For the past few weeks, we've been looking at first and second layer protocols and how they set ground rules and scaling functionality for a given blockchain network.
While Layer One protocols refer to the system associated with the underlying architecture of a blockchain, Layer 2 protocols are designed to solve scalability issues and operational difficulties specific to transaction processing.
Now let's take a look at the third layer 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 allow applications to run on blockchains - as well as the applications themselves. Layer 3 protocols can be divided into two primary sub-layers: the application and the execution.
The application component deals with user-oriented applications intended 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 handling 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 C++.
Layer 3 protocol examples
Layer 3 protocols most commonly make themselves known in the form of DApps. Here are some of the industry's most notable DApps using Layer 3 protocols today.
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 using smart contracts. It operates without an order book, unlike centralized trading platforms like Binance and Coinbase, instead using its automated market-making framework to provide trading liquidity.
NBA Top Record
NBA Top Shot is a leading NFT platform offering NBA highlights in the video format known as Moments. Users can purchase and trade corresponding moments, which vary in value and rarity from a LeBron James dunk to a Steph Curry three-pointer. Like all NFTs, the attraction to these moments hinges primarily on the concept of collectability, as you might find in high-end art or trading cards.
Yearn.Finance
Yearn.finance is one of the leading yield aggregators in the DeFi space and serves as a suite of DApps operating on the Ethereum blockchain to help users automatically earn the highest returns on funds deposited on decentralized platforms. Yearn.finance offers its services with 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 generate the highest returns from other DeFi projects should achieve.
