With the explosive growth of DeFi (Decentralized Finance) on Ethereum, the relevance of Layer 2 projects has become more pronounced. As the demand for scalable and cost-effective solutions intensifies, several Layer 2 projects stand out. Let’s explore the 10 most notable Layer 2 projects that are poised to make a significant impact in the near future with @Learn_With_Fullo
Layer 1s Transitioning to Layer 2
From 2021 to 2022, Layer 1 blockchain platforms like Ethereum experienced significant congestion and high transaction costs, largely due to their Proof of Work (PoW) mechanisms. This led to slow transaction speeds and operational inefficiencies. In response, several new Layer 1 projects emerged, aiming to outperform and replace Ethereum by offering better performance and scalability.
However, the launch of Ethereum 2.0, which transitioned Ethereum from PoW to Proof of Stake (PoS), significantly altered the competitive landscape. Post-upgrade, it became evident that few, if any, Layer 1 platforms could rival Ethereum’s enhanced capabilities. By 2023, a notable shift occurred: many projects began transforming their models from Layer 1 to Layer 2 to leverage Ethereum’s robust ecosystem rather than compete against it directly.
Today, Ethereum retains a dominant position in the market. Transitioning to becoming Layer 2 solutions for Ethereum seems to be a more strategic move than directly competing with the Ethereum platform.
Impact of Ethereum 2.0 on Layer-2 Projects
Ethereum 2.0 marks a major upgrade aimed at improving the speed, efficiency, and scalability of the Ethereum blockchain. By January 2024, Ethereum is expected to integrate Danksharding, including Proto-Danksharding, potentially increasing throughput to up to 100,000 transactions per second (TPS). These advancements will significantly affect Layer-2 networks in several ways:
Enhanced Scalability and Efficiency for Layer-2s: Danksharding will mitigate slow and costly transactions, optimizing the efficiency of Layer-2 solutions and making them more viable and cost-effective for blockchain enterprises.
Reduced Transaction Fees on Layer-2s: Proto-Danksharding is expected to lower transaction costs, making Layer-2 solutions more appealing for a wide range of users, from seasoned DeFi players to newcomers.
Seamless Collaboration Between Ethereum L1 and L2: Improved support for Layer-2 rollups and sequencers will facilitate smoother integrations, allowing users to transact quickly without leaving Layer-2 applications.
Improved User Experience: Users will benefit from faster confirmation times, less network congestion, and lower gas fees, enhancing their overall experience with Ethereum and Layer-2 solutions.
Ethereum 2.0 does not render Layer-2 solutions obsolete; instead, it fosters a symbiotic relationship where both Ethereum 2.0 and Layer-2 networks co-evolve to deliver a more scalable and efficient blockchain ecosystem. This collaboration is crucial for meeting the future demands of decentralized applications (dApps) and decentralized finance (DeFi).
Notable Layer-2 Projects
Arbitrum
Arbitrum stands out as one of the pioneering and most prominent Layer-2 projects on the Ethereum network. Utilizing Optimistic Rollups technology, Arbitrum can process transactions up to 10 times faster than Ethereum’s mainnet and reduce gas costs by up to 95%. With an impressive throughput of up to 4,000 TPS, Arbitrum has solidified its position within the Ethereum ecosystem. As of January 2024, Arbitrum holds over 51% of the total value locked (TVL) among leading Layer-2 projects.
Backed by major investment funds like Pantera Capital and Coinbase Ventures, Arbitrum has successfully raised $123 million.
Optimism
Optimism, another leading Layer-2 project, employs Optimistic Rollups to enhance Ethereum’s performance and scalability. It can handle up to 4,000 TPS, making transaction processing up to 26 times faster and reducing gas fees by up to 90% compared to Ethereum’s mainnet. Optimism serves as the foundation for many DeFi applications, NFT marketplaces, and decentralized autonomous organizations (DAOs). Its native token, OP, is used for transaction fees, staking, and network governance, offering an attractive investment opportunity.
Optimism has successfully raised $267.5 million from top investors like a16z and Coinbase Ventures.
Polygon
Polygon, a prominent Layer-2 solution, uses its own Proof of Stake (PoS) chain to process transactions, providing faster speeds and lower costs compared to Ethereum. With a capacity to handle over 65,000 TPS and low transaction fees, Polygon is ideal for NFT marketplaces and trading applications. Its robust ecosystem includes integrations with major DeFi protocols like Aave, SushiSwap, and Curve, as well as NFT platforms such as OpenSea and Rarible.
Supported by major partners like Starbucks, Reddit, and Nike, Polygon has raised $457 million from investors such as Coinbase Ventures and Binance Labs.
Base
Base is a new Layer-2 project developed by Coinbase, built on the OP Stack technology from Optimistic to leverage Ethereum’s high security and EVM compatibility. With strong backing from Coinbase—one of the world’s largest cryptocurrency exchanges with over $100 billion in ecosystem assets—Base has significant potential to become a leading Layer-2 solution.
Base aims to utilize Coinbase’s extensive network of tools and decentralized applications to build and expand its ecosystem.
Manta Network
Manta Network distinguishes itself with its focus on security and privacy, using advanced Zero-Knowledge Proofs (ZKP) technology to protect user privacy and enable anonymous transactions on Ethereum.
Recognized for its robust security and efficiency, Manta Network has raised $60 million from investment groups like The Spartan Group and Binance Labs.
Starknet
Starknet is an advanced Layer-2 project utilizing STARK (Scalable Transparent Argument of Knowledge) technology to process thousands of transactions per second at low costs. Starknet’s 2024 development plans include expanding its ecosystem and improving user experiences, aiming to reduce transaction fees through integration with Ethereum’s EIP-4844 and other innovations like the Volition mode.
Starknet has attracted $285 million from leading investors such as Paradigm and Pantera Capital.
Immutable X
Immutable X is a specialized Layer-2 platform for NFTs on the Ethereum network, employing ZK-STARK technology to ensure the security and efficiency of digital assets. Backed by the IMX cryptocurrency, Immutable X promises to revolutionize the gaming and NFT industries.
With an investment of $322 million from Coinbase Ventures and Continue Capital, Immutable X is becoming the go-to choice for NFT-related projects.
Linea
Developed by ConsenSys—the parent company of well-known projects like Metamask and Infura—Linea is a zk Rollup Layer-2 solution that uses zkEVM technology. This technology enables Linea to offer better product development experiences and high compatibility with Ethereum, allowing decentralized applications (DApps) to easily migrate from Ethereum to Linea.
Metis
Metis is a Layer-2 project leveraging the Optimistic Rollups model to ensure secure and efficient transactions on Ethereum. It supports a diverse ecosystem including DeFi, NFT, and GameFi projects.
Supported by OKX Ventures and Genblock Capital, Metis has raised $11 million and continues to foster a vibrant and diverse ecosystem.
zkSync
zkSync is a pioneering Layer-2 solution that implements groundbreaking zk-rollup technology to scale Ethereum. Its goal is to enhance Ethereum’s throughput while preserving core values like decentralization, autonomy, and scalability.
With backing from major investors like a16z and Coinbase Ventures, zkSync has successfully raised $458 million and is growing rapidly with numerous DeFi, Bridge, NFT, and DAO projects within its ecosystem.
Which Layer-2 Projects to Invest In?
When choosing to invest in Layer-2 projects, consider the following factors:
EVM Compatibility: Prioritize Layer-2 solutions compatible with the Ethereum Virtual Machine (EVM), such as Arbitrum, zkSync Era, and Linea.
Scalability and Efficiency: Look for projects with high scalability and low costs, especially for financial applications.
Security: Ensure the Layer-2 project maintains a high level of decentralization and security similar to the Ethereum mainnet. ZK-Rollups often offer stronger security compared to Optimistic Rollups.
Interoperability: Evaluate how effectively the project interacts with other networks within the Ethereum ecosystem.
Operational History: Seek out Layer-2 networks with proven reliability and performance based on reviews from developers and users.
Where to Trade Layer-2 Tokens?
Currently, 7 out of 10 Layer-2 projects have issued tokens, which you can trade on major cryptocurrency exchanges like Binance, OKX, and ByBit. Base has no plans to issue a token, zkSync is expected to release its token in June 2024, and Linea has not yet provided official information.
Conclusion
The recent developments in the cryptocurrency market have underscored the importance of Layer-2 projects for Ethereum. These projects not only address Ethereum’s scalability challenges but also present attractive investment opportunities. Projects like Polygon, Optimism, and Arbitrum are at the forefront of shaping the future of blockchain technology and decentralized applications.
