The race to achieve scalable, efficient, and cost-effective blockchain solutions is heating up, with Layer 2 (L2) rollups leading the charge for a while. Now, with the growing popularity of Layer3 rollups, many new narratives can be seen across the web3 community. Blockchain has influenced various industries by providing a decentralized and transparent way to store and execute transactions and smart contracts. However, this revolutionary technology still faces significant challenges, including limited storage, high fees, and low throughput.

According to Statista, blockchain technology is projected to reach nearly 1,000 trillion U.S. dollars by 2032, showcasing its growing significance. Despite its rising popularity, blockchain still faces a significant challenge: scalability. To address these challenges and trick the blockchain trilemma, we are always coming up with concepts and new solutions. Agg Layer 2 by Polygon is one such solution. 

Through this comprehensive article, we are creating an analogy between Layer2, Layer3s, and Polygon’s Agg L2s.

But, let’s start from the beginning. 

Understanding Blockchain Layers

Layer 1: The Foundation

Layer 1 represents the base layer of a blockchain, which includes the main blockchain network itself. Bitcoin and Ethereum are the popular examples of Layer1 blockchain. These blockchains handle core functions such as consensus mechanisms, block production, and security. However, due to their design, which prioritizes security and decentralization over speed and capacity, Layer 1 blockchains often struggle with scalability issues.

Layer 2: Enhancing Scalability

Layer 2 solutions exist on top of Layer1 ecosystems, aiming to reduce congestion and improve scalability and efficiency significantly.  These solutions work through offloading of transactions from the base chain, which leads to improving transaction speed and lowering down the cost. Layer 2 rollups, such as Optimistic Rollups and Zero-Knowledge (ZK) Rollups, bundle multiple transactions into a single batch and then submit this batch to the Layer 1 chain for finalization.

Layer 3: Specialized Applications

Layer 3 protocols are the solutions running on top of Layer 2 ecosystems.These include decentralized applications (DApps) that leverage the enhanced capabilities provided by Layer 2. Layer 3 rollups are less clearly defined but generally refer to solutions that provide additional functionalities or optimizations on top of existing Layer 2 protocols.

The Rise of Layer 2 Solutions

Layer 2 rollups are secondary frameworks built atop primary blockchains (Layer 1), such as Ethereum. Rollups computes all the transactions off-chain on an additional layer which, as we discussed, makes transactions cheaper and improves the throughput speed dramatically. 

Advantages of Layer 2 Rollups

1. Scalability Boost:

By offloading the transaction processing from the main chain, L2 rollups dramatically increase the network’s throughput. Processed transactions are bundled into batches and submitted on Layer1, taking off notable load from L1. 

2. Cost Efficiency

Users benefit from reduced transaction fees because L2 rollups minimize the need for frequent interactions with the main chain. This batching process lowers the overall gas fees required for processing transactions.

3. Security Assurance

Since L2 rollups ultimately settle on the main chain, they inherit the robust security measures of Layer 1 blockchains. This ensures that despite operating off-chain, the transactions remain secure and tamper-proof.

The Advent of Layer 3 Rollup Chains

Layer 3 rollup chains build on the foundation laid by L2 solutions, offering even more specialization and scalability. These chains provide a further layer of abstraction, allowing for application-specific optimizations without overloading the L2 or L1 layers.

L3 rollups use L2 solutions as their base layer. They offer a customized environment for specific tasks, enhancing scalability and efficiency while still leveraging the security and interoperability of the L2 layer.

Key Benefits of Layer 3 Rollups

• Superior Customization: 

L3 rollups provide developers with the flexibility to tailor solutions specifically for their applications. This includes customizing smart contract functionalities and optimizing performance to meet specific use cases.

• Efficient Cost Management: 

L3 rollups can further reduce transaction costs by handling more transactions off-chain before submitting them to L2, which then posts them to L1. This multi-layered approach spreads the cost burden, resulting in lower fees for users.

• Enhanced Interoperability: 

L3 rollups improve interoperability by facilitating smoother interchain communication and data transfer. This is crucial for the seamless functioning of dApps across different blockchain networks.

The Downsides of Layer 3 Rollups

While L3 rollups present an innovative approach to scaling, they are not without significant drawbacks.

• Fragmentation and Liquidity Issues: L3 rollups may lead to fragmented liquidity and user bases, creating isolated ecosystems that can hinder the broader integration of the blockchain network.

• Fee Extraction and Governance Challenges: Many L3 models involve fee extraction mechanisms imposed by the underlying L2 solutions. This can undermine the sovereignty of L3 chains and create governance challenges that complicate the ecosystem.

• Security Dependencies: L3 rollups rely on L2 for security guarantees. However, L2 solutions themselves may not have the economic or decentralized security strength required to serve as a reliable settlement layer. This multi-layered dependency increases the risk of security breaches.

Aggregated L2s: A Promising Alternative

Polygon Labs and other industry leaders argue that aggregated L2 solutions offer all the benefits of L3 rollups without their inherent drawbacks.

Advantages of Aggregated L2 Solutions

• True Sovereignty: 

Aggregated L2s enable extensive customization and maintain sovereignty without the constraints of L2-to-L3 dependencies. Developers can build highly tailored solutions while retaining full control over their chains.

• Reduced Costs and Enhanced Security: 

Through techniques like proof aggregation and recursion, aggregated L2s reduce the costs of posting transactions to the main chain. This approach also leverages the security of zero-knowledge proofs, providing robust economic security without intermediary dependencies.

• Unified Liquidity and State: 

Aggregated L2 networks create a unified liquidity pool and shared state across multiple chains, promoting horizontal scalability and reducing fragmentation. This integrated approach supports a more cohesive and efficient blockchain ecosystem.

Comparison: Layer 2 Vs. Layer 3 Vs. Agg L2 Rollups

Now, let’s expand on some vital parameters to provide a detailed analysis of L2s, L3s, and Agg L2s. This section will help you understand the nuanced differences and use cases for each layer.

Customizability

Layer 2:

• L2 solutions provide a high degree of customization, allowing developers to build unique protocols and services without being constrained by the main Ethereum layer’s limitations. The ability to create custom rules and features means L2s can be tailored to specific needs, ranging from gaming applications to complex financial products.

Layer 3:

• L3s are often designed for niche applications that require a specific framework or set of rules that are not efficiently handled at the L2 or L1 level. While this allows for targeted solutions, it also means that L3s often depend on the underlying L2s for fundamental operations, potentially limiting their sovereignty and the breadth of customization.

Agg L2s

• Agg L2s offer the highest level of customization among the three, by enabling a network of L2s to interoperate seamlessly. This creates a rich ecosystem where different L2 solutions can specialize and yet benefit from one another’s capabilities. The aggregation ensures that enhancements and custom features of one L2 can be leveraged across others, enhancing the overall network’s adaptability and functionality.

Cost

Layer 2:

• L2s generally offer cost benefits by processing transactions off the main Ethereum chain, reducing the burden on Ethereum and thus lowering transaction costs. Technologies like ZK-rollups and optimistic rollups aggregate multiple transactions into a single one, significantly reducing costs.

Layer 3:

• The cost-effectiveness of L3s can vary significantly based on their design and the L2 networks they rely on. While L3s can optimize transaction costs within their specific ecosystem, they may incur additional costs related to cross-layer operations and potential fee extractions by the L2 layer.

L2:

• By aggregating multiple L2 solutions, Agg L2s can distribute operational costs more efficiently across the network, often resulting in lower costs for end-users. This structure also allows for more efficient resource use, further driving down fees.

Interoperability

Layer 2:

• L2s can be highly interoperable within their own ecosystem but may face challenges interacting with other L2s or L3s without specific bridging solutions. L2s are free to create their own specific standards and protocols, and this can create further silos. 

Layer 3:

• L3s provide interoperability within a constrained ecosystem, typically focusing on vertical integration within a specific L2 environment. This can limit broader interoperability with other blockchain networks, potentially isolating the L3 from wider blockchain benefits.

Agg L2:

• Agg L2s are designed to maximize interoperability among different L2 networks. This design philosophy not only enhances liquidity and state sharing but also simplifies the user experience across different blockchain applications. The aggregated nature of these platforms facilitates a more unified blockchain ecosystem.

User Experience

Layer 2:

L2s with high-speed transactions and lower cost definitely improves user experience when compared to L1s. However, the basis of user experience is always the way L2s is managed and its various implementation aspects. 

Layer 3:

• L3s can optimize the user experience for specific applications by providing specialized services or features that are not feasible at the L2 or L1 levels. However, this specialization might also introduce complexities in user interaction, especially when moving assets or operations across layers.

Agg L2s:

• Agg L2s potentially offer the best user experience by combining the advantages of multiple L2 solutions into a cohesive platform. Users benefit from enhanced features, lower costs, and greater speed without having to navigate the complexities of multiple independent L2 environments.

Security

Layer 2:

• Security in L2 solutions depends heavily on their specific architecture and the security mechanisms they inherit from Ethereum. While they add their own security measures, the integrity of these additions is crucial for protecting against vulnerabilities.

Layer 3:

• L3s rely on L2s for their security model, which means their security is only as robust as the underlying L2. This dependency can introduce additional security risks if the L2 layer is compromised.

Agg L2s:

• Agg L2s enhance security by leveraging the collective security protocols of all connected L2s. This not only helps in creating a more resilient framework but also mitigates risks associated with individual L2 vulnerabilities.

Let’s Wrap:

The debate between Layer 2 and Layer 3 rollups highlights the evolving landscape of blockchain scaling strategies. While L3 rollups offer significant advancements in scalability and customization, they also introduce potential pitfalls related to interoperability, fee extraction, and sovereignty. On the other hand, aggregated L2 solutions promise to deliver these benefits while avoiding many associated drawbacks, fostering a more integrated and scalable blockchain environment.

Businesses, developers, and stakeholders must carefully consider the trade-offs between these approaches, aiming to build scalable, secure, and efficient solutions that drive the next wave of blockchain innovation.

If you are building a custom rollup solution, check out Zeeve RaaS. We support all the leading rollup frameworks required to launch your L2, L3, or even Agg L2 chain. Visit our RaaS page for more information. If you have any further queries, schedule a call with our experts to help you develop your custom rollup solutions.