Layer 2: Arbitrum, Optimism lead L2 adoption surge with $250m flows per month
Arbitrum and Optimism are Ethereum Layer 2 (L2) solutions boosting the scalability of the blockchain – and investors are taking notice.
Combined, the networks account for between 30% to 40% of Ethereum’s total transactions, according to recent data from Tomasz Tunguz, venture capitalist at California-based Redpoint Ventures.
The news comes after the transition of Ethereum (ETH) to a proof-of-stake (PoS) consensus system, known as The Merge, to improve the transactions speeds and capabilities of the blockchain. But gas fees still appear to be holding back the second largest cryptocurrency.
ETH to USD
Steady increase in adoption
Tungruz’s data showed that adoption of L2 solutions has been steadily climbing since July 2021 with minimal disruption from this year’s bear market.
This success could be down to their prioritisation of the user experience. Arbitrum and Optimism promise fast, secure and scalable networks, designed for Ethereum developers.
The L2 solutions also provide cheaper platforms. Despite taking up a significant number of transactions, they represent less than 2% of the gas fees on the Ethereum blockchain, noted Tunguz.
Ethereum feeling the pressure
As the second largest blockchain, Ethereum has been feeling the influence of the younger rivals that have targeted its scalability problems. This spurred the blockchain to move to a proof-of-stake system in the hope of faster transaction times among other improvements.
However, the Ethereum Foundation insisted earlier this year that The Merge would not reduce its gas fees. As part of its regular updates about The Merge, the foundation said:
It is not only gas fees where Ethereum is feeling the pressure. The Solana (SOL) blockchain is intruding on its dominance in non-fungible tokens (NFTs). An estimated 40% of NFT buyers are using Solana.
However, Ethereum is still leading by gross merchandise value (GMV). An overwhelming majority of 90% of the NFT industry’s GMV is on the Ethereum blockchain.
Crypto winter taking its toll
While L2 solutions are starting to see adoption, there are signs the industry is reeling from the crypto winter. Tunguz found across the board, on-chain activity was down between 40% to 70% from its peak.
Meanwhile, only 5,000 developers are writing Web 3.0 code every week, down by 20% from the beginning of 2022. Similarly the amount of smart contracts on Ethereum has been static at roughly 300,000 for almost half a year.
But Tunguz stressed that crypto is difficult to draw data from compared with traditional finance. He said:
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