Week 1 — Layer-2 scaling ecosystem newsletter
Summary
The past week (26th Nov to Dec 3rd) has been very exciting for the L2 scaling ecosystem and in this newsletter, I will unpack some of the major events and provide a high-level overview.
The goal of this newsletter is to be the weekly digest of latest information about layer-2 ecosystem with crisp and clear information including some trend forecasts based on my research.
⭐️ Layer-2 TVL and gas fee
Let’s start with some stats for the week.
Layer-2 scaling solutions are quickly gaining adoption and this is reflected in the increasing total value locked (TVL) every month. The TVL of L2 increased by 34% monthly from 4.93 billion USD on Nov 3rd to 6.62 billion USD on Dec 3rd.
On the other hand, this week, the TVL of layer-2 decreased by 7.6% in past 7 days and the TVL as of today is 6.62 billion USD
The overall crypto market trend is downwards this week which might have contributed to this.
If you compare the the TVL of L2 with the entire DeFi ecosystem, its very small and there is a huge potential to grow.
Watch out for this value as it will keep rising in the long run.
If we look at the breakdown of the TVL by different layer-2 solutions, Arbitrum is still leading at the top with 2.65 billion USD of TVL.
Now let’s look at the layer-2 scaling platforms fee for transfer and swaps
For transfer of ETH and tokens, zk-rollups based scaling solutions such as Loopring and ZkSync outperformed the Optimistic rollup based solutions such as Arbitrum and Optimism.
The swapping tokens functionality is not yet available on most zk-rollup scaling solutions in mainnet, so Arbitrum and Optimism are still the best options for swapping tokens on L2.
⭐️ Latest developments in layer-2 ecosystem
EIP-4488 — a critical change proposed to enhance layer-2 scaling in ETH ecosystem
On 24th November 2021, EIP-4488 was proposed on the Ethereum official GitHub repository here by Vitalik Buterin.
EIP-4488 is an Ethereum improvement proposal which you would want to keep an eye on if you are interested in latest developments on the Ethereum blockchain from the perspective of layer-2 scaling solutions. This EIP was opened by Vitalik Buterin and its a request to reduce the gas cost associated with CALLDATA.
Layer-2 scaling solutions publish the data to layer-1 ETH in the form of CALLDATA. EIP-4488 will reduce the rollup overhead and thereby lower the L2 fee.
What does EIP-4488 mean for layer-2?
It is good news for layer-2!
Ethereum core developers have once again indicated their focus on the rollup-centric approach and their support for layer-2 rollup based scaling solutions.
If you are interested in the technical details of this proposal, you can read more here
Starkware
One of the biggest news in the layer-2 ecosystem in the past week has been the Alpha mainnet release of StarkNet on November 29th 2021. StarkNet is a decentralised and permissionless layer-2 scaling engine developed by the team at Starkware. The rollout of this platform will be in different stages and decentralisation will be increased with time. Some of the components of StarkNet such as the sequencer are still centralised since its in early stages of development.
With this release, StarkNet has added blockchain composability which allows anyone to deploy a smart contract on their ecosystem and also interact with other smart contracts. This has already attracted various smart contract development teams who have started building prototypes using the Cairo language (Starkware’s turing complete language).
Look out for the new projects developing on the StarkNet ecosystem.
Its been amazing to see the speed at which this ecosystem is developing.
Arbitrum
Arbitrum continues to gain quick adoption and traction in not just the Ethereum ecosystem but also the entire blockchain space.
On November 29th, the first atomic cross-chain swap between Monero and Ethereum Arbitrum occurred.
In addition to this, we continued seeing existing and popular projects launching on Arbitrum such as the following:
Tornado cash: This Ethereum transaction privacy service signalled support for Arbitrum which will allow its users to transact faster and cheaper.
Premia Finance: The decentralised options protocol, Premia Finance is live on Arbitrum now
Optimism
LayerSwap integration with Optimism
LayerSwap is an interesting new project which allows you to transfer crypto from CEX to Optimism. We have already started seeing some integrations between tier-1 centralised exchanges and specific L2 scaling solutions.
LayerSwap aims to democratize this by not limiting the ability to move assets between CEX and L2 to only specific L2 solutions but instead any L2 solution thereby giving the option to the user to choose.
zkSync
zkSync integrated with the decentralised blockchain indexing service — TheGraph and now zkSync is the first layer-2 scaling solution based on zk-rollups which has integrated with TheGraph
This is good news for developers building Dapps on zkSync because it will allow them to fetch on-chain data with subgraphs more efficiently.
⭐️ Trends and projects to watch out for
CEX and L2 integrations: With the integration of layer-2 solutions such as Arbitrum with Binance and Zksync with Huobi exchanges, we will continue seeing many more similar L2 scaling solutions integrations with tier-1 centralised exchanges in near future.
⭐️ Layer-2 investments
At this point, most L2 scaling solutions do not have their token and there is no official announcement from any team about a token in the future besides some speculation. ZkSync is the most likely to release a token in future but again, it is not guaranteed.
The best way to gain investment exposure to L2 platforms is by investing in projects which are built or actively building on L2.
Few examples are projects such as Immutable X and DyDx which are built using StarkEx, an L2 scaling engine by Starkware.
ZigZag L2 decentralised exchange
This new decentralised exchange has the goal to build a permissionless DEX which leverages ZK rollups based scaling solutions such as zkSync and StarkNet.
Their zkSync integration is already live and integration with StarkNet mainnet release will be live soon.
