Understanding Layer-3 protocols

Over the last few weeks we've looked at the first and second tier protocols and how they provide ground rules and scaling functionality for a particular Set blockchain network.

While Layer One protocols refer to the system associated with a blockchain's underlying architecture, Layer Two protocols are designed to address scalability issues and operational difficulties specifically related to transaction processing.

Now let’s 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 3 protocols?

Layer 3 protocols consist of the protocols that enable applications to run on blockchains - as well as the applications themselves. Layer 3 protocols can be divided into two primary sublayers: the application and the execution.

The Application component deals with user-centric applications designed 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 via APIs.

The execution component, on the other hand, has to do with dealing with rules and smart contracts. It is the execution piece that contains the actual code behind the application. The intersection between the two sublayers also appears here.

For example, when a user initiates a transaction, the process moves from the application level to the execution level. 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 3 protocols

Layer 3 protocols most often make themselves known in the form of DApps. Here are some of the most notable DApps in the industry using Layer 3 protocols today.

Uniswap

Uniswap, powered by the Ethereum network, is a DeFi protocol used for exchanging various types of crypto. Uniswap facilitates automated transactions on the Ethereum blockchain through the use of smart contracts. It operates without an order book, unlike centralized trading platforms such as Binance and Coinbase, instead leveraging 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 purchase and trade corresponding Moments that vary in value and rarity, from a LeBron James dunk to a Steph Curry three-pointer. Like all NFTs, the attraction to these moments is primarily tied to the concept of collectability, like you might find with high-end art or trading cards.

Yearn.Finances

Yearn.finance is one of the leading yield aggregators in the DeFi space, serving as a suite of DApps that operate on the Ethereum blockchain to help users automatically earn the highest returns on funds deposited on decentralized platforms. Yearn.finance offers its services using code only, eliminating the need for a financial intermediary such as 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 routing investment strategies that deliver the highest returns from other DeFi projects should achieve.