From Layer 2 to Layer 3: How Blockchain Overcomes Scalability Challenges

Scalability Issues and Layered Solutions

Since Bitcoin was created by Satoshi Nakamoto as a decentralized digital cash system, and then Ethereum by Vitalik Buterin ushered in the era of smart contracts, blockchain has become the foundation for countless decentralized applications (dApp). However, this development path has not been smooth. The explosion of user base and the increasing demand for transaction processing have revealed a hard limit: the base layer blockchain cannot handle the enormous transaction volume required by the market.

To address this challenge, the industry has developed independent blockchain layers: Layer 1 (base layer), Layer 2 (off-chain processing layer), and more recently Layer 3 (application and interaction layer). Each layer has its own role, working together to create a flexible and scalable blockchain ecosystem.

Layer 1: The Blockchain Foundation Where It All Begins

Layer 1 is the main blockchain, maintaining security and decentralization of the entire system. Bitcoin, Ethereum, Solana, and other blockchains at this layer are designed with fundamental protocols: consensus rules, data structures, and validation mechanisms.

To enhance processing capacity, Layer 1 projects often adopt:

• Increasing block size to include more transactions
• Optimizing consensus algorithms (e.g., from PoW to PoS)
• Applying sharding (fragmentation), allowing the blockchain to be split into smaller parts processed in parallel

Ethereum 2.0 with its PoS mechanism exemplifies this development direction. Bitcoin, on the other hand, chose SegWit to improve efficiency without changing core rules.

But despite these optimizations, Layer 1 must accept a trade-off: high security but slow speed, and high transaction fees.

Layer 2: When Transactions Move Off-Chain

Layer 2 is the “underlying” layer that runs beneath Layer 1, handling a multitude of off-chain transactions without causing congestion. The simple yet effective idea: instead of every transaction being recorded on the main blockchain, Layer 2 accumulates many transactions and then submits the final result to Layer 1 in one go.

Popular Layer 2 models include:

Lightning Network (for Bitcoin): Allows users to open bilateral “payment channels,” enabling fast transactions without recording on the main blockchain. Only when closing the channel is the result stored on the Bitcoin blockchain.

Rollup Solutions (for Ethereum): Aggregate thousands of transactions into a single “roll-up,” compress data, and send it to Ethereum. Projects like Arbitrum, Optimism, and StarkNet are typical examples.

As a result, Layer 2 reduces transaction fees by up to 99% and increases processing speed by hundreds of times compared to Layer 1. However, Layer 2 focuses solely on one goal: increasing throughput within a single blockchain.

Layer 3: The Ecosystem of Interacting Blockchains

Layer 3 is the next leap forward. If Layer 2 addresses speed and fee issues, Layer 3 tackles a different problem: how to connect multiple blockchains together?

Layer 3 builds on Layer 2 platforms, but its goal is not to speed up transactions but to create a network of interconnected blockchains that can interact seamlessly. A transaction can start on Ethereum L2, move through Solana, and end on Polkadot without needing a centralized intermediary.

Key features of Layer 3 include:

Cross-Chain Interoperability: Using protocols like Cosmos’ Inter-Blockchain Communication (IBC), Layer 3 enables data and asset transfer between blockchains.

Specialized Applications: Layer 3 hosts complex dApps such as on-chain games, DeFi protocols, or distributed storage systems that require high speed and low cost.

Cost Optimization: By employing advanced data compression techniques and hybrid consensus mechanisms, Layer 3 maintains very low costs.

Comparing Layer 2 and Layer 3: Two Different Worlds

Simply put: Layer 2 solves the “faster” problem, while Layer 3 solves the “wider” problem.

Emerging Layer 3 Projects Shaping the Future

Polkadot: A multichain network allowing “parachains” to connect to a main relay chain. Parachains like Acala, Moonbeam, Astar, and Clover Finance are real-world applications running on Polkadot.

Cosmos with IBC Protocol: Creates an “internet of blockchains” where chains like Akash Network, Osmosis, Band Protocol, Injective, and Fetch.AI can communicate.

Chainlink: Often called an oracle, Chainlink actually functions as Layer 3 by connecting smart contracts on Ethereum, Avalanche, Optimism, and Polygon with external data and real-world events.

Orbs: Layer 3 blockchain with hybrid PoS consensus, fully compatible with EVM. It operates alongside Ethereum, Polygon, BNB Chain, Avalanche, and Fantom, handling high-speed dApps.

Superchain (Open Index Protocol): Focuses on decentralized data indexing on blockchain, suitable for DeFi, NFT, and Web3 use cases.

Layer 1, Layer 2, and Layer 3: Core Differences

Layer 1 is the foundational layer, defining the basic rules of the blockchain. It prioritizes security and decentralization but is limited by speed.

Layer 2 is an augmentation layer built on Layer 1 to address speed issues. It processes transactions off-chain and then submits results to Layer 1.

Layer 3 is the connectivity layer, built on Layer 2 (or directly on Layer 1) to create an interactive blockchain ecosystem. It is not only fast and cheap but also enables blockchains to operate together seamlessly.

Conclusion: A Layered Blockchain Future

The evolution from Layer 1 to Layer 2 and then to Layer 3 is not a replacement but an addition. Each layer addresses a specific problem: Layer 1 ensures security, Layer 2 increases speed, and Layer 3 connects everything into a single network.

Blockchain Layer 3 is at the forefront of this revolution, shaping a future where blockchains are not only fast and secure but also truly decentralized and interoperable. This is a necessary step for blockchain to transition from an outsider technology to an integral part of daily life.