Erik Weijers, 2 months ago

Record Ethereum Layer 2 activity

Ethereum’s Layer 2 ecosystem has witnessed record network activity in November. Despite the bear market, the monthly transaction fees that L2's paid on Ethereum doubled from the previous month. It's another sign that we're in a 'bullish crypto winter'. 

Layer 2 (L2) networks such as Arbitrum and Optimism help offload transactions from the Ethereum blockchain to their own chain. They are like roads exiting and entering Ethereum's highway. By offloading traffic, Ethereum won't get too clogged and expensive. These L2's then settle the transactions on Ethereum in one big batch, for which they pay. It is these transaction fees (or gas fees) that have reached a record amount.  

Examples of big Layer 2 networks are: 

  • Arbitrum (50% market share)
  • Optimism (OP, 30% market share)
  • dYdX

Four times more activity than a year ago

Compared to a year ago, L2's consume four times more gas on Ethereum. Still, they are a relatively small percentage of total Ethereum transaction volume: they total now 4%.

What is this gas spent on? Arbitrum has done really well and is responsible for a big part of the uptick in activity. The L2 recently launched Nitro, which was a success, and a lot of users are anticipating a potential airdrop of the Arbitrum token. In order to benefit from that airdrop, you have to become active first on the Arbitrum network. 

Another example is GameStop, which launched an NFT marketplace on L2 ImmutableX.

Record Total Value Locked

According to analytics platform L2beat the Total Value Locked (TVL) across various L2's has reached an all-time high of $5.64 billion. Where does that TVL come from? For example, liquid Ethereum staking provider Lido launched on Layer 2's.

Bullish or bearish for Ethereum?

It has been argued that the success of Ethereum Layer 2's could be bearish for Ethereum in the short or medium term. After all, what Ethereum sells is block space on its own blockchain. As L2's take transactions away from Ethereum, this lowers demand. And lower demand means lower Ether prices.  

We'll see how this will play out. But increasing popularity of L2's is arguably good for Ethereum in the long term. After all, it remains the foundational blockchain that the entire Ethereum ecosystem is built on. Popular L2's will cement Ethereum's position as smart contract blockchain market leader.

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