Author: Lugui Tillier, CoinTelegraph; Translated by: Baishui, Golden Finance
A major topic in the crypto space in 2024 is the number of second layer (L2) blockchains created on the Ethereum network.
The sudden surge in L2s is seen as a joke by many who believe it is just hype. Nevertheless, we are likely to have thousands of L2s in the next year. This will go a long way towards Ethereum’s success.
Background: The Ethereum network is a layer 1 blockchain (L1). Ethereum prioritizes decentralization and security, but lacks scalability — a problem known as the blockchain trilemma, where only two of these three things can be achieved.
As a result, the Ethereum network ended up becoming less scalable and extremely expensive to execute on it. To address this issue, L2s (also known as Rollups) were created. They provide a cheaper way to process transactions outside the Ethereum network by combining transactions into batches and sending those batches to the Ethereum network.
How Layer 2 Rollups work. Source: Makeuseof.com
However, there are two major pain points in this model. The first is the fragmentation of the Ethereum ecosystem. Market liquidity is scattered between L2s, which creates a poor user experience. Users need to constantly switch wallets between networks and "bridge" their assets. In addition, bridges and "wrapped" assets on different networks have been the main targets of hackers in recent years.
The second pain point is that the transaction costs of these L2s are unstable and unpredictable, which is terrible for the development of various applications. One day you might only spend a penny to perform an operation, and the next day that number might be 10x or 100x higher because some meme coin is popular and takes up all the block space.
The result is an ecosystem with fragmented liquidity, fragmented users, poor user experience, vulnerability to attacks, and an environment that remains unsuitable for developing applications in a financially sustainable manner.
Thousands of L2s can solve the problem
Despite the seeming complexity, launching and maintaining L2 is very quick and relatively cheap today. Rollup-as-a-Service (RaaS) companies are doing this work and already make it possible to launch and maintain a Rollup in up to six minutes for less than $1,000 per month, as is the case with RaaS Gateway.Fm.
These rollups are built using the Chain Development Kit (CDK) of a larger L2, such as Polygon.
Application Chain is an L2 created and customized specifically to support one application, providing a controlled environment with lower cost and more predictability than building on a public L2.
Industry chains are blockchains (usually permissioned) created and customized to serve a specific industry, such as gaming or real-world assets (RWA).
These environments are inherently better suited for economically sustainable on-chain development. But they have an added benefit: their customization for specific use cases allows for greater efficiency than public L2s built for general purpose.
Of course, these new chains do lead to greater fragmentation. This problem is being partially solved by the same L2 that provides CDK for the rest of the market. Polygon, Optimism, and ZkSync are building liquidity aggregation layers that will make thousands of application and industry chains look like one.
AggLayer, the liquidity aggregation layer created by Polygon, is a project that stands out in this space. It is at the forefront of developing an aggregation layer that uses zero-knowledge (ZK) proof technology. (ZK is key not only to enabling instant interoperability between chains connected to AggLayer, but also to reducing the costs of these chains in the future.)
Major companies including OKX, Ronin, ImmutableX, Telegram Open Network (TON), and Fox Corporation have already or are in the process of connecting L2 to AggLayer.
Visualization of the AggLayer protocol. Source: Polygon Labs
Even Ronin (one of the largest gaming blockchains in the world) announced in June that it was considering the possibility of transitioning from L1 to L2 connected to the AggLayer. This would add tremendous value to the Ethereum ecosystem and Ronin itself, as it could devote less energy to infrastructure and spend more time acquiring new games and ensuring their success.
It’s clear that thousands of application and industry chains are coming and they are essential for financially sustainable on-chain development. The ZK aggregation layer will solve much of the fragmentation we have today. For other L1s, migrating to the Ethereum ecosystem to take advantage of increasingly unified liquidity is an attractive dynamic - allowing them to focus less on infrastructure and more on acquiring and retaining killer applications on their chains.
