DeFi leads activities on Layer 2 (L2) chains, demonstrating a significant integration of decentralized finance within the blockchain ecosystem. In 2024, decentralized activities accounted for these networksâ most considerable block space, primarily fueled by decentralized exchange (DEX) trading and lending services.Â
The growth of various rollup platforms has raised questions about the sustainability and utility of these chains as their activity dynamics evolve.
The dominance of DeFi and stablecoins
The relationship between DeFi and L2 chains has proven effective, with DEX trading and lending emerging as the primary catalysts for activity on these platforms. In 2024, stablecoins have been crucial, serving as the primary liquidity source across L2 networks. Mantle has allocated over 57% of its block space for DeFi activities. Following closely is Base, which primarily facilitates meme token creation and small-scale liquidity pair launches, with over 43% of its on-chain space consumed by these transactions. The demand for value transfers from Ethereum has driven net inflows of $1 billion into major L2 ecosystems, further solidifying DeFiâs position in the space.
After recent market recoveries, the total value of DeFi across all chains has surpassed $103 billion again, with Ethereum retaining the most significant share at nearly $60 billion. L2 chains compete with other platforms like Solana, TRON, and Binance Smart Chain (BSC) for market activity. Ethereumâs continued dominance remains the critical factor influencing liquidity and traffic in the existing L2 landscape. Furthermore, applications such as Uniswap and Aave have demonstrated their capacity to attract traders and capital, driving further activity on L2 chains.
Fragmentation of L2 chains
Despite the growth, most L2 chains continue to exhibit fragmentation. Polygon remains the most prominent option for cross-chain activities, leveraging its established relationship with Ethereum and its multiple liquid bridges. It holds approximately $63 million in locked liquidity, yet bridging activities are not highly trafficked, as most wrapped assets tend to remain on the new chain. This limits the efficacy of the bridging process, complicating returns to the original chain.
ZKSync transactions slowed down after the airdrop incentives ran out. | Source: Dune Analytics
Arbitrum leads the pack in bridging activity, although data indicates only around 819 wallets engage in bridging per week. Daily, fewer than 150 wallets are active, moving under 400 ETH. Other chains like Optimism, Zora, and Scroll maintain around 10% bridging activity. However, the vision of cross-compatibility among L2 chains and Ethereum has yet to be fully realized.
Challenges of L2 adoption
2024 marked a year of rapid growth for L2 chains, with high transaction volumes and significant value inflows. These chains have effectively scaled Ethereum, redirecting traffic to a more cost-effective and efficient layer. Many L2s are adopting business models to attract venture capital investment or to create viable tokens for short-term gains.
A notable challenge faced by L2 chains is the rapid decline in transaction volumes shortly after their launch. The incentive model, particularly with airdrops, often draws developers to nascent L2s during their testnet phases. Once the mainnet is live, users frequently shift to emerging chains, seeking larger airdrop rewards. This pattern leads to a decline in activity as early adopters migrate to newer opportunities.
L2 chains may rely on high-fee applications and liquidity hubs that offer passive returns or trading opportunities to sustain user engagement. While some chains successfully maintain liquidity and user bases, the initial hype surrounding L2 technology has led to questions about its long-term viability. Existing chains continue to host tangible activity, which could positively impact Ethereumâs ecosystem.
The post DeFi Leads Activities on L2 Chains, but Questions Remain first appeared on Coinfea.
