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Layer 2: Arbitrum, Optimism lead L2 adoption surge with $250m flows per month

By Raphael Sanis

Edited by Charlie Mellor

14:14, 21 September 2022

An Ethereum gold coin in front of a price chart
Arbitrum and Optimism offer a cheaper solution to Ethereum’s mainnet with their solutions making up less than 2% of gas fees – Photo: Shutterstock

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.

DOGE/USD

0.13 Price
-1.410% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.0012872

SOL/USD

179.15 Price
+2.410% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 2.2652

BTC/USD

65,622.40 Price
-0.400% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 106.00

ETH/USD

3,339.72 Price
-4.230% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 6.00

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: 

“The Merge was a change of consensus mechanism, not an expansion of network capacity, and was never intended to lower gas fees.”

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: 

“Web3 data is fuzzy. None of these numbers have the precision or accuracy of a publicly traded stock whose figures have been audited and are governed by accounting standards.”

Markets in this article

ETH/USD
Ethereum / USD
3339.72 USD
-147.31 -4.230%
SOL/USD
Solana / USD
179.1537 USD
4.1858 +2.410%

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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