Layer2 Research from Catapult Community
Disclaimer: This article was compiled from research articles created by members of the Catapult community.
Layer 1 vs Layer 2: What are the differences?
Layer 1 is the main blockchain responsible for on-chain transactions, while Layer 2 is the network connected to L1 and responsible for off-chain transactions.
Scalability and speed issues of L1 blockchains led to the birth of Layer 2 blockchain solutions such as Ethereum-based Polygon blockchain or Bitcoin-based Lightning Network.
In short, Layer 2 or L2 blockchain solutions allow thousands of low-value transactions to be processed after verification on parallel blockchains, after which the records are transferred to the main blockchain or mainnet to guarantee their immutability.
Layer 2 solutions comparison
Though, what essentially are these L2 solutions? Why is there a situation where some Layer 1 blockchains like Ethereum or Bitcoin need to add an additional layer to their architecture? Let’s find out!
First of all, let’s check a comprehensive comparison chart of different types of scalability approaches.
Even at first glance, it’s obvious that these different types serve different purposes. Some of these solutions are aimed at increasing certain performance aspects of the parent Layer 1 network: TPS, further scalability, fees, or even anonymity.
Surprisingly, most Layer 2 chains we know belong to a very narrow selection of types, while some other Layer 1 or 2 blockchains are in use for years, yet still unnoticed. For example, Ethereum Layer 2 solutions that are entering or have recently entered the market are mainly concentrated around 2 core technologies — Optimistic Rollups and Zero Knowledge Rollups.
Both of these technologies promise a bright and cheap gas future for Ethereum, with a better anonymity set.
One of the lesser known types of Layer 2 solutions is app-specific Layer 2. They can be different in their structure, purposes, and even consensus achievement parameters. All for one purpose — deliver the best performance as an underlying Layer (or actually Layer 2) of some specific app or numerous apps. In other words, to understand the app-specific Layer 2 solutions better, one would need to dig deeper into their products and main performance metrics. Naming a few of the more famous app-specific Layer 2 solutions there are dYdX, ImmutableX, Ronin, and some others.
Tokens Narrative
Now, let’s move to the most interesting and hype part — native tokens of some of the Layer 2 solutions. Of course, not all of the Layer 2 have native tokens, but most of them do have or promised to launch them sooner than later.
Officially we’re on the bear market for more than 6 months at the time of writing this article. Let’s review some of the performance metrics of selected Layer 2 projects and try to make some humble projections about their performance.
Of course, DefiLama is imperfect, just like any other analytics platform. But they have one defined methodology to calculate their data, right? So at least we can follow the trendline and compare similar values and parameters from different projects.
Out of 8 Layer 2 solutions, only 4 have an existing native token. 4 others don’t have it (maybe for a good reason).
Though, let’s skip projects without tokens and check the other 4 chains’ valuations and current market cap.
According to DefiLama, the biggest Layer 2 with the token in terms of total value locked (TVL) is Arbitrum. On the other side, the biggest Layer 2 solution with a token in terms of TVL is Optimism. At the time of creating this article, Optimism had the second biggest TVL ($939.71M) among the 8 reviewed, with Arbitrum being the first in terms of TVL ($1.01B) with only less than a 10% difference. The interesting thing is that Optimism, out of all other Layer 2 solutions with a native token, is the only one to have TVL higher than Market Cap.
It turns out that among the reviewed Layer 2 solutions with tokens, only 1 of them operates and locks more funds than their native token valuation, which is a really good point of view on the current state of the industry.
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