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Investors often filter cryptocurrencies based on their position and use in the blockchain stack.
Layer One (L1) cryptocurrencies like Ether (ETH) and Solana (SOL) are coveted for their gas fee utility, while Layer Two (L2) tokens like Arbitrum (ARB) and Optimism (OP) are associated with blockchain scaling and protocol governance.
Alternate approaches to security and scalability have created Layer Zero (L0) and Layer Three (L3) cryptocurrency networks.
In this article, we explain the difference between L0, L1, L2, and L3 networks and how the market narrative has changed around them.
Let’s sift through the layers, and look at the top projects in each one.
Key Takeaways
- L0 blockchains are built to function as the interoperability layer that connects all its hosted chains.
- L1 blockchains form the foundational layer in a blockchain stack.
- L2s have evolved over time from ‘solutions to scale L1s’ to ‘solutions to achieve blockchain modularity’.
- L3s allow highly customizable and optimized environments for maximum performance.
Understanding L0 vs L1 vs L2 vs L3
First, let’s briefly define each layer:
Layer 1 blockchains form the foundational layer in a blockchain stack. They can host secondary blockchain networks by providing them with the basic infrastructure and security required to function.
Layer 2 blockchains are built on top of L1 networks to help the network achieve higher throughout.
Layer 3 blockchains are highly-customizable chains custom built for applications.
Layer 0 blockchains provide an alternative to your typical L1 scaling approach. When used, they form the base layer that hosts L1, L2, and L3 chains. L0 blockchains are built to function as the interoperability layer that connects all its hosted chains.
Layer One: Ethereum and Solana Approach Scaling Different
All L1s are designed to be the base layer that provides security to secondary chains. Most L1s share the same functionality, but under the hood, L1s have unique designs that prioritize scalability, decentralization and security to varying degrees.
L1s can also differ from each other in the way they scale. Take Ethereum and Solana, for example. Ethereum’s L2-centric scaling roadmap is different from Solana’s plans to scale its L1 horizontally through a process known as Sealevel, taking advantage of GPUs in a process akin to parallel processing.
At the time of writing, crypto investors are unsure which of the two approaches will come out on top. Critics have slammed Ethereum’s plan to rely on using L2s due to the resultant fragmentation of crypto capital across numerous isolated secondary chains. At the same time, ETH’s dominance is going to be hard to crack.
Advocates of Ethereum’s L2-centric scaling roadmap are confident that the fragmentation problem will eventually be solved through interchain operability solutions.
Layer Two: From Scaling L1s to Blockchain Modularity
The crypto industry’s obsession with scale has resulted in L2 chains enjoying a period of increased investor interest.
The narrative around L2s has evolved over time from L2s being seen as ‘solutions to scale L1s’ to ‘solutions to achieve blockchain modularity‘.
Blockchain modularity is a concept that looks to split up key on-chain processes like execution, data availability, settlement and consensus across multiple specialized chains, instead of a single blockchain handling all the processes. Think of a factory, where each division specializes in its own skillset.
The concept of blockchain modularity has changed how we look at the relationship between L1 and L2.
Traditional L2s like Arbitrum and Base are built purely to help the base L1 layer (Ethereum, in this case). This setup can be seen as a one-on-one relationship where the L1 gains higher throughput, while the L2 uses the L1 for data availability and settlement. From a user perspective, near-zero gas fees are super attractive.
Now, with blockchain modularity, the L1 is no longer the focus. Instead, they are seen as a part of the modular setup that suits the L2 best.
For example, Eclipse is a L2 that uses the Solana Virtual Machine (SVM). All transactions are executed on the Eclipse L2 chain.
Eclipse L2 uses Ethereum L1 only for settlement, while outsourcing data availability to modular-focused Celestia.
Layer Three: Customizable App Chains
L3 has attracted criticism from a section of the crypto community who argue that the creation of such chains will lead to further fragmentation of crypto liquidity.
In simple words, more L3s means more capital spread across isolated ecosystems that require bridges to move tokens between them. This setup will result in poor user experience — a key issue that the crypto industry has been dealing with since its inception.
So do we really need L3s? Maybe.
There are niche use-cases for L3 chains like blockchain gaming that require highly customizable and optimized environments for maximum performance.
L3s also have the freedom to customize their properties and prioritize performance at the expense of decentralization.
The L3 sector is still in its nascent stage. Don’t rule it out.
Layer Zero: Interoperability with Polkadot (DOT)
During the 2021 bull run, Polkadot (DOT) was a popular crypto network among investors due to its unique design as an interoperability protocol.
At the time, Polkadot’s “parachain” auctions became highly-anticipated events where crypto projects bid to win the chance to build secondary blockchains known as “parachains” on top on Polkadot.
Most teams crowdfunded their auction bids which made parachain auctions community events.
The parachain auctions brought promising projects like L1 network Moonbeam and decentralized finance (DeFi) network Acala to the Polkadot L0. Being hosted on a common platform allows all parachains to communicate with each other through Polkadot’s XCM cross-chain messaging system.
However, the hype around L0 networks has cooled today. Polkadot has dropped out of the top 10 list with DOT struggling to scale its all-time high of over $50 hit nearly three years ago.
The hyper-fragmentation of blockchains seen today highlights that the industry is focused on prioritizing solving scalability issues over interoperability for the time being.
The Bottom Line
We hope this article helped you understand the relationship among L0s, L1s, L2s and L3s.
Over the last five years, each blockchain layer has experienced rapid growth. This evolution has solved blockchain scaling limitations but also led to the emergence of “unknown unknowns” like blockchain fragmentation as well.
The problem overall is solving the ‘blockchain trilemma‘ — how do you have scalability, security, and decentralization all in one place? While fragmentation is today’s problem, combined they are looking to be tomorrow’s solution.
