What do you mean by 3-way link?

A 3-way link as the same suggests involves 3 web-sites.

Let us consider 2 webmasters:
- first webmaster has web-sites A, B
- Second webmaster has web-sites C

If they decide to link as follows:

A -> C
C -> B

This is a 3-way link. Search engines donot like excessive Link exchange.
So this is done hoping that SEs will not be able to identify it as a link exchange.