Adoption of Layer 2 Protocols Could Drive Crypto’s Next Tipping Point

Adoption of Layer 2 Protocols Could Drive Crypto’s Next Tipping Point

A mysterious Redditor has made a data-driven prediction that the next major phase of development in the blockchain space will be in layer 2 solutions, primarily Ethereum.

The May 22 post explains that “we are at a tipping point” where the industry is moving away from bridging L1 (layer 1) blockchains towards L2 (layer 2) blockchains, which are “from the start, more secure and decentralized than L1 altcoins and are built to utilize sound money on a credibly neutral platform.”

“L2 adoption is happening now, albeit slow and bursty. Behind the scenes, L2s are improving reliability, lowering fees, and increasing affordability. L2s continue to build and improve, and that’s fantastic.”

An L2 scaling solution takes advantage of the security of an L1 chain like Ethereum and relieves traffic on it by “rolling” a number of transactions into a single packet so that they are settled at once.

Other L1 chains like Solarium, that brags about relatively cheap and fast transactions, they have garnered support from users who are put off by high fees.

The average Solana (SOL) transaction costs around $0.0025, while Ether (ETH) transactions cost around $1.30 at time of writing. Despite that wild disparity, demand for Ethereum’s block space has remained overwhelmingly dominant, with its $73.89 billion total value locked (TVL) surpassing Solana’s $4.24 billion, according to blockchain tracker DefiLlama. Also, Solana has had reliability issues recently.

At the close of this edition, Arbitrum is the largest Ethereum L2 solution with $2.65 billion in TVL, according to L2beat. The entire Ethereum L2 ecosystem has a TVL of $4.77 billion. These numbers may be poised for an explosion if the right forces conspire to drive users and capital away from other L1s.

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Several of the leading decentralized applications (DApps) are already deployed in L2 solutions. Decentralized exchanges (DEX) SushiSwap and yield aggregator Curve are on Arbitrum. For its part, the crypto derivatives protocol Synthetix and the DEX Uniswap are in Optimism.

The Optimism airdrop could mark the start of a rapid influx of users to L2. This may be due to the same network effects that attracted users to the protocols of decentralized finance (DeFi) based on Ethereum and Ethereum Virtual Machine (EVM) for the last two years.

Optimism is an L2 with USD 474 million in TVL. EVM chains are those that are compatible with Ethereum token standards, such as Binance Chain (BNB), Polygon (MATIC) and Fantom (FTM).

Ultimately, if there is an increase in the utility of L2, Ethereum’s L1 will have a natural increase in usage, which could further solidify Ethereum as the world’s leading decentralized application and smart contract platform.

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