TL;DR
For another bull market to occur, Layer 2 (L2) adoption on Ethereum is key: without it, gas fees on the base chain won’t allow mainstream adoption. The good news is that L2s are maturing, and adoption is already happening. Arbitrum, in particular, is showing high daily transaction volume, even comparable to Ethereum’s main net, despite a much smaller market cap.
You could argue that for another bull market to happen, Layer 2 adoption on Ethereum is a requirement. Without Layer 2’s to offload traffic, gas fees for a swap on the Ethereum base chain will exceed $100. The bull market will throttle itself as the Ethereum base chain will get overpopulated. This happened in the previous cycle.
The good news: Layer 2 solutions are popping up left and right and people are finally using them. In fact, daily activity has been outpacing Ethereum main net through 2023. In the last two months, it’s been by nearly a 3:1 margin for the last two months. Here’s the chart. Red is added Layer 2 transactions, blue line is Ethereum.
Wen Layer 2 Summer?
Viewing the above chart, you could argue Layer 2 summer is already here. Still, markets don’t really feel frothy yet – far from it. It feels more like the ‘bear market is for building’ phase. Compare it to how the groundwork for DeFi summer of 2020 was laid during the bear market of 2018 and 2019.
And make no mistake, a lot of building still needs to be done for crypto as an industry to reach some serious degree of mainstream adoption. This is at least Vitalik Buterin’s point in a recent post. According to him, for Ethereum to move from an experimental technology to one that can onboard the masses, there are three major technical transitions that it needs to undergo. The Layer 2 scaling transition is one of them. The other ones are people moving to smart contract wallets (in which they don’t have to store a private key). And the third is privacy-preserving transactions.
If the builders keep building and can manage to achieve all the above within a year or two, and if historic market cycles rhyme with the current, the bear market of 2022/2023 will serve as the foundation for a potential Layer 2 summer in 2024.
What will definitely help L2s is that The Ethereum Improvement Proposal 4844 (EIP-4844), part of the Cancun upgrade, will go live roughly in autumn 2023. It will reduce transaction fees on Ethereum by at least a 10x. While this is of course good for Ethereum users, it also benefits layer 2’s who transact on Ethereum’s base chain. Especially for large-scale applications like gaming or social media, that 10x will matter.
The final ingredient that yet is missing, is a breakthrough application. Everyone is building the base layer technology on which the applications can ride. But we are still waiting for a ‘ChatGPT moment’ in crypto. What application will bring the masses in, if any? Or which ecosystem of applications? A metaverse, a game, a social media platform? The tokenization of real-world assets? Tokenized ticketing, music. If/when these applications will pop up, unlocking new possibilities and use cases, they will attract more users to the Layer 2 ecosystem.
Layer 2s: the Data
Now let’s have a look at some Layer 2s.
Here are the L2 coins in the top 300 (data from Coinmarketcap.com). There is a clear top 4: Polygon, Arbitrum,…
Erik started as a freelance writer around the time Satoshi was brewing on the whitepaper.
As a crypto investor, he is class of 2020. More of a holder than a trader, but never shy to experiment with new protocols.
