The Rise of Ethereum Layer 2 Scaling Solutions

An overview of the current L2 landscape

TL;DR

• Layer 2 scaling solutions on Ethereum have seen exponential growth since late 2021.
• TVL of rollup solutions is on a constant growth.
• Arbitrum is leading the rollup space with 50% of the market share.
• Polygon zkEVM is to launch on March 27.

2022 was a bleak year for crypto. Much of the space crashed and burned but Ethereum’s Layer-2 ecosystem portrayed secular growth. Some prominent scaling solutions experienced a breakout in the past year with extraordinary growth achieving numerous milestones.

When Ethereum transaction fees skyrocketed due to increased user demand, rollups became an urgent need to solve the chain’s growing accessibility issue. Unlike sidechains like Polygon PoS, rollups leverage Ethereum’s existing security infrastructure. The first big rollup chains to the market were Optimism and Arbitrum, both of which use “Optimistic” rollup technology.

In this article, let’s dive deeper into the current Layer-2 landscape on Ethereum.

An Overview

As shown in the above graph, the TVL of L2 solutions has been on a growing path achieving exponential growth in just 3 years. The current TVL of L2 solutions stands at $6 billion. These L2s saw significant liquidity inflows in late 2021 and 2022.

The active TVL landscape of L2 rollups on Ethereum looks like this. Arbitrum and Optimism collectively share 80% of the total L2 market share.

Arbitrum

Arbitrum is currently the biggest rollup in regard to TVL and user activity. It has a whopping TVL of $3.36 billion.

TVL on Arbitrum

Arbitrum is EVM compatible and has considerably lower transaction fees making it easily accessible for both developers and users.

Arbitrum saw significant growth in transactions through 2022 and 2023 so far, as a result of increasing traction of native dapps and its nitro upgrade which dramatically reduced transaction fees. The network’s transaction count has risen 2000% from 1.21M in January 2022 to 25.82M in January 2023.

A similar trend can be seen in user growth and developer activity throughout the last year.

Optimism

Optimism is the second-largest rollup with $1.87 billion in TVL. Optimism is also an Optimistic rollup and has seen plenty of rollups fork their codebase. Optimism has an impressive ecosystem, especially in regard to the derivatives market with applications such as Synthetix and Perp.

TVL on Optimism

Optimism also experienced growth in user activity in the past year, likely due to increased activity following the OP launch and subsequent incentive programs.

Riding the wave of the previously mentioned token launch and incentive programs, Optimism saw its monthly active address count soar 1100% from an average of 33.1K in Q1 2022 to 403.4K in Q4 2022.

ZKSync

ZKSync is a mainstream scaling technology implementing Zero-Knowledge (ZK) proofs. These ZK proofs have active cryptographic security. ZKSync uses SNARKs as its validity proof and is building its own version of zkEVM.

ZKSync has a broad ecosystem with some of the best dapps such as Curve, Yearn, ZigZag and Mute.io.

ZKSync Era (previously zxSync 2.0) is in the final stages of development before opening up to users.

Polygon zkEVM

Polygon’s zkEVM is one of Polygon’s scaling solutions developed to make dapps scalable. The long-awaited scaling upgrade from Polygon announced its beta launch going live on March 27.

The development of the zk-rollup technology has been ongoing for the past 3 years. The Polygon zkEVM has hit several milestones as noted by the team. These include the deployment of more than 5,000 smart contracts and more than 84K wallets.

Takeaway

2023 seems to be the for Layer 2 projects, with Coinbase announcing its own Layer 2 project Base, Polygon all set to launch their zkEVM this month, and Arbitrum surpassing Ethereum in terms of total transactions processed. These scaling solutions are gaining more traction among both retail and institutional user groups.

After careful consideration of the current L2 landscape, UniLend is set to launch our v2 testnet on a prominent scaling solution in the coming weeks.