Crypto: The competitive landscape for Layer 2 solutions is booming

Blockchain technology has attracted massive interest due to the relevance of the solutions it offers. As this interest grows, so does the need to improve the operational efficiency of blockchain networks. In response, Layer 2 scaling solutions have emerged as efficient options. This is particularly true for so-called Layer 1 blockchains such as Ethereum. Thanks to Layer 2 scaling solutions, the challenges associated with Layer 1 blockchains have now been overcome. However, the growing adoption of Layer 2 solutions has given rise to a complex and competitive landscape. A dynamic marked by the emergence of several projects proposing varied approaches to solving scaling problems. At a time when the market for Layer 2 solutions is facing numerous challenges, an analysis of the key dynamics of this market is essential.

Layer 2: what is it, concretely?

In a recent analysis, we spoke of challengers threatening to dethrone Ethereum as Layer 1 market leader. To fully understand the Layer 2 protocol, we need to return to the notion of Layer 1.

Layer 1 is not unrelated to Layer 2, the subject of this analysis. The link between these two notions lies in their interaction within the ecosystem of blockchain technology.

As a reminder, Layer 1, also known as the “first layer”, refers to the main blockchain itself. It is in fact the fundamental crypto infrastructure where transactions and smart contracts are validated, recorded and then secured. This, via consensus mechanisms, such as proof-of-work (PoW) or proof-of-stake (PoS).

But Layer 1 blockchains have functional limitations. They may therefore encounter restrictions. Their operational processing capacity is not optimal. The same applies to the transaction fees they charge. These are generally high, while transaction validation times are longer.

Layer 2 blockchains have been designed to overcome these obstacles to Layer 1 operation. They incorporate various scaling solutions to reduce the workload on the main blockchain. This is achieved by moving certain activities off the main blockchain. What’s more, Layer 2 protocols work in synergy with the Layer 1 blockchain.

As you can see, Layer 2 blockchain marks a major technological advance. This progress has been made against a backdrop of strong demand for efficient, scalable blockchain infrastructure. A unique set of assets that explain the sustained growth of the Layer 2 protocol market.

🔢[Ranking] TOP 5 Layer-2s With Highest #TVL | by @l2beat

1️⃣ @arbitrum: $5.6B
2️⃣ @optimismFND: $2.6B
3️⃣ @zksync: $405M
4️⃣ @dYdX: $338M
5️⃣ @BuildOnBase: $236M#Ranking #Layer2 #TVL pic.twitter.com/442ZaDDUdi

— BASE Daily News 🛡️ | #BuildOnBASE (@BuildOnBaseNews) August 22, 2023

Layer 2: current market trends and statistics

The market for Layer 2 protocols is extremely dynamic. And it’s growing steadily. Here are a few key figures to illustrate this dynamism.

The total blocked value (TVL) of Layer 2 protocols is worth over $10 billion.

Crypto-data provider Datawallet notes the growth of Layer 2 solutions within the Ethereum ecosystem. This evolution is remarkable when we look at the total value locked (TVL) linked to this technology.

Since Tuesday, August 8, it has exceeded $10 billion in value. Layer 2 scaling solution Arbitrum One leads this trend, with a TVL of $6.01 billion, for a market share of 56.98%.

Arbitrum One is followed by OP Mainnet, which accounts for 27.01% of the market, with a TVL of $2.85 billion. With a market share of 4.06%, the Layer 2 zkSync protocol comes in 3ᵉ position. Its TVL is estimated at $429 million. It is $337 million for dYdX, which captures 3.19% market share. Base closes the game, retaining just 1.37% market share with a TVL of $145 million.

Layer 2 protocols massively adopted by centralized exchanges (CEX)

According to Datawallet, Layer 2 scaling solutions are currently very popular. This is particularly true of CEXs such as Binance and Coinbase. The latter, for example, has introduced its basic Layer 2, a rollup using the OP stack. Crypto derivatives exchange Bybit has done the same with Mantle.

The list is by no means exhaustive. But these examples of major exchanges maneuvering around Layer 2 reflect the growing importance of this technology. This is helping to reinforce the scalability and efficiency of the crypto ecosystem.

Trend towards Layer 2 solutions

Layer 2 scaling solutions are technically so powerful that alternative Layer 1 blockchains are migrating to them. This is the case, for example, with Celo, a blockchain project developed by CLabs.

According to Datawallet, this migration dynamic is not just a question of interoperability. Basically, it’s financial motivations, and in particular cost-efficiency, that underpin the adoption of Layers 2.

By opting for this technological solution, crypto firms want to avoid the expense of issuing rewards. To achieve this, they want to take advantage of Ethereum’s network security. A strategy that promises to improve liquidity sharing, developer experience and recognition of Layer 2’s economic benefits. Moreover, this choice enables Layer 1 blockchains to allocate substantial resources to innovation. A policy that marks a turning point in the evolution of blockchain.

Conclusion

It has to be said that Layers 2 protocols are tending to redefine the crypto market, particularly that of Ethereum. This, by offering improved scalability that reduces transaction costs. Clearly, Layer 2 solutions are spearheading the evolution of the Ethereum ecosystem. However, as with any emerging technology, there are hurdles to overcome. In particular, there are potential centralization issues. Users and developers need to remain vigilant and understand the subtleties of each Layer 2 solution. A strategic choice that should enable them to make informed choices.