Layer 2 networks hit $13B TVL, however challenges nonetheless stay

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Ethereum layer-2 networks reached a brand new milestone on Nov. 10, reaching $13 billion of complete worth locked (TVL) inside their contracts, in response to information from blockchain analytics platform L2Beat. In keeping with business specialists, 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.

Ethereum layer 2 TVL. Supply: L2Beat

In keeping with L2Beat, 32 totally different networks qualify as an Ethereum layer 2, 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 $11.8 billion.

However starting on June 15, layer-2 TVL progress turned optimistic. And by Oct. 31, these networks had reached a brand new excessive of almost $12 billion mixed TVL. From there, funding in layer 2 apps continued to climb, passing the $13 billion TVL mark on Nov. 10 and persevering with to just about $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 total crypto funding was a lot bigger than it’s in the present day. On Nov. 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 overall market cap of cryptocurrencies is a extra modest $1.4 trillion, according to CoinMarketCap, but the TVL of layer 2s is bigger than ever.

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

“On the time of [the] bull market, Ethereum at peak occasions was very nonscaleable, which meant that transactions had been sluggish and really costly due to the bull market. It will be tons of of {dollars} simply in transaction charges for one transaction, so subsequently it was not sustainable.”

In keeping with Sinelnikova, one more reason that layer 2 networks have thrived within the bear market is due to the profitable advertising efforts of their growth 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 all the time 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 network Metis

Nonetheless, Sinelnikova warned that layer 2s nonetheless face challenges within the realm of consumer expertise. Optimistic rollup networks require customers to attend seven 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 growth and have a tendency to crash extra typically than older networks. The Metis CEO claimed that her workforce is engaged on a “hybrid” layer 2 community that may mix the perfect of each worlds, giving customers the choice to withdraw utilizing both an instantaneous ZK prover or a seven-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 typically neglected: centralization. “Whereas layer-2 options have gained reputation for his or her scalability enhancements over the past 12 months, they typically 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 facet in layer-2 implementations challenges the core rules of decentralization and trustlessness which have underpinned the blockchain house.”

McGuire expects competitors from layer 2s to spur enhancements to layer 1s, finally 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 fuel charges) on the foundational layer versus relying solely on L2s to supply scalability.”

Along with their TVL growing, the variety of layer 2s additionally continues to rise. On Nov. 14, crypto change OKX announced that it is building a layer 2, and there have been rumors that Kraken is building one as well.