Bankless: A review of Layer 2 in 2022

Original Author: Ben Giove

Original compilation:The way of DeFi

2022 is a dismal year for Crypto, with stablecoins, hedge funds, lenders, and exchanges all imploding in dire fashion. Much of the field collapsed, but there were still some growth points amid the carnage. A prime example of this long-term growth is the Layer-2 ecosystem.

Ethereum's superior scaling solution has quietly experienced an explosion in 2022, with many milestones in both the infrastructure and application layers, and extraordinary growth in key KPIs.

With that in mind, let's take a look back at L2's 22 years and see if 2023 turns out to be another breakout year.

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TVL

L2 TVL in ETH; Source: L2Beat

The dollar value of assets bridged to L2 fell 28.6 percent from $5.7 billion to $4.1 billion. However, this may be due to the drop in cryptocurrency prices rather than the withdrawal of user funds, as TVL in ETH rose from 1.6 million to 3.4 million, a 120.6% increase. This shows that, net of prices, L2 has a lot of liquidity inflows in 2022.

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Arbitrum's monthly trading volume; Source: Dune Analytics

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Optimism’s monthly trading volume; Source: Dune Analytics

Optimism has also experienced a substantial increase in transaction volume, likely due to increased activity following the launch of OP and subsequent incentive programs. Optimism processed 3.2 million transactions in Q1 and 30.3 million in Q4, an increase of 846.7% between the two periods.

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Arbitrum monthly active users; Source: Dune Analytics

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Optimism monthly active users; source: Dune Analytics

During 2022, Optimism will also experience a substantial increase in users. Riding the aforementioned wave of token offerings and incentive programs, Optimism’s monthly active addresses surged 1118.7% from an average of 33.1K in Q1 to 403.4K in Q4.

highlight moment

Rise of GMX

GMX emerges as a breakthrough L2 application in 2022. When on-chain activity dried up and prices fell, usage of the Arbitrum-based decentralized perpetual exchange skyrocketed, putting L2’s increased throughput to good use by facilitating $81.4 billion in trade volume and generating $33 million in revenue quantity. GMX has become the core foundation of Arbitrum, accounting for 39.5% of the network TVL. Many projects such as Dopex, Vesta Finance, Rage Trade, Umami Finance, etc. are built on GMX and integrate the platform's liquidity token GLP.

This growth, along with a strong group of tokens incorporating revenue sharing, has resulted in the GMX token being one of the best performing assets among all cryptocurrencies, gaining 87.4% against USD and 487.2% against ETH in 2022.

L2 Token Airdrop

Several well-known L2s launched tokens in 2022.

The most notable of these is Optimism, which airdropped 5% of the OP supply to early adopters and stakeholders. The launch of the token has catalyzed an uptick in user activity and liquidity on the network, with its TVL up 86.9% since its launch on May 31.

Another L2 launching a token is zk-rollup provider StarkWare. StarkWare, which announced a funding round in May at a whopping $8 billion valuation, launched their STRK token in mid-November, although it's not yet tradable.

The OP, and of course STRK, have yet to unleash their full value-accumulating capacity for use in decentralized Optimism and StarkWare sequencers, respectively. Nonetheless, the launch of both is an exciting first step in the design of the L2 token and will continue to serve as an important strategic tool for each network.

zkSync launched

zkEVM is considered the holy grail of scaling solutions because it combines the network effects and development tools of the EVM with the massive throughput of zk-rollup.

However, no one seems to be touting zkSync, but they launched zkEVM, zkSync 2.0, mainnet in October. It’s worth noting that the network is still in “baby alpha,” the first of a three-phase rollout, and not currently open to contract deployment or end-users, but the network reaching production still represents a huge achievement in terms of scaling.

trough

The departure of dYdX

A major low point for the L2 ecosystem in 2022 is the impending acquisition of dYdX by Cosmos.

In June, the perpetual exchange announced that it would be migrating from StarkEx, opting to launch its V4 as its application-specific blockchain built using the Cosmos SDK.

This is a substantial blow to the current L2 landscape, as dYdX is the largest decentralized perpetual exchange, facilitating $461.2 billion in trading volume over the past 12 months. This action by dYdX has also led to speculation that many other well-known dapps will also migrate from Ethereum, avoiding the L2 ecosystem and choosing to build their own sovereign chains.

So far, no such mass exodus has occurred. However, dYdX's decision is a stark reminder that L2 will continue to face stiff competition.

Centralized carriers still exist

say it's a"trough"May be a bit harsh -- but many L2s still continue to operate under the primary trust assumption. For example, neither Arbitrum nor Optimism have fully implemented trustless fraud prevention measures and decentralized sequencers. Also, each network can still be upgraded by the core team (albeit with a timelock delay).

This is understandable since upgrades are new technologies and these centralized carriers act as guardrails to prevent the loss of user funds. However, these trust assumptions remain a source of risk going into 2023.

outlook

2023 promises many exciting developments for existing and new L2s.

Let's talk about a few of these aspects:

Arbitrum

First, Arbitrum has a number of catalysts that could spur its growth in 2023.

In addition to the seemingly endless number of innovative DeFi applications being launched on L2, the network is poised to benefit from the recovery of the Arbitrum Odyssey. Odyssey is a campaign designed to encourage usage of well-known dapps on the web by rewarding users with NFTs. Odyssey was delayed for the second week due to the spike in gas fees it caused, but the event should resume in the near future.

Additionally, Odyssey could also be a precursor to the Arbitrum token launch. This token may be airdropped to early adopters and Odyssey participants, while being used by dapps for incentive programs. Arbitrum is tight-lipped about the details of its token, but if (and when) it does launch, it will likely result in a massive spike in user activity and liquidity flowing into the network.

Optimism

Optimism is also on track to see another year of strong growth in 2023.

With the continued rollout of OP incentives and the upcoming second airdrop, Optimism is poised to achieve significant scalability improvements with the launch of Bedrock. Bedrock is currently live on the test network and is an upcoming network upgrade, which is expected to reduce the cost of submitting calldata to L1 and realize support for zk-proofs, etc."alternative proof system"support. Bedrock (along with the upcoming implementation of EIP-4844, which will drastically reduce all L2 gas costs) should result in a massive increase in the scalability of Optimism.

Optimism is also expected to see more adoption of the OP Stack, a development framework that enables the creation of custom L2s. The OP Stack is expected to gain more adoption with the launch of Aevo, a decentralized options exchange from Ribbon Finance, which will be built on an L2 utilizing the stack.

「Alt」L2s

These two optimistic rollups are not the only L2 that is preparing to do a big job in 2023.

There are many L2 milestones that will be achieved, such as the mainnet launch of Polygon and Scroll's zkEVMs.

As mentioned, zkSync will continue to roll out in phases to support smart contract deployment and eventually usage by eager degens like myself.

Additionally, other networks such as Fuel, a highly scalable ORU that utilizes Swell as its programming language, will also see further traction as developers become more familiar with their tools.

As we can see, L2 is a rare growth point in the ecosystem in 2022.

There have been many highs and some lows, but Ethereum is scaling and 2023 will be another explosive year for L2.