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Two protocols control 80% of all Ethereum Layer 2 TVL

Two protocols control 80% of all Ethereum Layer 2 TVL


25 January 2023 11:25, UTC


Studying time: ~3 m

Ethereum’s main Layer 2 protocols, Arbitrum and Optimism, surged in reputation in 2022. Mixed, Arbitrum and Optimism account for four-fifths of all worth locked throughout Ethereum’s Layer 2s.

On January 12, these two protocols surpassed Ethereum’s every day transactions — showcasing their scaling potential. Optimism alone processed 800,000 transactions that day.

“Layer 2” refers to off-blockchain scaling options that batch, roll-up, or in any other case improve transaction throughput. Layer 2s use separate protocols from the primary blockchain to course of transactions sooner or cheaper. Finally, all Layer 2-processed transactions settle in batches onto the common, Layer 1 blockchain.

Arbitrum botches main launch, cedes progress to Optimism

One of many major promoting factors of a Layer 2 is cheaper transaction charges. In accordance with Dune Analytics, Optimism’s transaction charges have traditionally remained decrease than Ethereum’s base blockchain. Nevertheless, Arbitrum’s value financial savings lately jumped sharply close to the top of August 2022 and outcompeted Optimism. Since then, Arbitrum has maintained its low-cost lead.

Nevertheless, Arbitrum has struggled to regain credibility after its botched launch of a service known as Odyssey. In accordance with DappRadar, Arbitrum had $1.2 billion in whole worth locked (TVL) on August 29, 2022. Sooner or later later, its TVL plummeted to $125 million and has by no means materially recovered.

Many attribute that precipitous drop to Arbitrum’s unsustainable incentives previous to the launch of Odyssey, which handed out NFTs as rewards for exercise on its platform. That preliminary use case was questionable, as customers had little monetary incentive to stay after they have been paid out.

Arbitrum later paused Odyssey solely. Builders then migrated the primary Arbitrum One platform to Nitro, a separate improve that promised higher throughput, decrease charges, and higher compatibility than Odyssey with Ethereum’s base layer.

Optimism tries the sluggish and regular strategy

In the meantime, Optimism’s TVL grew steadily all through 2022. DappRadar experiences that Optimism has about $650 million TVL at this time.

Much like Arbitrum’s Odyssey NFT, Optimism launched OP Airdrop #1 alongside its Optimism Collective, an try at extra democratic governance of its ecosystem. It additionally launched an incentive program for builders concerned about constructing on its platform. For what it’s value, OP Airdrop #1 didn’t coincide with as dramatic a drop in TVL as Arbitrum’s Odyssey launch.

In distinction to Arbitrum, artificial asset creation protocol Synthetix grew to become one of many first purposes to decide to constructing on Optimism. The variety of transactions on Synthetix has steadily elevated since that dedication, with most occurring on the Optimism platform. Nevertheless, common dollar-denominated buying and selling volumes have halved since their peak six months in the past.

The evolution of Ethereum 2.0: Your questions answered

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In August 2022, researchers at Delphi Digital speculated that Synthetix v3 may construct on different Layer 2 platforms, particularly for atomic swap performance. Synthetix didn’t immediately point out Layer 2 platforms in its documentation for Synthetix v3. It solely stated that builders have been going to rebuild the platform from the bottom as much as account for newer DeFi requirements — not solely closing the door on the chance that it would construct on different platforms like Arbitrum.

In abstract, Arbitrum and Optimism noticed surges of their use in 2022. Regardless of a basic decline in DeFi apps’ TVL, Arbitrum didn’t fully collapse and made it via a botched Odyssey launch, whereas Optimism continues to steadily acquire TVL. These two protocols account for the overwhelming majority of all liquidity backing Ethereum’s second layer scaling options.

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