Ethereum

Unleashing the Potential: Layer 2 Networks Surpass $13 Billion TVL, Yet Hurdles Persist

Ethereum Layer 2 Networks Reach $13 Billion in Total Value Locked

Ethereum layer 2 networks have achieved a significant milestone, with a total value locked (TVL) of $13 billion in their contracts, according to data from blockchain analytics platform L2Beat. This growth in interest in layer 2s is expected to continue, although challenges in user experience and security still remain.

The Rise of Layer 2 Networks

There are currently 32 different networks that qualify as Ethereum layer 2s, including Arbitrum One, Optimism, Base, Polygon zkEVM, Metis, and others. Prior to June 15, these networks had less than $10 billion of cryptocurrency locked within their contracts, and their combined TVL had been declining since April. However, from June 15 onwards, layer 2 TVL growth turned positive, reaching a new high of nearly $12 billion by October 31. The investment in layer 2 apps continued to climb, surpassing the $13 billion TVL mark on November 10.

This rise in TVL is particularly remarkable when compared to the rate during the bullish market of 2021. At that time, when the market cap of all cryptocurrencies reached an all-time high, layer 2s had less than $6 billion locked within their contracts. Today, even with a more modest total market cap of cryptocurrencies, the TVL of layer 2s is greater than ever.

The Appeal of Layer 2s

Metis CEO Elena Sinelnikova suggests that Ethereum’s high gas fees during the bull market had a lasting impact on users, leading to a desire for alternatives as demand returned. Ethereum’s scalability issues resulted in slow and expensive transactions, making it unsustainable for many users. Layer 2 networks have provided a solution with lower fees and faster transactions.

In addition, successful marketing efforts by layer 2 development teams have attracted high user activity, resulting in high yields. Users are drawn to layer 2s for the potential for big returns in decentralized finance (DeFi).

Challenges for Layer 2s

While layer 2s have experienced significant growth, they still face challenges, particularly in user experience. Optimistic rollup networks, for example, require users to wait 7 days for a withdrawal to be processed, which can be frustrating. On the other hand, newer zero-knowledge (ZK) proof networks can process withdrawals instantly but are still in early stages of development and may experience more crashes.

Centralization is another challenge for layer 2s. The use of centralized sequencer nodes for transaction processing raises concerns about potential censorship or government interference, which contradicts the core principles of decentralization and trustlessness in the blockchain space.

The Future of Layer 2s

Despite the challenges, layer 2 networks are expected to continue growing. The competition from layer 2s may also drive improvements in layer 1 networks, leading to higher scalability and throughput at the foundational layer. This refocus on true scalability paired with low gas fees may reduce the need for layer 2s in the future.

As layer 2 networks gain traction, more projects are entering the space. Crypto exchange OKX recently announced that it is building a layer 2, and there are rumors that Kraken is also working on one.

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