What are the Blockchain Layers? L0, L1, L2, L3

Blockchains layers are the different levels of interaction and infrastructure provided among blockchain projects. Depending on the layer, the project may provide blockchain technology, a blockchain network, a blockchain upgrade, or blockchain applications. The difference between these seemingly identical terms is Layer 0 vs Layer 1 vs Layer 2 vs Layer 3.

What are the Blockchain Layers?

Not every project is a Bitcoin. One of the reasons crypto research is confusing for newcomers is blockchain layers. We tend to look at cryptocurrencies by market capitalization, which gives the impression that the most traded coins are the most valuable.

If you try comparing which coin is better, you’ll often find that one has nothing to do with the other. They might both have great fundamentals and price potential, but they serve different purposes. It’s like comparing apples and pears, for example:

• Ethereum provides a blockchain network for developers.
• Polkadot provides interoperable technology for blockchains like Ethereum.
• Polygon provides scalability solutions for Ethereum developers.
• Liquid Loans is a decentralized application that provides DeFi services to users.

There’s no “better” project when comparing different blockchain layers, but one layer can affect another. Without foundational layers, many decentralized applications (dApps) wouldn’t exist.

Comparing blockchain layers is like comparing different technologies. Each layer leverages infrastructure from previous ones to provide new solutions for a different market. For example, the Ethereum blockchain uses infrastructure from Internet service providers, creating its own infrastructure to provide to dApp developers.

To remove confusion, you can replace:

Layer 0 = Software Infrastructure

Layer 1 = Blockchains/Networks

Layer 2 = Sub-Blockchains (or software upgrades)

Layer 3 = (Decentralized) Applications

Let’s look at the different layers that form the entire blockchain ecosystem.

What is a Blockchain Layer 0?

Layer 0 refers to all digital technologies that make blockchains possible. The goal is to make networks functional, accessible, and interactable with each other. By achieving this, dApp developers find more innovation opportunities, which creates more token utility for users.

Layer 0 makes possible:

1. Functional blockchains via physical infrastructures such as hardware, electricity, and Internet services. The biggest difference between traditional telecom companies and Layer 0 projects is decentralization. Oftentimes, these layer-0 teams develop their own blockchains (e.g., Avalanche Network).
2. Accessibility and efficiency. Because blockchains are trustless and autonomous, they’re worldwide available. And as we reduce costs and increase speeds, more people will use them. It’s why Bitcoin is so secure and expensive to attack.
3. Blockchain interaction. Blockchains are often incompatible because they use different programming languages, smart contracts, and properties. Layer-0 protocols allow blockchains to communicate better, so they can synergize and use each others’ dApp ecosystem.

The value of Layer 0 is CCIP, cross-chain interoperability protocols. Interoperable blockchains can seamlessly transfer information and tokens that aren’t necessarily compatible (e.g., Ethereum and Solana).

For example, Polkadot allows us to translate data among incompatible blockchains. Similarly, Cosmos achieves interoperability on all networks built with their developer toolkit. And Chain Link provides off-chain data to apps and blockchains like Solana, Ethereum, or Binance Chain.

None of these projects are blockchains per se, although some blockchains can also provide blockchain technology. This places Ethereum between Layer 0 and 1.

What is a Blockchain Layer 1?

Simple: Layer 1 projects are blockchains. Public blockchains are digital ledgers designed to easily read or add financial data and prevent changing the existing one. Each blockchain has a different consensus model to agree on what data to add, along with smart contracts to automate transactions without 3rd-party intervention.

Unlike applications, smart contracts are autonomous programs that don’t interact with users directly. Some smart contracts like Bitcoin’s only allow basic payments. Others like Ethereum’s allow us to develop complex applications.

Other Layer 1 blockchains are Solana, Binance Chain, Ripple, Monero, or Litecoin. Even though many blockchains support smart contracts, developers choose one based on their architecture. This means each network gives a priority to scalability, security, and decentralization (see blockchain trilemma).

Because new technology introduces new problems, Layer 0 protocols aren’t enough for blockchains to be scalable-secure-decentralized. That’s where Layer 2 protocols come in.

What is a Blockchain Layer 2?

When blockchains developers use other blockchains to build their own, we call them Layer 2 blockchains. Because they use infrastructure from Layer 1 blockchains, they are more scalable and efficient. For example, Ethereum has L2 blockchains Polygon, Arbitrum, and Optimism, which are faster and cheaper (but more centralized because of their smaller size).

This dependence also means that L2s cannot run when L1s are down. Inversely, many L2s are experimental networks, so there’s no guarantee they’ll be as secure as L1 blockchains.

To avoid confusion, it’s worth comparing L2s with similar upgrades:

• L1 blockchains have regular updates set by the community (such as Ethereum 2.0. or Bitcoin Taproot). Flexible blockchains become more secure and decentralized over time.
• On immutable blockchains like Ethereum, smart contracts prevent such changes. So instead, developer communities create hard forks like PulseChain. A fork blockchain is a variant of the original blockchain that involves new features and code tweaks. Thus, fork chains have different scalability-security-decentralization.

The teams that design Layer 2 and fork chains are often unrelated to Layer 1 founders.

What is a Layer 3 Blockchain?

Layer 3 is decentralized applications, which is a way of naming protocols that users can interact with. Up until here, all layers were software providers to other developers. L3s are all about the users, also known as Web3 Apps.

Many dApps are DeFi services, which people can access by using its utility token (e.g., LOAN for Liquid Loans).

The L3 name can be confusing because L2s don’t necessarily precede L3s:

• L1 blockchains have one dApp ecosystem, and L2 blockchains have their own. 
• Because L1 and L2 are compatible, they share common tokens that we can transfer among networks.
• But because they have different app ecosystems, not all tokens are common. L3 tokens built on L2s won’t show on the L1 block explorer. But L3s built on L1s might show on L2s if the app developers choose to, but not necessarily. 
• Different L2s built on the same L1 are also compatible.

e.g., Uniswap is an L3 that didn’t support Polygon until November 20th of 2021.

The ecosystem of a Layer 1 blockchain is the native token, tokens from its Layer 2 blockchains, and utility tokens built on L1. Each Layer 2 has its micro-ecosystem of dApps (L3s) built on L2.

Bitcoin Blockchain Layers Example

Bitcoin is the first popularized public blockchain and an L1. But did you know Bitcoin has an ecosystem from L0 to L3? 

• You can consider Bitcoin mining devices and ATMs and L0, along with Internet, electricity, and essentials.
• Bitcoin has led to several fork blockchains and L2s, namely Liquid Network and Lighting Network.
• The closest thing to a Bitcoin Layer 3 is CakeDefi. It’s a DeFi dApp built on a Bitcoin fork that supports smart contracts (DeFiChain). It’s not EVM-compatible, so it doesn’t support Metamask and requires a different one.

Bitcoin has primitive smart contracts but isn’t optimized for app development. So while it’s possible to build dApps on Bitcoin, it lacks the efficiency of networks like Ethereum 2.0. and PulseChain. DeFiChain is a PoS blockchain with 30s block time, which isn’t competitive with 3s on Pulse.

Things might change on future Bitcoin upgrades.

Ethereum Layers Example

Like Bitcoin, Ethereum shares telecom infrastructure as Layer 0. A blockchain-related L0 is Cosmos, as it bridges Ethereum with other EVM-incompatible networks. Polkadot can be L0 too because most parachains were ERC-20 tokens too. (Think of parachains as a Layer 2.1 hybrid between blockchains and applications.)

Layer 1 is Ethereum itself and any of its countless forks (e.g., PulseChain). Layer 2 ETH blockchains are Arbitrum, Optimism, Polygon, Immutable X, Loopring, and 17 others. Layer 3 includes the nearly 3,000 dApps built on Ethereum.

Because it has the largest ecosystem in crypto, more developers want to build on Ethereum, whether it’s improving previous layers or building their own apps. One of those projects is PulseChain.

PulseChain Layers Example

Unlike other blockchains, PulseChain is the first hard fork with the full system state of Ethereum. By comparison, this means:

• PulseChain and Ethereum share similar Layer 0 technologies
• PulseChain acts as a scalability solution for Ethereum because it shares its load and reduces fees, increasing Ethereum’s value. It aims to reduce ETH block time from 13s to 3s.
• Bringing the ETH system state means importing all ERC-20 tokens and Ethereum NFTs to PulseChain. 
• Early PulseChain users can qualify for the airdrop in PRC-20 tokens of all assets held on Ethereum Mainnet.

Unlike Ethereum, it doesn’t have Layer 2 solutions because the Mainnet hasn’t launched yet, and it’s so scalable it doesn’t need them. This can position PulseChain as one of the fastest-growing dApp ecosystems. Some of the first DeFi protocols launching in the Pulse Network (PLS) are:

• Liquid Loans (LOAN), a truly decentralized lending protocol. Users can borrow at 0% interest rates and no repayment schedules for a small fee. It uses an over-collateralized stablecoin (USDL) to guarantee platform liquidity, along with LOAN tokens for staking.
• PulseX (PLSX), a decentralized exchange (DEX) for PRC-20 tokens. AKA the Uniswap of Pulsechain.