What you consider to be three-steps will depend on the federation your class belongs to (or belonged to) and the variations that exist within it. From the Encyclopedia of TaeKwon-Do, written by Gen. Choi (one of the original Kwans, and founder of the ITF branch - which variant came first is a political discussion I won't start here), there is a sequence that step sparring goes through (this is going to be VERY abbreviated):
3 step sparring
attacker performs 3 identical attacks, stepping/attacking right, then left, then right again, moving forward. Defender performs 3 identical blocks, moving backward; delivers 1 counter at the end of the sequence, thereby "winning". At it's most basic, the attacker delivers 3 middle obverse punches, the defender blocks with 3 middle obverse inner forearm blocks, and then "wins" with a reverse punch. The primary purpose is to learn distancing. Learned and demonstrated by white and yellow belts.
2 step sparring
Defender requests 2 (usually different) attacks, specifying technique, height and tool. Attacker attacks using those techniques; defender blocks, then counters ("wins") using technique(s) of choice. The primary purpose is to learn how to apply different techniques to different targets. Learned and demonstrated by green and low blue belts.
1 step sparring
Defender requests 1 attack, specifying technique, height and tool. Attacker attacks; defender blocks and counter attacks. The primary purpose is to learn single-strike techniques. Learned and demonstrated by blue and red belts.
Pre-arranged sparring
With a partner, create a 6-8 movement (per person, so 12-18 total movements) set of attack, defend, counter attack, counter defense. The primary purpose is to learn to attack, block, and counter in moving sequence. Learned and demonstrated by red and black belts.
Model 1 step
Uses the same rules as 1 step,
except that all techniques must be repeated at half-speed, for technical proficiency and accuracy. No jump kicking allowed (unless you can do a slow motion jump kick
... in which case, I want to watch and learn!). The primary purpose is to be able to perform all techniques correctly and demonstrate them with technical proficiency. Learned and demonstrated by high red and black belts.
Semi-free sparring
Performed in 2 and 3 step variations. Partners face in L-stance (back stance, fighting stance, whatever you call it); Partner 1 kihaps (yells) and attacks, using any technique. Partner 2 blocks and then attacks using same tool (same meaning either hand or foot). Partner 1 blocks, then attacks using other tool; Partner 2 blocks, counters using same tool. 3 step is the same except that there is a third exchange (tool can be anything). The primary purpose is to be able to respond to less predictable attacks. Learned and performed by red and black belts.
Foot sparring
Follows the same rules as prearranged, except that all techniques must be with the feet. The primary purpose is to be able to attack and block with the feet and legs. Learned and performed by black belts (III Dan and up).
Free sparring
According to the original sequence, free sparring is performed only by seniors. However, free sparring generally begins at white belt and continues all the way up. The primary purpose is to learn to defend yourself in a moving, changing, unpredictable environment.
This is a very brief description of the varieties of step-sparring available for TKD. It is not intended to be technically accurate (although I did try not to allow errors... but it's been a long day, and I didn't go get my Encyclopedia) and there could easily be mistakes - but as a general overview, I hope it helped explain what step sparring is for, and who learns it where in the progression.
Some classes/organizations teach the rules for step sparring and let their students create their own combinations - that's what we do, and I think it forces the students to understand what they're doing, how to apply various techniques, what will and won't work, etc. Others teach preset combinations, usually numbered, and don't teach the rules to make up their own. Some don't teach step sparring at all, or only teach parts of it. Personally, step sparring is one of my favorite parts, but I know a lot of people who don't like the nit-picky nature of some of the rules.
