If you are following blockchain, it's likely that you would have heard these terminologies (Layer 1, Layer 2, Layer 3). It might seem more confusing if you are a non-tech Web3 builder. In this blog, I will try to explain the above in the most simple of terms.
Very simply, a blockchain is a distributed ledger of transactions that is shared among the nodes of a computer network. When you share the record among different nodes, it is imperative the system has a way to identify the universal state. Every blockchain has a way to achieve this and this mechanism is called the “consensus protocol”. Among other things, the way in which this consensus protocol is achieved can have an impact on the cost of recording transactions, the security of the systems etc.. For example, Bitcoin uses a consensus protocol called proof of work (PoW). (The main problem that comes with PoW is the amount of energy needed to solve the hash, and the arms race that results. We will come to that later)
While the primary purpose of Bitcoin was to create a new form of digital money that operates outside of government control, people also began to realize that the underlying technology can also be used for other purposes. Ethereum conceived the use of blockchain for storing computer codes that can be used to build immutable and tamper-proof applications on top of it. In simple terms, this means the emergence of a new general purpose computer that is decentralized. Or in other words, platforms like Ethereum are providing blockchain infrastructure as a service so that people can build decentralized applications. These general purpose platforms are referred to as Layer 1. Ethereum, Binance Smart Chain, Solana, Cordana, Polkadot, Neo - all are examples of such Layer 1 blockchains.
Layer 1 platforms can suffer from issues of scalability. This is especially true in the case of Ethereum. Here comes Layer 2 - these are scaling systems for Layer 1. Layer 2 refers to an additional protocol that lies on top of the blockchain system. The goal for these layers is solving transaction speeds and scaling difficulties faced by major cryptocurrency networks, while also providing features such as faster confirmation times or more flexible rules about how transactions can be made relative to their parent chains' ecosystems. Examples are Polygon, Lightning Network, Ethereum Plasma etc..
If you are a non-technical person, here is where all the action and fun is. Layer 3 are decentralized applications built on top of Layer 1/Layer 2. Any project built on top of Ethereum is a Layer 3 application - these applications don’t create their own main net, rather they use one of the existing frameworks (pay the transaction fees) and build on top of it. You would also see specific use-case builders developing their decentralized computers instead of using platforms like Ethereum - or in other words, they build their own blockchains. These blockchains may or may not allow you to build third party decentralized applications on top of it.
You may also hear “Layer 0”. What is it? It's a platform where you can build your own blockchain. Think of it as a whitelabeled solution that doesn't have the heavy lift, like dApps on top of layer 1/2. Polkadot para chains are an example.
Are you building?
As a Web3 builder, there are many different paths you can take: (a) build a Layer 1 for your specific use case or (b) build on top of an existing Layer 1 blockchain (c) build on top of Layer 1 + Layer 2 scalability solutions (d) use Layer 0, build your own Layer 1 for your use case.
(Note: This is intended as a general guide so that non-specialist readers might better understand them - it's not perfect/complete in all respects. So, technical readers, please excuse!)