Layer 2 networks hit $13 billion TVL but challenges still remain

Ethereum Layer 2 networks reached a brand new milestone on November 10, reaching $13 billion of whole worth locked (TVL) inside their contracts, in keeping with information from blockchain analytics platform L2Beat. In response to trade consultants, this development of higher curiosity in layer 2s is more likely to proceed, though some challenges stay, particularly within the realms of consumer expertise and safety.

In response to L2Beat, there are 32 totally different networks that qualify as Ethereum layer 2s, together with Arbitrum One, Optimism, Base, Polygon zkEVM, Metis, and others. Previous to June 15, all of those networks mixed had lower than $10 billion of cryptocurrency locked inside their contracts, and their mixed TVL had been declining since April’s excessive of $11.eight billion.

However starting on June 15, layer 2 TVL progress turned constructive. And by October 31, these networks had reached a brand new excessive of practically $12 billion mixed TVL. From there, funding in layer 2 apps continued to climb, passing the $13 billion TVL mark on November 10 and persevering with to almost $13.5 billion on the time of publication.

This rise in TVL is much more dramatic in comparison with the speed that existed in the course of the bull market of 2021, when general crypto funding was a lot bigger than it’s right now. On November 12, 2021 when the market cap of all cryptocurrencies reached an all-time excessive of $2.82 trillion, layer 2s had lower than $6 billion locked inside their contracts. At this time, the full market cap of cryptocurrencies is a extra modest $1.four trillion, in keeping with Coinmarketcap, but the TVL of layer 2s is larger than ever.

In a dialog with Cointelegraph, Metis CEO Elena Sinelnikova proposed a principle for why layer 2s are rising despite the persevering with bear market. In response to her, Ethereum’s excessive gasoline charges in the course of the bull market left an indelible affect on customers, resulting in a need for options when demand began to come back again, as she acknowledged:

“On the time of [the] bull market, Ethereum at peak occasions was very non-scaleable, which meant that transactions had been gradual and really costly due to the bull market. It might be a whole bunch of {dollars} simply in transaction charges for one transaction, so subsequently it was not sustainable.”

In response to Sinelkova, one more reason that layer 2 networks have thrived within the bear market is due to the profitable advertising efforts of their improvement groups, which has led to excessive consumer exercise and subsequently, excessive yields. “They’re deploying capital to draw new customers and to draw new enterprise into DeFI [decentralized finance],” she acknowledged. “DeFi folks from all ecosystems, they at all times go the place there are huge yields […] and that is simply naturally occurring and is […] the character of enterprise.”

Associated: Aave v3 launches on Ethereum layer-2 community Metis

Nonetheless, Sinelkova warned that layer 2s nonetheless face challenges within the realm of user-experience. Optimistic rollup networks require customers to attend 7 days for a withdrawal to be processed, which might result in frustration. Alternatively, newer zero-knowledge (ZK) proof networks can course of withdrawals immediately, however they’re nonetheless in an early stage of improvement and have a tendency to crash extra usually than older networks. The Metis CEO claimed that her group is engaged on a “hybrid” layer 2 community that can mix the perfect of each worlds, giving customers the choice to withdraw utilizing both an on the spot ZK prover or a 7-day optimistic course of.

Kelsey McGuire, chief progress officer for layer 1 community Shardeum, informed Cointelegraph that layer 2s face one other critical problem that’s usually missed: centralization. “Whereas Layer-2 options have gained recognition for his or her scalability enhancements over the past 12 months, they usually introduce a trade-off in decentralization” she acknowledged. She continued:

“On the execution layer, the place transactions are processed, centralized sequencer nodes are employed, elevating issues about potential censorship or authorities interference. This centralized side in Layer-2 implementations challenges the core rules of decentralization and trustlessness which have underpinned the blockchain area.”

McGuire expects competitors from layer 2s to spur enhancements to layer 1s, in the end resulting in greater throughput for the foundational layers themselves, as she acknowledged “there could also be fewer and fewer new L1s, and we’ll begin to see a refocus on true scalability (as in excessive TPS paired with low gasoline charges) on the foundational layer versus relying solely on L2s to offer scalability.”

Along with their TVL growing, the variety of layer 2s additionally continues to rise. On November 14, crypto change OKX introduced that it’s constructing a layer 2, and there have been rumors that Kraken is constructing one as effectively.