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Impressive Growth in Layer 2 Activity Indicates Future Trends

by Sam White
  • Increases in the amount of Ether spent on Layer 2 activity show a continuously growing trend.
  • Layer 2 solutions are key to Ethereum scaling, but alternative Layer 1s provide competition.
Ethereum
AFP
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We may be in a bear market, but not everything is contracting, and if you want to see some remarkable growth taking place, then look no further than the amount of Ethereum gas spent on Layer 2 transactions.

ETH spending indicates an ongoing, impressive increase in Layer 2 activity throughout 2021, hitting new heights through 2022, and providing what may be an indicator of trends to come next year, and beyond.

What Are Layer 2s?

Ethereum is the number two blockchain after Bitcoin, and serves a different intended purpose, operating as the architecture on which decentralized applications can be built.

However, it suffers from scaling problems. When the Ethereum network is busy, it becomes congested, and transaction costs (the infamous gas fees) surge.

What’s more, as the price of ETH itself rises, so do dollar-denominated transaction costs, since ETH is what’s used to pay those transaction costs. This creates a network that becomes more expensive to use as its popularity grows and if more people choose to invest in its tokens.

Layer 2 protocols aim to solve these problems by finding ways to ease the network load. Essentially, and through various methods, they take transactions off the main network, improving speed and massively lowering costs, before finally settling back on the main Ethereum blockchain.

Through Layer 2 solutions, Ethereum should be able to properly scale, and so there’s fast-moving competition to become established as the best Layer 2 option.

Which Layer 2s Stand Out?

Arbitrum, Optimism, zkSync and StarkNet are four well-known Layer 2s that are often compared. Looking at the total value bridged by each of these protocols, we find that Arbitrum is establishing a clear dominance, with more than four times the amount of the nearest competitor, Optimism (over 2 million ETH bridged, compared to less than 500,000 ETH).

Polygon has recently become the Layer 2 choice for an impressive number of globally recognized traditional brands and platforms that are looking to expand into web3 and NFTs (including companies such as Starbucks, Meta and Reddit), and Polygon is also very active when it comes to blockchain gaming.

Immutable X is specifically focused on gaming and NFTs, and could potentially carve out its own, distinct niche.

Metis is a scaling solution that additionally aims to improve on the DAO concept, turning it into something more substantial via what it calls a DAC.

While a DAO is a Decentralized Autonomous Organization, and can tend to be nebulous and, arguably, limited in its functions, a DAC is a Decentralized Autonomous Company, meaning a decentralized entity that can perform the functions of a regular company, taking on the best of both worlds.

Among the list of relatively well-known Layer 2s, there is also Loopring, an efficient system that provides the rails for a decentralized exchange of the same name.

Ethereum Is Scaling

When Ethereum switched successfully to proof-of-stake, there was no reduction in its gas fees, and in fact, the Founder of Ethereum, Vitalik Buterin has indicated that in order to scale (and avoid those fees), Layer 2 solutions will be key.

It appears now that those solutions are finally taking off, which is positive news for Ethereum itself. At this point, it seems reasonable to observe that Ethereum has captured network effects and first mover advantage when it comes to smart contract technology, and should be looking now to build on that, a stage which Layer 2s can enable.

As the web3 narrative continues to develop, the Ethereum network can remain at its core, as it has the most developer activity, and ETH is the only cryptocurrency besides Bitcoin that is not obscure to those not involved in crypto.

ETH is also the only crypto other than Bitcoin that can be seen as a relatively conservative digital asset to keep hold of for the long term, giving an indication of the secure reputation that Ethereum has now established.

Alternative Layer 1s

Although Ethereum is dominant and should remain so, it would be inaccurate to claim that there is no future for any alternative Layer 1s. What is meant by alternative Layer 1, is a straight competitor to Ethereum, offering similar capabilities but without the gas fee and scaling issues.

It looks plausible that as Layer 2s compete to make Ethereum function more efficiently, a few Layer 1s will stick around as ready-to-go working alternatives to the entire Ethereum ecosystem.

In this box, Cardano and Solana are perhaps the most prominent options. Cardano isn’t favored with the VC contingent, as evidenced when it is sometimes overlooked for analysis. However, it works, it is genuine about decentralization, and it is not tainted by association with notorious, collapsed crypto platforms.

What’s more, Cardano has now survived near the top since 2017, throughout all seasons, euphoric and catastrophic, of the merciless crypto cycles.

In terms of its characteristics, Solana is at the other end of the scale: a newcomer, speedy and slick when it works, but prone to breakdowns. On top of that, it has a questionable commitment to decentralization and is associated with the fallen Founder of FTX, Sam Bankman-Fried.

Nonetheless, Solana has a very high profile and has excelled at maintaining an active developer community, particularly around NFTs, and the network’s uptake and activity cannot be overlooked when thinking long term, despite recent turbulence.

We may be in a bear market, but not everything is contracting, and if you want to see some remarkable growth taking place, then look no further than the amount of Ethereum gas spent on Layer 2 transactions.

ETH spending indicates an ongoing, impressive increase in Layer 2 activity throughout 2021, hitting new heights through 2022, and providing what may be an indicator of trends to come next year, and beyond.

What Are Layer 2s?

Ethereum is the number two blockchain after Bitcoin, and serves a different intended purpose, operating as the architecture on which decentralized applications can be built.

However, it suffers from scaling problems. When the Ethereum network is busy, it becomes congested, and transaction costs (the infamous gas fees) surge.

What’s more, as the price of ETH itself rises, so do dollar-denominated transaction costs, since ETH is what’s used to pay those transaction costs. This creates a network that becomes more expensive to use as its popularity grows and if more people choose to invest in its tokens.

Layer 2 protocols aim to solve these problems by finding ways to ease the network load. Essentially, and through various methods, they take transactions off the main network, improving speed and massively lowering costs, before finally settling back on the main Ethereum blockchain.

Through Layer 2 solutions, Ethereum should be able to properly scale, and so there’s fast-moving competition to become established as the best Layer 2 option.

Which Layer 2s Stand Out?

Arbitrum, Optimism, zkSync and StarkNet are four well-known Layer 2s that are often compared. Looking at the total value bridged by each of these protocols, we find that Arbitrum is establishing a clear dominance, with more than four times the amount of the nearest competitor, Optimism (over 2 million ETH bridged, compared to less than 500,000 ETH).

Polygon has recently become the Layer 2 choice for an impressive number of globally recognized traditional brands and platforms that are looking to expand into web3 and NFTs (including companies such as Starbucks, Meta and Reddit), and Polygon is also very active when it comes to blockchain gaming.

Immutable X is specifically focused on gaming and NFTs, and could potentially carve out its own, distinct niche.

Metis is a scaling solution that additionally aims to improve on the DAO concept, turning it into something more substantial via what it calls a DAC.

While a DAO is a Decentralized Autonomous Organization, and can tend to be nebulous and, arguably, limited in its functions, a DAC is a Decentralized Autonomous Company, meaning a decentralized entity that can perform the functions of a regular company, taking on the best of both worlds.

Among the list of relatively well-known Layer 2s, there is also Loopring, an efficient system that provides the rails for a decentralized exchange of the same name.

Ethereum Is Scaling

When Ethereum switched successfully to proof-of-stake, there was no reduction in its gas fees, and in fact, the Founder of Ethereum, Vitalik Buterin has indicated that in order to scale (and avoid those fees), Layer 2 solutions will be key.

It appears now that those solutions are finally taking off, which is positive news for Ethereum itself. At this point, it seems reasonable to observe that Ethereum has captured network effects and first mover advantage when it comes to smart contract technology, and should be looking now to build on that, a stage which Layer 2s can enable.

As the web3 narrative continues to develop, the Ethereum network can remain at its core, as it has the most developer activity, and ETH is the only cryptocurrency besides Bitcoin that is not obscure to those not involved in crypto.

ETH is also the only crypto other than Bitcoin that can be seen as a relatively conservative digital asset to keep hold of for the long term, giving an indication of the secure reputation that Ethereum has now established.

Alternative Layer 1s

Although Ethereum is dominant and should remain so, it would be inaccurate to claim that there is no future for any alternative Layer 1s. What is meant by alternative Layer 1, is a straight competitor to Ethereum, offering similar capabilities but without the gas fee and scaling issues.

It looks plausible that as Layer 2s compete to make Ethereum function more efficiently, a few Layer 1s will stick around as ready-to-go working alternatives to the entire Ethereum ecosystem.

In this box, Cardano and Solana are perhaps the most prominent options. Cardano isn’t favored with the VC contingent, as evidenced when it is sometimes overlooked for analysis. However, it works, it is genuine about decentralization, and it is not tainted by association with notorious, collapsed crypto platforms.

What’s more, Cardano has now survived near the top since 2017, throughout all seasons, euphoric and catastrophic, of the merciless crypto cycles.

In terms of its characteristics, Solana is at the other end of the scale: a newcomer, speedy and slick when it works, but prone to breakdowns. On top of that, it has a questionable commitment to decentralization and is associated with the fallen Founder of FTX, Sam Bankman-Fried.

Nonetheless, Solana has a very high profile and has excelled at maintaining an active developer community, particularly around NFTs, and the network’s uptake and activity cannot be overlooked when thinking long term, despite recent turbulence.

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