What about L3?

Like I mentioned on LinkedIn a couple of weeks back, Dencun/4844 was Ethereum’s broadband moment. The blob transactions enabled by that hardfork network upgrade enabled a new type of storage space for unstructured data.

Very soon after this change, we saw transaction prices on Layer 2s, like Arbitrum, Base, and Optimism drop significantly, often over 10x cheaper than prior to the upgrade. As Ethereum mainnet continues building on these new rails, additional transaction bandwidth will be unlocked, supporting further growth among the L2s.

This upgrade also kicked off a renewed discussion about Layer 3s. But what are L3s? This is the topic being discussed.

Some argue L3s will further reduce the cost of transactions on them, where by transaction batching on L3s go to L2s, unlocking further optimizations. While there might be some optimizations available to unlock through such a mechanism, I would argue this is not an L3, but instead a more optimized and specialized L2.

Instead, what I would argue is that L3s are for privacy. I say that because this would add a new feature layer to the stack:

Layer 1: Settlement
Layer 2: Transactions
Layer 3: Privacy

Privacy is a necessity. Even as a long time blockchain native, someone who in 2019 used Monolith to pay for my tube ride to the office with Ether, would not be willing to have my salary and all my expenses out in the open on a public blockchain.

If we are to make this used by everyone, both people and business, being able to shield the details of your transactions will be essential. Good progress is being made in this space, with both Aztec and EY’s Nightfall being worthy of a mention. While the technology is making quick progress, regulatory clarity will likely be the final hurdle for production use of this.

Much like L2s exist today in two broad flavorous, as an optimistic type and zero knowledge type rollup, we can also imagine L3s that do not make use of ZK type technologies to enable privacy, but instead hide activity without otherwise encrypt it. Just like you can use a centralized exchange today, like Coinbase, to bridge tokens and Ether between L2s, we could also imagine Coinbase providing L3 type functionality without needing to go down the Aztec/Nightfall route. This would unlock the spending pattern privacy needs of many, while avoiding complex technology solutions and still allow them to provide the type of account activity transparency to governments and regulators akin to what banks are required to do today.

Sticking to my thesis that L3s are for privacy, with the above in mind, we’ll then likely see an “optimistic” L3 for privacy, provided by Coinbase, Circle and the likes first, before “ZK” L3s come a bit later. This as a way to cater to unmet market needs while allowing the technology and regulatory landscape more time to evolve.