Leveraging Layer 3 Infrastructure to Enhance DeFi Security: A Case Study

What do we know about decentralized finance? It’s open source and non-custodial. It’s diverse, globally accessible, and financially empowering. It’s a whole bunch of good things, which is why it’s now a trillion-dollar industry and the center of much of the innovation occurring in web3.

But there are also some less savory things we know about DeFi. Like the fact that it’s bedeviled by security concerns. From hacks to scams and vulnerabilities to exploits, DeFi is a battleground that serves up a steady stream of corpses. Newbs wrecked by clicking phishing links; seasoned vets wrecked by wallet draining exploits; well-funded and well-audited protocols wrecked by flash loan attacks. The list goes on.

At least $6B has been drained from DeFi protocols to date, and that doesn’t include the users whose wallets have been emptied through an array of attacks, some sophisticated, many basic. That DeFi has a security problem is no secret. But to the industry’s credit, it’s not as if they’ve been ignoring it: hundreds of millions of dollars of investment has poured into shoring up DeFi over the last two years, and a good chunk of it has been directed up the stack to Layer 3.

It’s here that some of the greatest progress is being made in fostering a more secure onchain landscape as a closer examination of one project in particular shows – Orbs. It characterizes the sort of gains that L3 technology is bringing to DeFi, particularly when it comes to security.

Security-as-a-Service on Layer 3

Orbs’ L3 infrastructure, secured by a Proof-of-Stake (PoS) network, adds a crucial layer of trustless computation. Unlike Layer 2 solutions like zk-rollups, which focus on scalability and privacy, Orbs decentralizes execution logic itself, providing a critical safeguard for protocols handling high-value transactions. 

Traditional blockchain architecture executes critical operations onchain, exposing them to attacks if vulnerabilities are exploited. Orbs acts as an intermediary execution layer, facilitating complex logic and scripts beyond the native functionalities of smart contracts. This frees DEXs and L2s from having to do the heavy lifting. Rather than coding or modifying unproven smart contracts, they can connect to a battle-tested solution that can be integrated with just a few lines of code.

Not only does this approach reduce the likelihood of DEXs introducing critical errors into homespun code, but it provides them with better tooling to mitigate some of the most persistent threats faced by onchain traders. Like front-running, where malicious actors manipulate transaction order to their own economic interests. Orbs combats this by handling transaction logic off-chain, where it can implement more robust order-matching and validation processes. Once finalized, results are anchored to L1, ensuring transparency without exposing operations to mempool machinations.

Institutional-Grade Security

We often hear the term “institutional-grade” bandied about in blockchain, particularly when it comes to describing custody or security standards. But what does this actually mean? In practice, it means securing protocols with the same standards that the best enterprises in the field adhere to. It means having security so robust – and demonstrably so – that professional firms would feel comfortable placing millions of dollars into them.

Because for institutional players, trust and reliability are non-negotiable. Orbs’ L3 provides a decentralized and resilient framework for executing high-value transactions, addressing the stringent security standards required by professional and institutional investors. This makes DeFi a more attractive proposition for large-scale capital deployment.

While security is paramount, this can’t come at the expense of efficiency. Orbs strikes a balance by enabling complex computations to run off-chain while maintaining full transparency onchain. Outcomes from Orbs’ computations are periodically recorded on L1, ensuring an immutable and auditable trail. This approach not only reduces costs but also preserves the trustless nature of DeFi. Additionally, Orbs supports advanced use cases like automated liquidations, multi-step trading strategies, and cross-protocol logic, all of which benefit from the reduced latency and cost-efficiency of L3 execution.

Optimizing for Security

One of the reasons why L3s are able to optimize for security is because they operate as operation-specific chains. Or “application-specific” as they’re often described. Layer 1s are public hubs that are frequented by everyone and used for everything. L3s, in comparison, aren’t populated by hundreds of dapps and dozens of use cases – as well as millions of users – all fighting for space.

This also makes them less subject to opportunistic attacks from hackers, who are drawn to general-purpose networks where opportunities are more numerous and there’s anonymity in numbers. From the perspective of DEXs and perps protocols, integrating a dedicated L3 for order execution minimizes the likelihood of exploits, and allows them to focus on core competencies like improving UX and adding new features.

Layer 3 as the Backbone for DeFi

As DeFi continues to expand vertically and horizontally, the need for specialized infrastructure to support its growing complexity is evident. Layer2 solutions have been instrumental in enhancing scalability, but they cannot address all challenges, particularly those related to execution logic and security. Layer 3 fills this gap, enabling the creation of more secure applications that aren’t reliant on untested code.

Decentralized order execution on L3 also reduces the attack surface and provides tamper-resistant operations. By offloading complex logic from L1 and L2, network resources are freed up for other transactions, while benefiting from the speed and omnichain compatibility that are Layer 3’s defining traits.  As DeFi continues to evolve, so must the infrastructure that underpins it. As a new wave of chain-agnostic layers is now demonstrating, the best place for this to be done is on Layer 3. It’s the backbone that gives decentralized finance its flexibility.