Overview of Layer 3: Initial phase

The Ethereum ecosystem develops an additional Layer 3 layer that operates on top of the rapidly growing Layer 2 networks. Attention for Layer 3 increased after Degen Chain was announced to launch with native token DEGEN.

Overview of Layer 3

Layer 3 blockchain can be understood as a blockchain built on the foundation laid by the Layer 1 and Layer 2 networks, making this blockchain better compatible with specific needs (gaming, privacy, custom blockchain…).

The way a Layer 3 works is similar to how a Layer 2 works, however instead of using Ethereum's settlement layer*, these projects use Layer 2 directly. In addition, Layer 3 projects can More cost-effective by using Data Availability (DA) solutions* that are even cheaper than blobs on Ethereum.
Note:
·      *Settlement layer: One of the basic structures of blockchain, resolving disputes, verifying validity and ensuring the "finality" of transactions.
·      *Data availability layer: refers to data availability, serving and ensuring all nodes have the ability to access and download data on Roll up when necessary.

In addition to the transaction fee advantage, Layer 3 blockchains can offer a number of benefits including:

Expand the network to a larger scale than Layer 2, while still maintaining the security capabilities from Layer 1.
Diverse customization capabilities (customize gas fee tokens), low setup costs, L3 is more accessible both from the project and user side.
Bridge from Layer 2 to Layer 3 is fast and cheap, projects are easier to attract onboard users.
In return, Layer 3 still has a few problems:

·      Liquidity fragmentation: The fact that Ethereum already has many Layer 2s causes liquidity to be divided across many chains, the appearance of L3s can increase this problem.
·      Most Layer 2s are still quite new, not all projects are suitable for the role of a settlement layer. If rollups using fraud evidence have a challenge period, the transaction verification process may be disturbed.
Layer 3 cuts costs mainly by using another DA layer, but with the recent Dencun update, the transaction storage cost of Rollups has dropped sharply. The difference between the two options may no longer be too significant.

Grouping layers 3

Basically, in a Layer 3 blockchain there will usually be 3 important components:
·      Tech stack (toolkit to help develop Rollup): OP Stack, Arbitrum Nitro, ZK Stack...
·      Settlement layer: A certain Layer 2 on Ethereum
·      DA layer: Solutions provided by chains such as Arbitrum Anytrust, zkSync zkPorter... or service solutions from third parties such as Celestia, EigenDA, Avail...
·      Due to the needs and purposes of each project, a Layer 3 can use services/technology from many parties, then combine to form the most optimal block. Normally, projects will be divided according to the choice of blockchain as the settlement layer because it is the original Layer 2 on which the project operates.
Current Layer 3 groups include:
·      Layer 3 on Base: Includes Degen Chain, GoldChain, Clique projects
·      Layer 3 on Arbitrum: Xai, RARI chain and L3 blockchains belonging to Arbitrum Orbit
·      Layer 3 on zkSync: Pathfinder (testnet) and L3 blockchains belonging to zkSync Hyperchains

Analyze Layer 3 projects
Based on the above division, in this section, we will further analyze prominent Layer 3 project groups, including: Degen Chain, Xai, Pathfinder,..
In fact, even though Layer 3 projects already have products, they are still in the initial testing phase. Degen Chain is not the first Layer 3 project but it is the project that has attracted the most attention thanks to the growth of memecoin and the Base blockchain.

Degen Chain is a Layer 3 blockchain on Base, using the Arbitrum Nitro toolkit and leveraging Arbitrum AnyTrust's solution for the DA layer. This means Degen Chain uses Base as the settlement layer, uses Arbitrum solutions to build the platform and DA layer, and the ability to customize the gas token allows using DEGEN as a native gas token.
Degen Chain just launched on March 27 but has quickly achieved remarkable numbers:
·      14.19 million transactions were completed successfully out of a total of 24.08 million transactions
·      1.47 million users
·      15.19 thousand tokens created
·      29.17 thousand contracts created, of which 1.29 thousand contracts have been verified

User, contract and token creation metrics show the explosion in activity on Degen Chain during its launch phase. However, it is also a warning for uninformed users that when there are too many tokens and contracts created, the risk of encountering scam tokens is quite significant.
The number of active users and new users on L3 has shown signs of cooling down, however the number of transactions per day is still being maintained, showing that users tend to stay and carry out trading transactions.

Instead of choosing a specific-purpose development direction as the initial orientation of L3 projects, Degen Chain is following the General-purpose Layer 3 direction with initial projects mainly trading. DEX. Among them, the largest project currently is DegenSwap - the fork version of Uniswap V2.
However, this may cause Degen Chain to encounter some disadvantages:
·      Low liquidity, fragmentation across L2/L3
·      Small transaction fees make the network vulnerable to transaction spam bots, users' trading experience can be affected by transaction disputes from bots, MEV attacks...

Layer 3 will need bridges from Layer 2, choosing Base for development is a reasonable choice from Degen Chain. Currently, Coinbase is trying to bring new users to Base through free measures to send ETH from Coinbase to Base, supporting the Base network on the new Smart Wallet...

If Coinbase successfully attracts users to Base, Degen Chain will also be a project that will benefit greatly, similar to Optimism and Arbitrum with Ethereum before.

In addition to Degen Chain, blockchain Base also has two other new and less popular L3 projects: GoldChain and Clique. These are both L3 projects focusing on Games, on Gold there are 2,250 users creating 4.1 million transactions and on Clique there are 2,075 users creating 1.9 million transactions

Layer 3 on Arbitrum: Arbitrum Orbit

L3 blockchains built on Arbitrum One or Arbitrum Nova, using AnyTrust DA solution, Arbitrum Nitro tech stack create the L3 Arbitrum Orbit ecosystem.

Xai Blockchain

Unlike Degen Chain, Xai is a Layer 3 blockchain developed for the specific purpose of Gaming on Arbitrum. Xai uses Arbitrum as the settlement layer, and also uses Arbitrum AnyTrust for the DA layer. Also a new mainnet project from January 9, 2024, Xai also has outstanding numbers:
·      8.89 million transactions
·      579,321 users
·      149,695 average transactions per day
·      Number of daily transactions on Xai. Source: Xai Explorer
With the above basic features, Xai inherits the technology and security of Arbitrum Rollup, and very low transaction fees thanks to the DA solution from Arbitrum AnyTrust. In particular, to optimize users' seamless gaming experience, Xai supports gas-free transactions and seamless interactions without needing to interact with the wallet.
Currently on Xai there are 5 different games operating, including:
·      Final Form: Card game developed by Ex Poplus and Xai.
·      LAMOverse: Game in the action and third-person shooting genre. The project is built by Ex Populus and Xai Foundation.
·      Carnivale: Open-world action RPG. Built by Ex Populus Studio.
·      Tarochi: Pixel game that collects and upgrades monsters similar to Pokemon. Built by Paima Studio.
·      Kashi (coming soon)
In addition to Xai, on Arbitrum there are RARI Chain and PMON Chain (not yet launched) which are both L3 projects focusing on NFT & Gaming. On RARI chain there are 107,180 users but the number of transactions is 605,625 which is quite modest compared to other projects.

Layer 3 on zkSync: Hyperchains

zkSync Hyperchains and Arbitrum Orbit are both large Layer 3 development ecosystems. zkSync Hyperchains is a collection of Layer 3 blockchain networks using zkEVM & ZK Stack and linked together via Hyperbridges. Currently, this project group only has Pathfinder with a testnet version.

zkSync creates a solution that helps Layer 3 projects easily customize blockchain to their specific needs. Projects are in the development stage, products (if any) are only in the testnet stage. The Hyperchains project also has some notable improvements:

·      Minimize transaction costs: Optimize transaction processing, projects can optionally choose DA solutions such as zkPorter, AnyTrust, Avail, Celestia, EigenDA...
·      Security: Inheriting the security level of Ethereum and L2 is zkSync Era
·      Cross-chain interoperability between L3s
·      Ability to customize parameters and gas tokens for L3 blockchains
·      Increase scalability thanks to the ability to split resources and process transactions in parallel.

Other projects

Orbs is a project that provides public Blockchain platform services in the form of IaaS (Infrastructure as a Service), actually launched in 2019. Recently with the launch of Orbs V3 and V4, the project has developed further. Layer 3 solution direction.

Accordingly, Orbs provides additional Layer 3 services, Orbs Lambda and Orbs VM, built on top of Layer 1 & 2 projects. Basically, Orbs provides services and solutions for other projects to use. TON is the project that uses L3 backend infrastructure services the most with TONvote, TON Minter...

Orbs V4 is being researched and developed, expected to be released in the near future with updates related to L3.

In addition, there are a number of other projects that are researching products and preparing to launch L3 such as Open Campus, Muster Network (Arbitrum), Gotchichain (Aavegotchi)...

summary

With increasing demand for expansion, L3 blockchains have gradually appeared. Degen Chain and Xai have initially attracted the community's attention. However, these projects are still only in the testing phase and there are many points that need to be observed.

Large Layer 2 projects tend to form alliances of L2/L3 blockchains to increase scalability and influence. zkSync Hyperchain and Arbitrum Orbit are the latest projects to join the race with Optimism Superchain.