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Layer 2s are having a moment.
We’ve been talking about the potential of L2s for multiple years now and finally, their time has come.
In just the last 7 days, L2s have enabled Ethereum to scale to a factor of 5x and we’re only just getting started!
Moreover, L2s on Ethereum are securing more assets onchain than Solana, Avalanche, Cardano and even Binance Smart Chain… combined!
But why are they winning by so much?
It’s simple.
L2s on Ethereum provide fast and cheap transactions, just like Solana and Avalanche, however L2s do it with the settlement guarantees and the decentralization of Ethereum (PSA: L2s are not yet fully decentralized, but they are moving towards it).
This is something that Alt L1s just can’t compete with.
Not only that, but Ethereum L2s benefit from the network effects that Ethereum has created over its last 8 years of growth.
Developers, users, applications and liquidity from Ethereum will flow to its L2s, and amongst L2s, much easier than with other L1s.
It’s safe to say that Ethereum and its scalability roadmap via L2s has already won the smart contract blockchain wars. That’s not to say other L1s won’t survive, but the king remains in the Ethereum ecosystem.
The question we should be asking now is not what L1 is going to win, but instead, which L2 is going to win?
In the Ethereum ecosystem, there’s already 50+ Layer 2s live on mainnet executing transactions to Ethereum.
With many many more on the way (upcoming projects via L2beats.com)…
Of course, the most notable as of late being Base, an L2 launched by the publicly traded company, Coinbase.
In less than 1 week since going live to the public, Base has managed to accumulate more than $200 Million in total value locked. Putting it 5th for the most value locked amongst all L2s.
And already more than Cardano who has been around since 2017! 🤯
While 50+ L2s may seem like a lot, I believe there will be 1000s of L2s within the next couple years and millions over the coming decade.
L2s are a very exciting space for blockchain development and the overall web3 space.
They provide a much needed product (inexpensive & decentralized blockspace) with a profitable business model to go with it (more on this later).
In today’s report, we are going to take a snapshot of the current L2 ecosystem and breakdown who’s currently winning, what types of onchain activity are happening and where, as well as dive into the economics of L2s.
By understanding these numbers, we can get a better idea of where to put our attention in terms of building on and/or investing in L2s.
In next week's report, we will combine this data with a deep dive on the tokenomics of popular L2s and look into the value accrual components of L2 tokens.
Ok, let's dive into it!
The Top L2s In The Ethereum Ecosystem Currently
Much of the L2 ecosystem is still in Beta or only recently launched.
That said, there are a few ‘OGs’ which we are going to focus most of this report on. The 4 we will focus on today are:
- Arbitrum
- Optimism
- Polygon POS (currently an L1, but planning to merge into an L2 within the next 6 months)
- Immutable
Why are we choosing these 4?
With more than 86% market share of the total value locked on L2s, Arbitrum and Optimism are the clear leaders currently in the L2 ecosystem. They're also the 2 general purpose L2s that have been around the longest, launching back in September of 2021.
While Polygon POS is not yet an L2, if it were it would be 3rd on this list in terms of TVL. It’s also already near the top across L1s and L2s for almost every other metric, including users, transactions and onboarding the biggest brands into the space.
And finally, Immutable, one of the first Zero Knowledge Proof (ZK) rollups to go live on Ethereum. While Immutable sits only 7th in terms of TVL, their focus is not on accruing locked value from things like DeFi, instead they are focused on being the premier blockchain for gaming and NFTs.
This is important to keep in mind throughout this report. Finally, because Immutable uses ZK, the onchain data we have is limited and separate from the others.
In case you’re wondering, below is a list of other notable L2s in the Ethereum Ecosystem broken down by the 2 main types of L2s - zk proofs and optimistic rollups.
Zero Knowledge proofs are the next big innovation in blockchain. We are still waiting for general-purpose blockchains using ZK tech to go fully live and become scalable, but the leaders in this space so far are:
- ZkSync Era
- Starknet
- Polygon ZkEVM
In terms of competitors to Optimism and Arbitrum, which both use optimistic rollups, there are only a couple that might have legs to compete at the current moment:
- Base - Launched on August 9 by Coinbase
- Mantle - Launched on July 17 by a massive community with a treasury in the Billions
There are many others, but these are the leaders of the pack so far. I’m sure there will be plenty of competition and innovation in this space, so this may change very quickly!
In the meantime, let’s dive into the activity across the top 4 L2s.
Onchain Activity Across Top L2s
While TVL is a nice metric to show off, it’s actually more of a vanity metric than anything.
Blockchains rely on fees to generate revenue and become profitable, not value locked. Value that’s locked technically has no value to a blockchain, instead, it’s the value being moved that truly matters.
So instead of looking at TVL (which is what most chains and people flaunt on Twitter) we need to be looking at transactions, contracts deployed, users, and then ultimately, fees generated.
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