Layering Up: How Layer 3 Solutions Are Supercharging DeFi

Today, decentralized finance encompasses a wide range of activities. Within it can be found protocols of all kinds, addressing everything from the need for institutions to tokenize securities to the need for degens to trade catcoins. Business, pleasure, and everything that falls in between, DeFi does it all on-chain, non-custodially, and with full transparency.

With the fast growth of lending platforms, yield aggregators, and complex trading protocols, DeFi applications need to be able to handle more data and do so more cheaply than ever before. While Layer 1 blockchains like Ethereum laid the groundwork for trustless smart contracts, and L2 networks have scaled transaction throughput via rollups, the demands of DeFi have continued to outpace existing capacities.

This is where Layer 3 solutions come into play, providing specialized services that extend beyond basic scalability. It’s up on Layer 3 that much of the innovation enhancing the leading L1 and L2 protocols can be found. By tapping into the superpowers possessed by L3 solutions, these lower layers are able to enhance everything from liquidity to data delivery. Let’s take a closer look at the benefits this brings to bear—and how we ended up with a Layer 3 landscape that provides the best DeFi marches.

Learn Your Layers

To understand what Layer 3 does, it helps to consider how they compare to their L1 and L2 counterparts. Layer 1 serves as the base blockchain (e.g., Ethereum, Solana) where transactions are validated and blocks are produced. L1 blockchains offer the highest level of security and decentralization but can suffer from congestion and high fees.

Layer 2 solutions built on top of L1 address scalability and cost issues, primarily by executing transactions off-chain and periodically settling on the L1. Examples include Optimism and Arbitrum, which use rollups to bundle multiple transactions into a single proof, alleviating congestion on the main chain. L2s inherit the security of the parent chain they’re built on, such as Ethereum, without the other baggage that comes with it, such as high fees and congestion.

This brings us to Layer 3, a specialized layer that resides on top of L1 and L2. Rather than just focusing on scalability, L3s introduce advanced functionalities such as off-chain computation, smart vaults, automated trading, and miner-extractable value (MEV) optimization. By handling complex logic off-chain, L3 solutions can free up space on L1 and L2, leading to more efficient networks.

L3 in Action: Orbs as a Liquidity Layer

Orbs offers a perfect example of Layer 3 in action. As a Layer 3 network, it embodies much of the characteristics that are synonymous with this architecture, including being chain-agnostic, interoperable, and dedicated to enhancing existing protocols rather than replacing them. Orbs is in the liquidity business, spraying it anywhere it’s required across the on-chain landscape on demand.

And Orbs doesn’t just procure its liquidity from other DeFi pools either—it’s also got an arsenal of CeFi liquidity to draw upon. Directing this to DEXs is the sort of specialist task that L3s were made for, and it’s one Orbs tackles with aplomb. Its liquidity hub, integrated into dozens of networks and DEXs, allows DEXs to attempt to execute trades without going through a regular AMM. Most of the time, Liquidity Hub should be able to execute the trade at a better price than the AMM due to the much greater range and depth of liquidity sources it can call upon.

There are other parts to Orbs’ L3 stack, like the twin protocols dLIMIT and dTWAP, which are often used together to give DEXs extra features, like the ability to split up big orders into smaller ones to prevent slippage. And there’s also Perpetual Hub, which brings Orbs’ liquidity to DeFi protocols specializing in perps. Put it all together, and you get a multi-feature, multi-chain Layer 3 solution that works to make DeFi better—regardless of what’s being traded, where, and how.

What Else Can Layer 3 Do?

Orbs may be one of the best-known L3s, but it’s by no means the only layer up there enhancing DeFi by supplying greater functionality and reducing fragmentation by drawing L1s and L2s closer together. Due to their chain-agnostic design, L3s are particularly useful in connecting blockchains that don’t speak the same language. By connecting data and liquidity from disparate chains and bundling it into a single product, L3 solutions are powering the creation of true omnichain dapps.

This means that Solana developers can pull in pricing from Ethereum or that TON builders can create Telegram mini apps that are TON-native but capable of executing smart contracts based on events that occur on Polkadot. Single-chain dapps are so last year; with L3s uniting data from across the on-chain universe, coding a dapp that is compatible with multiple chains is now a doddle. And there’s much more to come, as DeFi’s various layers come to terms with what they’re good at—and what tasks are best passed upstairs to the next layer to handle.

As DeFi evolves, the need for higher-level execution layers that can handle complex operations will only grow. Layer 3 solutions like Orbs are poised to fill this gap, enabling the next generation of decentralized applications. By offloading complex calculations and specialized functions, L3s not only enhance user experience by reducing fees and latency but do so without compromising security or decentralization.

Just as it’s hard now to imagine DeFi before L2s—a period where everything happened on Ethereum—we’re fast approaching a time where it’ll be impossible to envision decentralized finance without L3s doing the heavy lifting behind the scenes. Because users don’t directly bridge funds to L3s and interact with their native dapps, Layer 3s serve as the invisible hand guiding the on-chain markets. Imperceptible, but ever present, directing liquidity, data, and computation to where it’s needed.