Ethereum’s Layer-2 Dominance Grows: An Insight

Updated: 10 October 2023

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According to a recent report by Messari on the State of Ethereum, 61% of all transactions were conducted on Ethereum’s Layer-2 networks in the third quarter. This growth was majorly influenced by Base’s dramatic launch and the rising demand for the Friend.tech social token platform.

It is still a bear market, and interest and enthusiasm across the board is low.

Kunal Goel, Messari’s senior research analyst, expressed his astonishment at the combined success of both platforms. In an interview with publication Decrypt, Goel mentioned that Base’s rapid rise showcases how a single app can revolutionize the trajectory of any blockchain. He further elaborated on the challenges new chains face, often termed the “cold start problem”. Yet, for Base, the alignment with Friend.tech played a significant role in attracting a plethora of users and capital. Goel emphasized that the decision of Friend.tech to launch on Base was pivotal.

However, Goel also conveyed his concerns, and said that the current bear market keeps overall interest and enthusiasm dampened.

Base, a project nurtured by Coinbase, has marked notable growth since its early August commencement. As per data from a Dune dashboard by 21.co, Base boasts a total value locked (TVL) of $448 million, positioning it as a frontrunner in layer-2 solutions, only surpassed by Arbitrum, Optimism, and zkSync Era. Notably, Arbitrum remains the favorite for Ethereum users, recording an average of 600,000 daily transactions. However, Base and Optimism have begun challenging Arbitrum’s dominance, leading to a 36% drop in its network activity in Q3.

Additionally, data from 21.co’s Dune dashboard highlights Arbitrum’s $4.22 billion TVL lead. Its closest competitor, Optimism, has a TVL of $1.27 billion. Their market capitalizations have been competitive, but according to Coingecko, Arbitrum currently takes the lead by a $30 million difference, totaling $1.067 billion.

Goel’s insights indicate that the dominance of Layer-2s in transaction throughput aligns with market expectations. He noted that there were indicators in the 2020-21 bull market that Ethereum’s mainnet wouldn’t suffice in the long run.

Layer 2: Formidable Players in the Blockchain Area

Eliezer Ndinga, the chief researcher at 21.co, shared similar sentiments. He had foreseen this trend, emphasizing the inherent scaling constraints of blockchains. Drawing a parallel with the evolution of the internet, Ndinga said scaling solutions today are reminiscent of how bandwidth transformed web experiences from the painstakingly slow dial-up era. He confidently labeled layer-2s as formidable players in the blockchain arena, especially with mainstream financial bodies beginning to embrace this tech.

For Goel, the burgeoning activities on L2s hint at a prosperous future. He noted that increased activity on L2s directly correlates with their market cap growth, strengthening Ethereum’s security and demand for its data services. He’s keenly observing the potential reduction in L2 costs post the Dencun upgrade and anticipates a surge in activities as costs drop. He thinks that L2s, with their reduced transaction fees, will inevitably be the preferred platform for all DEX trades, especially benefiting high-frequency transactions.