The below is the sample XML code implemented for 3 level cascade dropdown options.
<attribute displayName="Classification" id="customAttributes.string2" editable="true" required="true" type="dependentcombobox">
<options editable="true" selectLabel="Select Classification" createLabel="Please specify">
<values>
<item value="Event of Interest" displayName="Event of Interest">
<options>
<values>
<item value="Potential Incident" displayName="Potential Incident">
<options>
<values>
<item value="A" displayName="A"/>
</values>
</options>
</item>
<item value="Potential Vulnerability" displayName="Potential Vulnerability">
<options>
<values>
<item value="AA" displayName="AA"/>
</values>
</options>
</item>
</values>
</options>
</item>
<item value="Incident" displayName="Incident">
<options>
<values>
<item value="Tuning Opportunity" displayName="Tuning Opportunity"/>
</values>
</options>
</item>
</values>
</options>
</attribute>
<attribute id="customAttributes.string1" displayName="Event Type" hidden="false" required="true" type="dependentcombobox" referToAttribute="customAttributes.string2">
</attribute>
<attribute id="customAttributes.string3" displayName="Level" hidden="false" required="true" type="dependentcombobox" referToAttribute="customAttributes.string1">
</attribute>
And the same way we can do for 2 levels as well.
<attribute displayName="Country" id="customAttributes.string4" editable="true" required="true" type="dependentcombobox">
<options editable="true" selectLabel="Select Country" createLabel="Please Select">
<values>
<item value="India" displayName="India">
<options>
<values>
<item value="Delhi" displayName="Delhi"/>
<item value="Mahras" displayName="Mahras"/>
<item value="AP" displayName="AP"/>
<item value="Bihar" displayName="Bihar"/>
</values>
</options>
</item>
<item value="US" displayName="US">
<options>
<values>
<item value="Calif" displayName="Calif"/>
<item value="NY" displayName="NY"/>
<item value="LA" displayName="LA"/>
</values>
</options>
</item>
</values>
</options>
</attribute>
<attribute id="customAttributes.string5" displayName="State" hidden="false" required="true" type="dependentcombobox" referToAttribute="customAttributes.string4">
</attribute>