Layer3: The quest for privacy

Layer3: The quest for privacy

Blockchain technology has always promised decentralisation, security and stability. However, in practice, most protocols sacrifice one to achieve the others.  This tradeoff is seen in Ethereum and Bitcoin (which are more concerned with security and decentralisation). At the same time, Solana is more concerned with stability (speed) and security at the expense of decentralisation.

To achieve all three, multi-layer architecture is needed. But what about the bugbear of transactional transparency on-chain?  When all transactions are traceable with enough chain analysis, how do we build privacy into transactions for enterprises and individuals? No one wants their private information or transactional data available on-chain for public consumption. This is a massive barrier to TradFi adoption.

Let’s start by explaining each layer's function, the case for Layer3 and how this could be integrated with Layer1s and Layer2s to achieve ERP grade levels of privacy and transactional efficiency.

What is Layer 3?

For simplicity, we are defining:

  • Layer1s (L1) = Blockchain protocol for security and decentralisation, costly and slow transaction speeds. (Ethereum, Solana, Bitcoin, Polkadot)
  • Layer2s (L2) = Scaling application layer for settlements, payments, etc., which uses zkrollups or optimistic rollups to create ‘batches’ of transactions for recording settlement on-chain to L1, but not transactional information. (Arbitrum, Optimism, Bitcoin Lightning Network, Polygon blockchain)
  • Layer 3s (L3) = Customisation built on L2 applications designed for specific use cases.  (Starkware and StarkNet for privacy)

L2s gain L1 security through zero-knowledge rollups (zkrollups).  They batch up, compress transactions, and upload the data to L1 together with proof. The proof allows the L1 network to ‘prove’ the L2 performed its operation correctly.  The proof allows anyone to take over this prover role should the L2 cease functioning.

In Layer3, something similar happens but without making any data available. This is the ‘private’ blockchain layer similar to enterprise application solutions in web2. Any transactions performed at L3 remain private because the data is not shared with anyone. L3 would still publish the proof to its L2 system of choice, but only the proof.

Proof is published for each batch of blocks produced on the private blockchain. There is no way anyone can work out what's in those blocks, but everyone can verify the operation. This type of zero-knowledge proof setup is called a Validium.

Validiums enforce the integrity of transactions but do not share data, thereby creating transactional privacy.   This means we can use smart contracts and bridges between private blockchains (similar to complex TradFi transactions) to publish the required proof for each party to verify it is correct.

How would Layer 3 work?

There are three visions for how Layer3 architecture could work in tandem with Layer 2:

1. L2 is for scaling; L3 is for customised functionality:

In this structure, L2 helps applications scale, and the separate L3 is for customised functionality for different use cases, such as privacy or ERP applications.

2.  L2 is for general-purpose scaling; L3 is for customized scaling:

Specialised applications use something other than the EVM to do their computation and zkrollups, whose data compression is optimised for specific applications.

3. L2 is for trustless scaling (zkrollups); L3 is for weakly-trusted scaling (Validiums):

Validiums are systems that use SNarks to verify computations but leave data availability to a trusted third party (think private enterprise blockchain applications). Validiums are highly underrated and have a lower security grade than rollups, but they can be vastly cheaper.

L3 could be a one-of-a-kind solution for cross-chain capabilities to various blockchain networks. The L3 solutions' primary goal would be to provide true interoperability without using intermediaries or custodians.

L3 builders such as Starkware, Polygon, and zkSync are working on projects using rollups and validiums to figure out which structure is the best for what use case.  Achieving scalability and privacy while maintaining security and decentralisation has always been the holy grail for blockchain communities.  This architecture may finally bring us one step closer to on-chain privacy thanks to L3.

CeAnn Simpson

CeAnn Simpson

An experienced editor & analyst, CeAnn has been writing in the blockchain/DeFi/web3 space for six years. She loves creative challenges, producing podcasts and gaining insights from clients and guests.