Ethereum Layer 2 activity at all-time high: L2s now the norm.

Ethereum Layer 2 activity at all-time high: L2s now the norm.

The Rising Tide of Layer 2 Solutions in the Blockchain Industry

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The Ethereum blockchain has established itself as the epicenter of the decentralized finance (DeFi) sector, hosting a plethora of blockchain projects and decentralized applications (dApps). These applications leverage the Ethereum blockchain to offer a wide array of services in finance, trading, gaming, non-fungible tokens (NFTs), and many more. Some prominent projects operating on Ethereum include UniSwap, AAVE, GMX, Chainlink, OpenSea, StrongBlock, Tether, 1Inch V4, Ethichub, Zeroex, and Otherdeed. However, the exponential growth and success of these DeFi platforms have put significant strain on the Ethereum network’s ability to process transactions efficiently, resulting in longer confirmation times and higher fees.

To address scalability and speed issues, Ethereum has turned to secondary blockchains, known as layer 2 scaling solutions, built on top of its mainnet. These layer 2 scaling solutions relieve the Ethereum network’s burden and help expedite transaction times while reducing costs, all while maintaining the same level of security. Bruno Faviero, CEO of token management platform Magna.so, describes layer 2s as “a hotbed of innovation enabled by lower gas fees, scalability, modularity, and the ability to choose different security tradeoffs.” These layer 2 solutions have gained significant traction due to their ability to offer superior throughput and transaction speeds, resulting in their activity surpassing Ethereum’s mainnet by a factor of 5x.

Layer 2 Activity Overreach Ethereum by a Factor of 5x

Image Source: L2beat

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The activity across layer 2 networks is booming, with the combined L2 throughput surpassing that of the Ethereum mainnet by 5 times. According to data from L2beat, the weekly average scaling throughput of Ethereum’s layer 2 ecosystem has hovered around 50 transactions per second (TPS) since early August, while the Ethereum mainnet’s throughput has remained at around 11 TPS. This signifies a 5x scaling factor for the leading blockchain. Fakhul Miah, Elastos’ global head of growth, points out that Polygon, Arbitrum, Optimism, and Base have attracted a significant number of users and total value locked (TVL), with developers appreciating the speed and cost improvements offered by these layer 2s while preserving the security from the layer above. L2beat data also reveals that the TVL on Ethereum scaling solutions has more than doubled in value since the beginning of the year, currently reaching $9.47 billion. Arbitrum leads the pack with $5.6 billion TVL, followed closely by Optimism with $2.6 billion. zkSync, dYdX, and Base secure the other positions.

As Elena Sinelnikova, co-founder of the MetisDAO Foundation, which introduced the Metis Layer 2 Ethereum scalability solution, points out, airdrops have been one of the primary driving forces behind the lion’s share of volume in the layer 2 space. The surge in airdrop farmers “rotating” through the various new chains has given rise to a substantial amount of airdrop farming. This activity supports the notion that engaging extensively with layer 2s as a crypto user may be the most profitable endeavor with minimal risk.

Emerging Layer 2 Blockchains Take The Spotlight

Image Source: L2beat

Emerging contenders in the layer 2 space have been gaining notable traction, challenging the established dominance of incumbents like Arbitrum and Optimism. These newly launched scaling solutions have managed to hit 1 million users in fewer days compared to their predecessors. Leonard Tan, CTO and co-founder at Web3Auth, notes the remarkable growth rate of weekly transactions on Base, stating that BASE’s on-chain summer progress has been astounding, considering the prevailing market conditions. Friend.tech, an application enabling users to trade tokens associated with public Twitter profiles, has significantly contributed to the rising activity on Base. Beyond Base, Arbitrum stands as the third most active layer 2 network, followed by Starknet and Optimism. While newer players gain prominence, Arbitrum and Optimism still dominate the layer 2 landscape, collectively accounting for over 80% of the nearly $10 billion TVL within layer 2 networks.

According to Fakhul Miah, Arbitrum leads in terms of developer experience as it allows developers to run unmodified Ethereum Virtual Machine (EVM) contracts and transactions on a second layer. Polygon, on the other hand, provides flexibility and enterprise adoption. Sinelnikova highlights that Optimistic and Zk rollups lead in terms of technology. Zk proofs introduce complex mathematical techniques to provide proof of true and correct information, eliminating the need for game theory and incentives to detect malicious actors. However, this comes at the cost of sacrificing instant confirmations and lightning-fast speeds from a UX perspective, albeit gaining significantly faster finality.

Have Layer 2s Become the New Norm?

Image Source: Alchemy

The massive popularity of layer 2 solutions suggests that these blockchains have become the new norm within the Ethereum ecosystem. According to a report by Alchemy, the first quarter of 2022 witnessed a significant increase in bridging transactions to layer 2 networks, with users bridging over $635,000 worth of crypto assets, marking a 44% increase compared to Q4 2022 and a staggering 518% increase compared to Q1 2022. The number of users performing these transactions surpassed 635,000, whereas only 103,000 users bridged to layer 2s during the same three-month period the year before. The deployment of smart contracts related to layer 2s also increased by 160% compared to Q1 2022. Sinelnikova believes that unless there is a breakthrough innovation that eliminates the need for layer 2s altogether, they will continue to hold the position of “norm” within the industry. She further asserts that even as Ethereum scales through sharding and other mechanisms, it will still be much more expensive compared to layer 2s. Layer 2s have the potential to become the primary layer for most value transfers and DeFi activity, serving as the hub for the emerging Web3 economy.

In conclusion, layer 2 solutions have brought scalability, faster transaction speeds, and lower costs to the Ethereum blockchain, alleviating the strain on the mainnet caused by the growth of DeFi platforms and dApps. With the exponential increase in activity across layer 2 networks, it is evident that they have become a vital part of the blockchain industry’s landscape, offering significant benefits to both users and developers. As the industry continues to evolve, layer 2 solutions will likely play an integral role in shaping the future of decentralized applications and finance.

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