Blockchain Layers: L0 vs. L1 vs. L2 vs. L3

Disclaimer: This article is intended for US audiences.

Investors often filter cryptocurrencies based on their position and use in the blockchain stack.

Layer One (L1) cryptocurrencies such as Ether (ETH) and Solana (SOL) are sought after because of their gas fee benefits.

Layer Two (L2) tokens such as Arbitrum (ARB) and Pepe Unchained (PEPU) are associated with blockchain scaling and protocol governance.

Alternative 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 has changed around them.

Difference Between L0 vs. L1 vs. L2 vs. L3

First, let us briefly define the individual layers:

Layer 1 blockchains form the fundamental layer in a blockchain stack. They can host secondary blockchain networks by providing them with the basic infrastructure and security needed to function.

Layer 2 blockchains are built on top of L1 networks so that the network can achieve higher throughput.

Layer 3 blockchains are highly customizable chains that are specifically designed for applications.

Layer 0 blockchains offer an alternative to the typical L1 scaling approach. They form the base layer on which L1, L2, and L3 chains are hosted. L0 blockchains are built to act as an interoperability layer that connects all hosted chains together.

Layer 1: Ethereum and Solana Approach Scaling Differently

All L1s are designed to form the base layer that ensures the security of the secondary chains.

Most L1s have the same functionality, but inside they are characterized by unique concepts that focus on scalability, decentralization, and security to varying degrees.

L1s can also differ from each other in their scaling. Take Ethereum and Solana, for example.

Ethereum’s L2-focused scaling roadmap is different from Solana’s plans to horizontally scale its L1 through a process known as Sealevel, which takes advantage of GPUs in a process similar to parallel processing. At the time of writing, crypto investors are not sure which of the two approaches will prevail.

Critics have questioned Ethereum’s plan to rely on the use of L2s because of the resulting fragmentation of crypto capital across numerous isolated secondary chains. At the same time, ETH’s dominance will be difficult to crack.

Proponents of Ethereum’s L2-focused scaling roadmap are confident that the fragmentation problem will ultimately be solved by interchain operability solutions.

Layer 2: From Scaling L1s to Blockchain Modularity

The crypto industry’s obsession with scaling has led to L2 chains experiencing increasing 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 aims to split key on-chain processes such as execution, data availability, settlement, and consensus across multiple specialized chains instead of handling everything on a single blockchain.

Imagine a factory where each department specializes in its own skills.

The concept of blockchain modularity has changed the way we view the relationship between L1 and L2.

Traditional L2s like Arbitrum and Base are designed exclusively to support the L1 base layer (in this case Ethereum).

This setup can be thought of as a one-to-one relationship where the L1 achieves higher throughput while the L2 leverages the L1 for data availability and billing. From a user perspective, gas fees of almost zero are very attractive.

With the modularity of blockchain, L1 is no longer the focus. Instead, they are seen as part of the modular structure that best fits the L2.

For example, Eclipse is an L2 that uses the Solana Virtual Machine (SVM). All transactions are executed on the Eclipse L2 chain.

Eclipse L2 works with Ethereum L1 only for billing, while data availability is outsourced to the modular Celestia.

Layer 3: Customizable App Chains

L3 has been criticized by a part of the crypto community. They argue that the creation of such chains will lead to further fragmentation of crypto liquidity.

In simple terms, more L3s mean more capital spread across isolated ecosystems that require bridges to transfer tokens between them.

This setup will result in a poor user experience – a major problem that the crypto industry has struggled 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.

In addition, L3s have the freedom to customize their properties and prioritize performance at the expense of decentralization. The L3 sector is still in its early stages, so don’t write it off.

Layer 0: Interoperability with Polkadot (DOT)

During the 2021 bull market, Polkadot (DOT) was a popular crypto network among investors due to its unique concept as an interoperability protocol.

Back then, Polkadot’s “parachain” auctions became highly anticipated events where crypto projects bid for the chance to build secondary blockchains, called “parachains,” on Polkadot.

Most teams crowdfunded their bids, turning the parachain auctions into community events.

The parachain auctions brought promising projects such as the L1 network Moonbeam and the decentralized finance (DeFi) network Acala to Polkadot L0.

Because they are hosted on a common platform, all parachains can communicate with each other through Polkadot’s cross-chain messaging system, XCM.

However, the hype around L0 networks has cooled down today, with Polkadot falling out of the top 10 list and DOT struggling to reach its all-time high of over $50 recorded almost three years ago.

The current hyper-fragmentation of blockchains shows that the industry is prioritizing solving scaling problems over interoperability for now.

Conclusion

Hopefully, this article helped you understand the relationship between L0s, L1s, L2s, and L3s. Over the past five years, each blockchain layer has experienced rapid growth.

This development has solved the scaling limitations of blockchain but has also led to the emergence of “unknown unknowns” such as blockchain fragmentation.

In general, it is about solving the “blockchain trilemma”: How can scalability, security, and decentralization be reconciled? While fragmentation is today’s problem, together they are tomorrow’s solution.

ADVT.

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