The Rising Focus on L2 Solutions in the Crypto Ecosystem

• Layer 2 solutions enhance scalability by resolving the high fees and slow processing times associated with Layer 1 blockchains like Bitcoin and Ethereum.
• By bundling transactions, L2s significantly boost transactions per second, improving speed and reducing costs.
• Increasing cryptocurrency adoption is driving L2 innovation and investment, leading to diverse technologies and substantial capital inflow.

Time and again, we have seen popular L1 networks — from Bitcoin and Ethereum to Solana — have been clogged with pending transactions, especially during periods of high activity. This not only leads to a significant increase in transaction fees but also prevents users from capitalizing on opportunities in time.

Such occurrences show us that speed and cost remain the biggest technical challenges in the crypto world. The root cause is the blockchain trilemma, which involves trade-offs among the technology’s three most critical aspects: decentralization, security, and scalability.

Layer 1 blockchains prioritize security and decentralization, achieved through a distributed, global network of participants. However, there’s also a downside to Layer 1 blockchain, as they often face scalability issues.

At the largest annual European Ethereum event, the Ethereum Community Conference (EthCC), Ethereum co-founder Vitalik Buterin highlighted Ethereum’s limitations, including its struggle to handle high volumes of transactions. This issue often results in increased fees and delays. He also pointed out the complexities newcomers face when interacting with decentralized applications (dApps) and the challenges associated with becoming a network validator.

To resolve these issues, scalability in particular, developers have taken to building layer 2 solutions.

Layer 2 blockchains are off-chain solutions built on top of L1s. Some of the current popular L2 solutions are Lightning Network, Stacks, Merlin Chain for Bitcoin and Optimism, Arbitrum, Base, and zkSync for Ethereum, to name a few.

Unlike L1, where every transaction has to go through the distributed network for processing and broadcasting, L2s take the load off by performing most of the functions off-chain. This is how popular payment platforms like Visa work. Instead of managing thousands of daily transactions separately, which ends up clogging the network, they batch the transactions for final settlement.

Similarly, L2 solutions offload the burden of managing thousands of transactions from the mainnet. To achieve this, L2s bundle a large number of transactions into a single transaction, which increases the throughput, i.e., transactions per second (TPS). For instance, Bitcoin has a TPS of 5 while Ethereum has 7, and in comparison, the L2 solution boasts tens of thousands in TPS.

Higher throughput helps increase speed and lower fees on these layer 2 solutions. Higher TPS and lower fees improve user experience and enhance the utility. Meanwhile, by settling transactions on the mainnet, they also retain security and decentralization.

L2s, however, aren’t of just one type. They utilize different technologies. Rollups tech is a popular one where transactions are executed off L1 and then rolled into a single piece of data before it gets posted back to the mainnet, where it is reviewed. There are even variations to rollups, such as Optimism and ZK rollups. Then, there are sidechains that work as independent blockchains and run parallel to the main blockchain. To interact with L1, sidechains utilize bridges.

A Massive Wave of L2s

With crypto adoption rising significantly, the need for greater TPS is more important than ever. As of 2024, over half a billion users currently own crypto, and this number is projected to double by the end of this decade.

So, the greater the number of crypto users, the higher the number of transactions happening daily, and the greater the need for higher network capacity. Hence, there is an increasing need for and interest in L2s.

Today, there are over a hundred projects working on enabling improved scalability if we go by Coingecko’s data alone. Top L1 coins are worth $1.8 trillion, with Bitcoin alone accounting for $1.16 trillion of it. L2 coins, meanwhile, have a combined market cap of almost $20 bln. To go further into it, top sidechain coins are worth $1.43 bln, while top Bitcoin sidechains have a $2.6 bln collective market size. Top rollup coins, on the other hand, have a $11.8 bln market cap.

According to L2Beat.com, more than $40 billion worth of capital is locked (TVL) across L2 projects.

The data clearly shows that a lot is happening in the L2 space, but this is just the beginning. As their usage and capital inflow continue to surge, many exciting things are coming up.

Some of the exciting developments currently happening in the sector include L2 network Starknet introducing staking on its ecosystem before the year is over. For scalability, it produces STARK proofs off-chain and then sends them on-chain. In the future, Starknet users will be able to lock their tokens for a 21-day period and earn rewards in proportion to the STRK tokens staked. Its CEO, Eli Ben-Sasson, called this “an important step in building the staking community and technology, offering new opportunities for users and developers.”

Popular Bitcoin L2 Stacks is currently preparing for a big upgrade called Nakamoto to honor the trillion-dollar crypto asset’s pseudonymous creator. With this upgrade, the L2 solution aims to decouple the Stacks block production schedule from that of Bitcoin to solve the congestion issues.

Hong Kong’s licensed crypto exchange operator, HashKey Group, is also planning to launch its Ethereum layer-2 solution, HashKey Chain, in Q4. Even meme coins like Shiba Inu have launched their very own L2 called Shibarium to handle a greater number of users and bring additional value to their ecosystem.

Then, new waves of L2s are entering the space. Blockchain platform Celo is launching its Dango Layer 2 testnet, for which it is utilizing Optimism’s OP Stack. Bitcoin and Ethereum-powered hybrid L2 project BOB raised $1.6mln in a funding round led by Ledger Cathay Fund and contributions from BlackRock, Rarible, Ordinals, Aave, Curve, Magic Eden, Mechanism, Injective, and Babylon.

While Solana boasts a high TPS, projects like Rome are raising funds from Polygon Ventures, HashKey, and angel investors, including Solana’s Anatoly Yakovenko and Austin Federa, to allow Ethereum-based rollups to use Solana as a shared sequencer.

Given L2’s focus on allowing higher throughput and, as a result, greater transaction inclusion, it makes sense everyone is onboarding the L2 train. However, it’s important that equal efforts are being made to attract users to engage on these platforms. For that, we need to focus on simplifying user onboarding and providing a more seamless user experience.

About Shyft Network

Shyft Network powers trust on the blockchain and economies of trust. It is a public protocol designed to drive data discoverability and compliance into blockchain while preserving privacy and sovereignty. SHFT is its native token and fuel of the network.

Shyft Network facilitates the transfer of verifiable data between centralized and decentralized ecosystems. It sets the highest crypto compliance standard and provides the only frictionless Crypto Travel Rule compliance solution while protecting user data.

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