Understanding Layer Three Protocols: Bringing Layers One and Two to Life

Date Published

01/28/2022

In recent weeks, we have taken a look at layer one and layer two protocols and how they go about establishing ground rules and scaling functionality for a given blockchain network.

While layer one protocols refer to the system associated with a blockchain’s underlying architecture, layer two protocols are designed to solve scalability issues and operational difficulties specifically pertaining to transaction processing.

Now, we will take a look at layer three protocols and how they bring the work from layers one and two into the world in the form of decentralized apps (DApps).

What are layer three protocols?

Layer three protocols consist of the protocols that allow applications to run on blockchains – as well as the applications themselves. Layer three protocols can be split into two primary sub-layers: the application and the execution.

The application component deals with user-facing applications meant to facilitate user interactions with a blockchain, the key aspects of which are APIs, user interfaces, and scripts. DApps in this category interact with the base blockchain using APIs.

The execution component, on the other hand, has to do with the handling of rules and smart contracts. It is the execution piece that contains the actual code behind the application. This is also where the intersection between the two sub-layers appears.

For example, when a user initiates a transaction, the process moves from the application layer to the execution layer. It is important to note that different blockchains support different programming languages when creating smart contracts, with Ethereum using Solidity and EOS using C++.

Examples of layer three protocols

Layer three protocols most often make themselves known in the form of DApps. Here are a few of the most noteworthy DApps in the industry today making use of layer three protocols.

Uniswap

Uniswap, powered by the Ethereum network, is a DeFi protocol used for exchanging different types of crypto. Uniswap facilitates automated transactions on the Ethereum blockchain by using smart contracts. It operates without an order book unlike centralized trading platforms such as Binance and Coinbase, instead using its automated market-making framework to provide trading liquidity.

NBA Top Shot

NBA Top Shot is a leading NFT platform that offers NBA highlights in video format known as Moments. Users can buy and trade respective Moments which vary in value and rarity, from a LeBron James dunk to a Steph Curry three-pointer. Like all NFTs, the draw toward these Moments is primarily tied to the concept of collectability, such as you might find with high-end art or trading cards.

Yearn.finance

Yearn.finance is one of the leading yield aggregators in the DeFi space, serving as a suite of DApps operating on the Ethereum blockchain to help users automatically earn the highest yields on funds deposited on decentralized platforms. Yearn.finance provides its services using only code, removing the need for a financial intermediary like a bank or custodian. Products within the yearn.finance suite include Vaults, Earn, APY, and Zap, all of which serve different purposes from visualizing interest rates across different lending protocols to relaying investment strategies designed to generate the highest returns from other DeFi projects.

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Date Published

01/28/2022

Author

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