The Ethereum Dencun upgrade, the next critical phase in the Ethereum 2.0 roadmap before Danksharding, rolled out in March 2024 successfully, driving a significant reduction in gas fees across Ethereum layer-2 networks. Even as the Ethereum 2.0 upgrade unfolds, promising a more scalable, secure, and sustainable network, the spotlight on Layer-2 solutions has not dimmed. In fact, it's shining brighter than ever. These innovative networks are not just complementary to Ethereum's advancements; they are pivotal in revolutionizing how we interact with blockchain technology today.
Layer-2 networks have emerged as the unsung heroes in this transformative era, addressing the immediate challenges of Ethereum's current architecture – high gas fees and slower transaction times. They are the bridge to a future where blockchain applications can run seamlessly, catering to a growing user base without compromising on speed or cost.
Ethereum Scaling Solutions: Why Do We Need Them?
Total Value Locked (TVL) in Ethereum Layer-2 Networks | Source: L2Beat
Since its inception, the Ethereum blockchain has been a groundbreaking development in blockchain technology, offering diverse applications. As of March 2024, Ethereum’s TVL exceeds $51.25 billion, and it enjoys a market dominance of over 53% based on data from DefiLlama. However, it's not without its challenges, notably scalability. This is where Ethereum layer-2 scaling solutions come into play, garnering a Total Value Locked (TVL) of $38.75 billion at the time of writing.
These solutions are crucial for maintaining the efficiency and viability of the Ethereum network. They address the limitations of Ethereum's current infrastructure, particularly in handling a large number of transactions. According to L2Beat, the TVL of Ethereum scaling solutions exceeds $15.5 billion at the time of writing.
As the blockchain and crypto sectors evolve, the demand for scalable, efficient solutions is more pressing than ever, making layer-2 scaling technology indispensable.
DeFi Helps Propel Ethereum Layer-2 Networks
Decentralized finance (DeFi) has been a significant catalyst in the growth of Ethereum layer-2 networks. The explosion of DeFi applications on Ethereum led to increased transaction costs and network congestion, highlighting the need for efficient layer-2 scaling solutions.
These solutions have significantly reduced costs and improved transaction speeds by executing transactions off the main Ethereum chain. This development has not only benefitted DeFi platforms but has also made layer-2 crypto networks more attractive to investors and developers, driving the popularity and utility of layer 2 coins.
Top Ethereum Layer-2 Scaling Protocols
Here’s a look at the most popular Layer-2 scaling protocols for the Ethereum blockchain:
Optimism
OP/USDT 1-year price performance | Source: KuCoin
As a newer entrant in the layer-2 scaling solutions arena, Optimism has quickly gained traction. It utilizes Optimistic Rollups to enhance transaction throughput, significantly reducing fees and latency. This technology has made Optimism a strong contender in the layer-2 space, attracting a growing number of DeFi applications and users.
The OP token is utilized as the native cryptocurrency of the Optimism network, serving functions like governance, securing the network, and potentially participating in transactional activities and incentivization within its ecosystem.
In 2023, the Optimism network has made significant strides in scaling Ethereum with its OP Mainnet, a cost-effective Ethereum Layer 2 solution with EVM-equivalent architecture for efficient app scaling. The Superchain Project, part of the OP Stack, aims to enhance interoperability among chains, creating a unified blockchain ecosystem.
The OP Stack itself is pivotal for network scalability and cross-chain functionality. Optimism has also introduced Retroactive Public Goods Funding, leveraging protocol revenue to support projects beneficial to the public. With a strong focus on community and developer support, Optimism provides resources like documentation and a bug bounty program.
The network boasts over $3 billion in saved gas fees and more than 141 million transactions, underscoring its growing adoption and its role in the evolution of the Ethereum ecosystem.
Arbitrum
ARB/USDT 6-month price performance | Source: KuCoin
Known for its innovative approach to scaling Ethereum, Arbitrum uses a unique Optimistic Rollup technology. It stands out for its compatibility with Ethereum's existing infrastructure, making it easier for developers to migrate their applications. This ease of integration, combined with its efficient scaling capabilities, has made Arbitrum a key player in the layer-2 landscape.
The ARB token serves as the native cryptocurrency of the Arbitrum network. It is used for transactions, securing the network, and participating in governance decisions within its ecosystem.
In 2023, Offchain Labs made significant strides in the development of its Arbitrum network. The year saw the release of Arbitrum Stylus, a programming environment that expanded the possibilities for developers to build applications on Arbitrum by supporting popular languages like Rust, C, and C++.
The network also hosted a detailed discussion on the optimistic rollup protocol, explaining its choice and future prospects. In addition, Arbitrum announced the BOLD (Bounded Liquidity Delay) protocol, a new dispute protocol that enhances the network's decentralization and security.
Offchain Labs also provided updates on Prysm, the leading Ethereum consensus client, and proposed a modified transaction ordering policy for its sequencer, introducing a "time boost" for transactions. Lastly, the development of Arbitrum Orbit AnyTrust chains was made easier with a devnet AnyTrust chain hosting EVM-compatible smart contracts.
These developments underscore Arbitrum's dedication to improving its scalability solutions for Ethereum, providing more versatile and efficient options for the blockchain ecosystem's developers and users.
Base
Growth in Base’s TVL since mainnet launch in July 2023 | Source: L2Beat
Launched in mid-2023, Base is designed to complement Ethereum by providing a high-performance, scalable framework that enables rapid transaction processing at significantly reduced costs of less than 1 cent following the Ethereum Dencun upgrade. Its architecture leverages the latest advancements in blockchain technology to ensure seamless interoperability with the Ethereum mainnet, making it an attractive platform for developers and users alike.
Explore the top projects and tokens in the Base ecosystem.
Base, powered by Coinbase exchange, differentiates itself through its cutting-edge technology and user-centric approach. It incorporates a unique combination of Optimistic Rollups and zk-Rollups, harnessing the strengths of both to offer an optimal balance between security, scalability, and transaction speed. This hybrid model has been pivotal in reducing gas fees on Base to less than 1 cent, a milestone achievement made possible by the Ethereum Dencun upgrade's enhancements to the broader Ethereum ecosystem.
Since its inception, Base has experienced significant growth in TVL to $3.08 billion, reflecting its increasing popularity and trust within the crypto community. This rise in TVL is driven by several factors. Firstly, the platform's developer-friendly environment, comprehensive documentation, and robust support have attracted a variety of projects, from DeFi protocols to NFT marketplaces, creating a dynamic ecosystem. Secondly, the surge in interest in memecoins and other speculative assets has found a platform in Base, facilitated by low transaction costs and high throughput. Thirdly, the broader recovery of the crypto market in 2024 and optimism about the Ethereum 2.0 upgrade have boosted investor confidence in Layer-2 solutions like Base, attracting substantial capital inflows. Lastly, the Ethereum Dencun Upgrade has acted as a catalyst for Base, reducing operational costs, enhancing protocol efficiency, and thereby directly improving the Layer-2 network's performance and appeal.
Blast
Growth in Blast TVL over time | Source: L2Beat
Blast has quickly ascended as a pivotal force in the Layer-2 ecosystem, redefining the boundaries of scalability, speed, and cost-efficiency. Launched in early 2024, shortly after the significant Ethereum Dencun upgrade, Blast has carved out a niche for itself by leveraging advanced technologies to enhance transaction throughput while slashing gas fees to unprecedented lows.
Learn how to connect to the Blast mainnet.
Blast sets itself apart with its novel approach to Layer-2 solutions, emphasizing a user-friendly interface, minimal transaction costs, and robust security measures. At the heart of Blast's innovation is its use of state-of-the-art Optimistic Rollups, which streamline transaction processing without compromising on the decentralization or security facets of the Ethereum mainnet. This technology has been instrumental in reducing gas fees on Blast to less than 1 cent, a feat that aligns perfectly with the cost-reduction trajectories set by the Ethereum Dencun upgrade.
Since its inception, Blast has witnessed a meteoric rise in its TVL to $2.68 billion at the time of writing, a clear indicator of the network's growing adoption and the confidence it instills in its users. Blast's remarkable TVL surge among Ethereum Layer-2 networks is attributed to its unique native yield feature, which offers passive income on assets without staking, drawing significant investor interest. The early access program further bolstered its TVL by allowing assets to earn yields before the mainnet launch. Despite concerns over centralization and security, Blast's commitment to decentralization and user fund safety, along with comparisons to established Layer-2 solutions, has maintained investor confidence. Additionally, the involvement of Tieshun “Pacman” Roquerre, co-founder of Blur, added credibility and excitement, contributing to Blast's swift adoption and growth.
Mantle
MNT/USDT - 1-year price performance | Source: KuCoin
Mantle emerges as a distinguished Ethereum Layer-2 solution, notable for its integration of optimistic rollup technology and a unique data availability solution powered by EigenDA, which allows it to process transactions more efficiently and at lower costs than Ethereum's mainnet. Launched in mainnet alpha on July 17, Mantle has rapidly gained traction within the developer community, highlighted by its extensive testnet phase where it processed over 14 million transactions, engaged 48k developers, and saw the deployment of more than 80 dApps.
What sets Mantle apart is its modular architecture that separates execution, settlement, consensus, and data availability across different network nodes. This structure not only enhances transaction efficiency but also significantly reduces costs compared to Ethereum's base layer. Mantle's data availability layer, leveraging EigenLayer's Ethereum protocol, enables ETH restaking and supports the network's high transaction throughput, which could reach 1 TB per second or more. Mantle announced its 'Mantle Rewards Station' is now live. Users can claim the mShards daily during the locking period by redeeming Ethena Lab’s native token ENA in exchange.
Mantle's TVL growth to $877 million is attributed to several factors, including its developer-first approach, demonstrated by hosting over 20 hackathons during its testnet phase, resulting in 400 project submissions. The Mantle Grants Program and a $200M Mantle Ecosystem Fund further support ecosystem development, providing resources and incentives for dApp builders. Mantle's competitive edge is also underscored by its reported over 80% reduction in gas fees compared to Ethereum, and a performance capability of 500 transactions per second (TPS), which is significantly higher than Ethereum's 32 TPS.
Polygon
MATIC/USDT 1-year price performance | Source: KuCoin
Standing at the forefront of Ethereum layer-2 solutions, Polygon has established itself as a leader in this space. Its ability to offer scalability while ensuring security has made it a go-to platform for developers and projects. Polygon's adoption by major DeFi applications, like Aave, has further solidified its position as a top layer-2 project.
As of December 2023, Polygon's broad ecosystem includes over 28,000 contract creators, more than 219.11 million unique addresses, and a total of over 2.44 billion transactions. This showcases the widespread adoption and versatility of the Polygon network.
Polygon's ascent in the realm of Ethereum Layer-2 networks is nothing short of remarkable, and the recent unveiling of Polygon 2.0 - a network of zero-knowledge layer-2 blockchains, has further cemented its position as a frontrunner in blockchain scalability and innovation. This update positions Polygon as the "Value Layer of the Internet," signifying its ambition to offer a robust foundation for decentralized applications and digital transactions.
A key aspect of Polygon's growing influence is its active role in driving the tokenization of real-world assets. This groundbreaking development bridges the gap between traditional finance and the decentralized world. This initiative is not only expanding the use cases of blockchain technology but also attracting a diverse range of investors and enterprises to the Polygon ecosystem.
Additionally, the introduction of Polygon ID, a decentralized identity solution, showcases Polygon's commitment to privacy and security, offering users a more personalized and secure blockchain experience. These developments, along with continuous improvements and collaborations within the Polygon ecosystem, underscore its potential as a formidable Ethereum Layer-2 network, making it an increasingly attractive option for investors and developers alike.
The MATIC token functions as the native cryptocurrency of the Polygon network, utilized for staking and paying network transaction fees. It is integral to governing and securing the Polygon network while enhancing the scalability and sovereignty of blockchain projects connected to the ecosystem.
MetisDAO
METIS/USDT 1-year price performance | Source: KuCoin
MetisDAO (METIS) has been making waves in the Ethereum Layer-2 space due to its unique scalability approach using Optimistic Rollups, which reduces gas fees and enhances transaction speeds. This, coupled with its commitment to simplicity and user-friendliness, makes it an appealing platform for developers and users.
MetisDAO is also dedicated to fostering a robust DAO structure, promoting community governance and participation. Its continuous efforts in building a diverse ecosystem, including partnerships and integrations with various DeFi, NFT, and enterprise applications, have significantly expanded its use cases and market appeal.
The METIS token is primarily used as a utility token within the Metis ecosystem, serving functions such as paying for transaction fees, staking for network security and governance, and participating in dApps on the platform. Additionally, METIS token holders have governance rights, allowing them to vote on proposals and decisions that shape the future development of the MetisDAO network.
In 2023, MetisDAO launched the MetisDAO Foundation, which facilitates collaborative workspaces for the Metis Community Builders, Commons, and EcoNodes, marking a significant step towards a more decentralized, efficient, and inclusive blockchain ecosystem. Metis also launched the Metis Ecosystem Development Program to aid blockchain startups and established projects, offering technical support, funding, and marketing resources.
Throughout the year, Metis focused on technical developments and strategic partnerships, introducing an alpha testnet, launching the first-ever community-minted NFT project, releasing a beta testnet featuring MetisSwap, a decentralized exchange, and introducing its middleware, Polis, to bridge Web 2.0 and Web 3.0.
Conclusion
The recent bull run in the crypto market has highlighted the importance and potential of Ethereum layer-2 scaling protocols. With their ability to address the scalability issues of Ethereum, these layer-2 solutions have not only supported the growth of DeFi but have also become attractive investment opportunities.
Projects like Polygon, Optimism, and Arbitrum are leading the charge, showcasing the best of layer-2 scaling technology. As the crypto market continues to evolve, these layer-2 solutions are poised to play a pivotal role in shaping the future of blockchain technology and decentralized applications.
Recommended Reading
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What is the Ethereum Dencun Upgrade (Proto-Danksharding) in Q1 2024?