented. From April 2023 to April 2024, L2 TVL increased from under $10 billion to over $40 billion, which underscores the trend of users and developers moving to L2s to deploy DApps and engage in various DeFi activities.
Moreover, following Ethereum’s Dencun upgrade in March, which implemented EIP-4844, a new mechanism for data storage, costs to publish transaction data on Ethereum have dropped by approximately 99%. After EIP-4844, L2 fees have significantly decreased, putting them roughly on par with Solana. For example, Optimism and Base have both witnessed sub-cent fees.
However, this situation backfired and was short-lived as lower fees, the doubling of DEX trading volumes, the tripling of active traders, and a meme coin craze on Base caused user activity to spike, which in turn, caused fees to rise back up to levels seen before the EIP-4844 upgrade. What this scenario proved was that data availability (DA) is not the only factor that influences transaction costs — execution environments and the execution layer are still crucial.
In summary, Base’s spike in demand which pushed fees near or above pre-EIP-4844 levels highlighted that scaling Ethereum and the EVM more broadly cannot only be solved by lowering DA costs — far more work is required within the execution layer.
Layer 2 Rollup Market Analysis: OP vs ZK
At the moment, Optimistic Rollups dominate the Layer 2 Rollup market share leaderboard with Layer 2s such as Arbitrum, Optimism, and Base being built on the OP Stack.
OP’s dominance is due to its greater compatibility with Ethereum. ZK Rollups are valued less than their Optimistic counterparts due to their technical complexity and early stage of development. Nonetheless, both Optimistic and ZK Rollups have advanced the Layer 2 landscape immensely.
However, despite the significant growth of these Layer 2s, they still face the same issues as Layer 1s such as non-interoperability, cumbersome development environments, fragmented liquidity, and poor user experiences due to the requirement of cross-rollup bridges. This is because they’re limited to their respective tech stacks, thus hindering their interoperability, which complicates DApp development, and results in fragmented liquidity and users.
Layer 2 Verdict: Still Maturing
While Layer 2s successfully provided enhanced scalability to Ethereum, they still left loopholes in other areas such as security, development, interoperability, and liquidity fragmentation.
Therefore, in recognition of these remaining issues, many Layer 2 players and infrastructure protocols began looking at ways to further scale Ethereum, aggregate liquidity, more easily deploy DApps, and improve the user experience. Hence, the rise of Layer 3s.
Layer 3s: Uniting Ethereum & Layer 2s
Layer 3s are commonly defined as a third blockchain layer built on top of Ethereum Layer 2 Rollups that deliver higher scalability, lower gas costs, and greater customizability. For us at zkLink, a Layer 3 is also a third layer constructed on top of Ethereum Layer 2s that 1) aggregates fragmented assets from siloed Ethereum Layer 2s, and 2) provides developers and users with a more friendly blockchain environment for deploying EVM-compatible DApps while avoiding the complexities of cross-chain bridging.
zkLink Nova’s Layer 3 seeks to bring together the Ethereum Layer 2 Rollup ecosystem into one interface through zero-knowledge proof liquidity aggregation methods while simultaneously providing developers with an EVM-compatible environment to easily deploy their DApps.
This is because, just like Layer 1s, there are liquidity siloes on Layer 2s, with many protocols facing liquidity shortages, resulting in wasted resources, inefficient markets, and limited free capital flows.
On zkLink Nova’s Layer 3, liquidity is no longer siloed on Ethereum Layer 2 Rollups as assets from zkLink Nova’s integrated networks can be seamlessly bridged to the Layer 3 and aggregated and unified for enhanced liquidity. This allows DApps on zkLink Nova to have access to liquidity from all Ethereum Layer 2s, regardless of the tech stack, including OP Rollups and ZK Rollups.
This type of layer (L3) is extremely attractive to users who dislike having to bridge between Layer 2s to use a specific application as well as developers who no longer have to deploy their DApps on multiple Layer 2s. Instead, they can deploy on zkLink Nova’s Layer 3 just once and have access to the entire Ethereum market and user base. As a result, both users and developers save costs on transactions, and development costs, and are presented with DApps that have a better user experience due to greater liquidity depth and a diverse choice of tokens and applications.
Layer 3 Verdict: On The Rise
Layer 3s such as zkLink Nova represent an innovative solution in blockchain technology by addressing the critical issues related to liquidity fragmentation and multi-rollup DApp deployment. In particular, zkLink Nova improves capital efficiency through liquidity aggregation, enhances DApp functionality, and simplifies DApp deployment through an EVM-compatible network. While Layer 3s are still very much a new concept, and many more will emerge, it’s nonetheless an exciting development. zkLink Nova is already a first-mover in the space that will attract more users and developers as time goes on.
Who Will Win The Layer Wars?
Layer 1s such as Bitcoin and Ethereum have the largest market caps, but the DeFi and Web3 industries have largely shifted their primary development focus to Ethereum and Ethereum Layer 2s. This is because Ethereum Layer 2s provide affordable DApp usage for end users. However, Layer 2s have introduced increased complexity and fragmented liquidity within the Ethereum ecosystem, which has caused problems for further user adoption and DApp development. In addition, following the Dencun upgrade, more Layer 2s are likely to come to the market, further fragmenting the network and diluting the user base and liquidity on certain rollups.
This is why zkLink’s Nova Layer 3 network has emerged as a potential solution to Layer 2s’ network dilution and liquidity fragmentation issue, especially through the use of advanced zero-knowledge technology and the zkEVM for execution.
Only time will tell which layer will “win” — but the free market informs us that there will always be needs for Layer 1s and Layer 2s, which means it’s not a zero-sum competition. Nevertheless, Layer 3s such as zkLink Nova provide many interesting innovations and features that developers and users will find appealing, easing their experience with the Ethereum blockchain, all while receiving top-notch security, enhanced scalability, and greater customization for exploring new business models.
