Layer 2 Wars, the competition is heating up

Layer 2s (L2s) are scaling solutions for Ethereum, here to save the day from the horrific gas fees we have come to know Ethereum for during busy times.

“Layer 2” describes the collection of solutions that plan on scaling Ethereum, the Layer 1 blockchain, by increasing the network's speed and throughput. However, we are now seeing the number of L2's expand quite rapidly. In an industry where network effects often mean so much, the war to become the most used L2 is heating up!

Each L2 has a different approach or technology it is built upon, here is a quick overview/intro.

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• Plasma/Child Chains: Copies of Ethereum on another chain (child chains), moving traffic from the primary L1 (see L2's: Polygon & Matic)
• Roll-ups: bundle transactions together, complete them off-chain and store the important info on the L1 chain
  • Optimistic, assumes every transaction is valid, unless challenged (see L2's: Optimism and Arbitral)
  • Zero-knowledge, mathematically (cryptographically) proven from the onset that a transaction is valid. Much faster & efficient than optimistic roll-ups. (see L2's: zkSync,Loopring, dYdX). sidenote, Validium is similar but doesn't store transaction data on L1.

There will no doubt be more to come in the future.

Currently, there is around $34 billion total locked value (TLV) on ethereum in total, $4.6 billion of this is on Layer 2's.

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Total TLV on Layer 2's, source: https://l2beat.com/scaling/tvl/

Here we can have a quick overview of how this is spread across various L2's:

Current TLV across L2's

We can also have a look at the fees to use some of these L2s, as that may ultimately drive consumer choice (note this is a snapshot of cost at time of posting, will obviously change, but gives you a rough idea).

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Source: https://l2fees.info/

The next section is an abstract taken from the Ethereum foundation website, giving a flavour of why there are so many L2s around and why it is a good thing!

WHY ARE SO MANY SCALING SOLUTIONS NEEDED?

• Multiple solutions can help reduce the overall congestion on any one part of the network, and also prevents single points of failure.
• The whole is greater than the sum of its parts. Different solutions can exist and work in harmony, allowing for an exponential effect on future transaction speed and throughput.
• Not all solutions require utilizing the Ethereum consensus algorithm directly, and alternatives can offer benefits that would otherwise be difficult to obtain.
• No one scaling solution is enough to fulfil the Ethereum vision

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To summarize, for the health of Ethereum we don't really want a winner takes all situation in L2's. however, as an investor, you obviously want to pick the best-performing one. Guessing this will be difficult, but exciting to watch. Perhaps taking a wider approach to investing in several L2's may be beneficial and that is what I will be doing going forward. But do whatever you want of course!

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Further reading

For visual learners:

• L2's explained: https://www.youtube.com/watch?v=BgCgauWVTs0
• Roll-ups explained: https://www.youtube.com/watch?v=7pWxCklcNsU

Reading:

• Vitalik's post on a 'roll-up centric roadmap for Ethereum':https://ethereum-magicians.org/t/a-rollup-centric-ethereum-roadmap/4698
• Scaling from EF: https://ethereum.org/en/developers/docs/scaling/