Layer 3

What is Layer 3?

As time goes by, blockchains are getting more complicated. We refer to this complexity as layers because each layer has different functions.Layer 3 is the blockchain layer that the user primarily interacts with.

You can think of it as the user interface (UI). It consists of decentralized applications (dApps) that users interact with to perform functions, like trading, investing, banking, etc.

The Long Definition

Blockchains are built with layers. Layers are levels within the blockchain similar to floors in a building. Each layer (floor) has a different purpose.

Some of these layers may include the hardware infrastructure layer, the data layer, the network layer, the consensus layer, and the application layer. Each layer has a unique function.

Layer 3 (L3) is an application layer. An application layer is where smart contracts and decentralized applications (dApps) are processed. It also interacts with other layers such as the consensus layer because transactions need to be verified as true and correct.

Suppose you wanted to open a cryptocurrency savings account. Your part of the process, like connecting your wallet or signing transactions, takes place via the Layer 3 (L3) part of the blockchain.

Not every blockchain has an L3. It is only a feature in blockchains with smart contract support, like Ethereum and Solana. In fact, Ethereum has the most robust L3 of all blockchains. On the other hand, Bitcoin has none because it lacks native smart contract support.

What Does Layer 3 Consist Of?

Layer 3 consists of smart contracts and dApps. Smart contracts are lines of code on a blockchain. They are autonomous, meaning they work automatically when the right conditions are met.

For example, say you ordered a car to be delivered to you and you will be paying for it with cryptocurrency. The smart contract would automate the transfer of your cryptocurrency when the car is delivered.

Smart contracts are crucial to the application layer. They are what allow applications to be built on a blockchain. This is because blockchains are almost always decentralized networks. So, they have no board of directors, accounting department, or customer service.

The Ethereum blockchain demonstrates the different kinds of dApps that L3 supports. These include:

• Decentralized exchanges (DEXs): These are exchanges that allow people to trade crypto with each other anonymously. They are not owned or controlled by a single authority. Examples include Uniswap and Pancakeswap.
• Lending protocols: These are decentralized platforms that allow for crypto lending and borrowing. Like with DEXs, users are anonymous and can borrow crypto directly from each other. Examples include Compound and Aave.
• Crypto wallets: These are applications that allow users to access their crypto on the blockchain. This is how people use crypto without going through a centralized exchange (CEX). Examples include Metamask and Trustwallet.
• DeFi investment aggregators: These are dApps that collect investment opportunities, such as high-interest rates given out by lending protocols, from all over the decentralized finance (DeFi) space. They then make them available in one place for users.

Why is Layer 3 Important?

Layer 3 is where the blockchain-specific computer programs are. If you imagine the blockchain as a shopping mall, Layer 3 represents the individual stores in the mall. The other layers would be like the loading dock, the security office, and the hallways that run behind the stores. It is the user interface.

Therefore, this layer gives a blockchain utility beyond just buying and selling its crypto. This is why for many, the Ethereum blockchain is better than the Bitcoin blockchain. Its smart contracts and dApps have vastly improved its potential.