A look at the current status of Ethereum L2 series

Review of the past year

It’s been over a year since the main Ethereum L2 launch. L2 chains have matured, with distinct ecosystems and communities. The rollup-centric future remains intact.

I'm going to extract some of the content from a post I wrote almost a year ago to show some of the progress that has been made in L2.

At that time, the major ORU fees were relatively high.

The fee landscape is very different today, reflecting the progress made by all L2 teams.

In terms of TVL market share, L2’s ranking has risen over the last year.

This is the situation in November 2021.

This is October 2022.

Of the top 10 chains, only Arbitrum and Optimism have seen their TVL increase over the past month.

Over the course of the last year we have had a significant number of users that have bridged to L2. These are the stats for Arbitrum, Optimism, zkSync, and StarkNet.

However, despite the advancements in technology, if we are critical and look at the two most dominant Rollups in terms of activity compared to Ethereum, both L2s still have a way to go. Despite offering lower fees and speeds, Arbitrum and Optimism have not surpassed Ethereum in terms of daily activity or day-to-day transactions. Below is a high-level snapshot of where L2 currently stands in terms of adoption.

About Optimistic Rollups

Aside from application-specific rollups, Optimistic Rollups are the first general-purpose rollups to see significant numbers of users bridging funds from L1. They are the first real opportunity for people to gain access to the security guarantees of Ethereum without having to pay high gas fees.

Arbitrum has released their flagship upgrade: Nitro. They have seen the most adoption of any general purpose Rollup so far. Despite the bear market, they have 4xed their daily volume and doubled their daily unique transactions.

Here is a ranking of the most traded projects on Arbitrum.

Two other important things to note about Arbitrum:

Arbitrum Nova is an addition to the suite of products Arbitrum offers. A new chain that is well suited for gaming and social applications. Reddit’s Community Points will live on Arbitrum Nova.

They acquired Prysmatic Labs. Prysmatic Labs developed and still runs the computer software Prysm, which is used by more than 43% of the Ethereum nodes running the Ethereum network.

Stephen Goldfeder and Preston Van Loon spoke about the acquisition here:

I suspect Arbitrum acquired Prysm because a future sequencer could be built similarly to Prysm, making it easy for most Ethereum validators to run it.

If a validator can run the Prysm client on a single device, then they can likely run both Ethereum and the Arbitrum sequencer (and earn Arbitrum tokens) using the same hardware.

What is the current status of Optimism token?

It is clear that Optimism’s native token, OP, has achieved its desired effect, with daily transactions moving up and to the right.

Optimism Daily Trading

There are now over 150,000 OP holders. OP is distributed in many different ways, but it is now primarily used to support the growth of the ecosystem.

Perpetual Protocol currently sees the most transactions on Optimism, but Uniswap and Velodrome see the most unique addresses interacting with them.

Another interesting metric for Optimism and Arbitrum is their developer adoption rates over the last year. These stats come from Alchemy’s recent web3 report:

Optimism:

• Active development team has grown by >1000% year-to-date

• Active development team annual growth >1000%

• API consumption up 460% year-to-date

Arbitrum:

• Active development teams have grown 516% year-to-date

• Active development team annual growth rate 795% team

• API consumption up 121% year-to-date

The dapps ecosystem on both Arbitrum and Optimism has grown considerably since launch, with over 280 projects listed on Arbitrum’s ecosystem website and over 200 on the Optimism website.

GMX has become one of the highest-earning dapps in all of crypto, demonstrating that L2-native dapps can capture value.

A more difficult metric to quantify is the strength of both communities. I think Arbitrum has managed to develop the largest cult following of all L2s to date. Looking at the size of the community and engagement on Twitter, as well as the fact that certain native dapps (GMX and Magic) have their own die-hard fans, Arbitrum seems to have a strong base to build on.

I think Optimism is also doing a great job with community initiatives. I think their recent quest to earn NFTs was well executed. The design decision of the non-token citizen home was a great governance move.

OP Stack and Hyperchain

Optimism just announced that another major upgrade is coming: Bedrock. And they introduced the “OP Stack” in a blog post a few days ago.

OP Stack is not only Rollup and Optimistic, but also a modular open source blueprint for a variety of highly scalable and highly interoperable blockchains.

OP Stack will allow developers to build modular blockchains. It is a series of modules, each component implementing a specific layer of the stack: consensus, execution, and settlement. In theory, you can swap out Ethereum's DA layer for Celestia and run Bitcoin as the execution layer.

A team has built something cool using the OP Stack. OPCraft runs on the OP Stack custom Rollup. Using the MUD on-chain game engine and @optimismFND's OP Stack, they built a 3D autonomous world. (https://dev.optimism.io/opcraft-autonomous-world/)

If OP chains decide to share a Sequencer Set, "OP chains" will be highly compatible and able to leverage atomic cross-chain composability. To the end user, it should all be just one logical chain: the Superchain. It will be fun to watch the competition.

~This is a visual representation of a hyperchain~

About ZK Rollups

Zero-Knowledge Rollups have made a huge difference in the last year. I won’t explain zero-knowledge proofs in this post, but if you want a good list of resources to help you understand the technology, click here.

During ETHSeoul in August this year, Ethereum co-founder Vitalik Buterin predicted that ZK-Rollups will win the Layer 2 scaling battle against Optimistic Rollups.

The image is a simplified ecosystem with over 100 dapps built on ZkSync alone.

zkSync

zkSync has managed to acquire a large number of unique addresses.

My guess is that this is mainly due to Argent's contribution.

I’m talking about Argent’s mobile app, which allows anyone to create a zkSync wallet from their phone and quickly and cheaply use DeFi with the security guarantees of Ethereum, all while navigating with a great UI/UX. All the complexity that crypto natives are used to is abstracted away into the background.

Account abstraction (AA) will change the way people enter cryptocurrencies and trade. Both StarkNet and zkSync support it. The following thread explains the advantages of AA.

In short: better user experience, increased security, greater flexibility, and more. Mnemonics will become a thing of the past.

zkEVM

The zkEVM was once thought to be a few years away, but now zkSync is on the cusp of releasing zkSync 2.0. They say this will be the first fully working end-to-end zkEVM.

zkSync announced that it has successfully completed Milestone 3: Merged Proofs. By integrating Proofs of Validity, zkSync 2.0 officially became the world’s first zkEVM running on a public testnet.

zkEVM is the first zero-knowledge scaling solution that is fully compatible with Ethereum. It allows developers to migrate their dApps from EVM-compatible chains very easily. Developers can simply deploy their existing smart contracts without making any additional changes.

I do think we should temper some of our expectations, it’s actually expected to be fully alpha by the end of this year. Until then, no external bridge will be possible for any user. Steven Goldfeder, co-founder of Arbitrum, shared his skepticism about the timeline being portrayed.

I don’t know who needs to hear this, but I will say that it makes no sense that we are not 12 days away from the first zkEVM on mainnet. Anyone pushing that narrative is doing a disservice to the community.

We have two other teams in the zkEVM competition: Scroll and Polygon.

Scroll is the project I'm least familiar with. I don't think they've spent much time marketing themselves.

They just released their upgraded Scroll Pre-Alpha testnet. Their previous version attracted over 10,000 users to test their bridge and demo branches of dapps such as Uniswap. Their new testnet upgrade supports deployment of smart contracts on Scroll, allowing developers to write and deploy their own contracts on Scroll using the same Ethereum developer tools they are familiar with. Their alpha testnet will be next.

Starknet

I will quote Vitalik again:

"Starkware is made up of very smart cryptographers who are actually sane."

Every time I hear Eli and Uri (StarkWare founders) talk, I become more convinced that their vision has a good chance of becoming a reality.

StarkNet has been in alpha stage for a while now. Alpha 0.10.1 of StarkNet has just been successfully released on the Goerli testnet. They are still limiting the number of people who can connect to StarkNet while they focus on improving performance.

I don't think the StarkNet metric is important right now because it's still in Alpha.

But the metric that demonstrates what’s possible with StarkWare’s technology is the scale achieved by StarkEx provers and verifiers. Over 70 million NFTs have been minted on Sorare and ImmutableX. This is orders of magnitude higher than the total number of NFTs minted on other L1s and L2s combined. This scale has not been matched by any other system yet. Last week, StarkWare (StarkEX and StarkNet) had 1.6x more total transactions than Ethereum (12 million vs. 7.5 million). As an L2, all of these transactions are “rolled up” into a single proof recorded on Ethereum, gaining the same security and immutability as all Ethereum transactions.

Cairo 1.0 is a major release that will be released in late 2022. Cairo 1.0 has been “rebuilt for the decentralized web.” It is designed to support StarkNet’s requirements as a permissionless network, making the protocol simpler and more secure.

StarkNet Alpha is now moving towards Regenesis. The main motivation for Regenesis is to take advantage of the new possibilities brought by Cairo 1.0 - namely sequencer DOS protection, censorship resistance and gas metering, which are essential for StarkNet as a decentralized network. After Regenesis, StarkNet will only work with Cairo 1.0 based contracts and will start from a new genesis block but with existing state.

Some have been skeptical that developers will commit to learning Cairo in order to build on StarkNet.

Interestingly, AAVE and Maker are currently building on StarkNet and have not converted their Solidity code to Cairo. They are starting from scratch, which suggests that they believe Cairo provides enhanced performance for their protocols.

The thesis from the founders of StarkWare is basically that most L2 projects will be written in native L2 code within two years.

Eli Ben-Sasson (Founder of StarkWare)

They also announced the STARK token:

• StarkNet’s decentralization involves a native token and a new foundation.

• StarkNet tokens are used for governance and as a payment and staking asset for the network.

• 10 billion tokens have been minted and their distribution has begun.

Hopefully StarkNet will be freed from its shackles by 2023.

A brief introduction to ImmutableX

ImmutableX is an application-specific StarkEx zk-rollup aimed at pursuing gaming. Immutable already provides the incredible scale needed to support gaming (9k tps). One of the blockchain games I’ve been following for a long time is Illuvium, and I think it’s a huge vote of confidence in ImmutableX that they’ve decided to make it the home for their games.

Aztec

OFAC has been wreaking havoc on privacy projects lately. Many crypto natives are very concerned about this. Aztec offers a glimmer of hope.

Aztec is a zkRollup that allows users to privately interact with protocols on layer 1 Ethereum.

Projects don’t need to refactor their codebase to redeploy on rollups. They don’t even need to use a transpiler to deploy to zkRollup. Aztec is basically like a VPN, allowing users to use the protocol natively on L1. If you want to dig deeper, Jason has put together this great thread. (Thread: https://twitter.com/mrjasonchoi/status/1583122134334783489)

About Polygon Rollup

I feel like I have to single out Polygon for this post. Polygon has grown into its own set of Ethereum extension tools. You can see that they have many L2 solutions, most of which are acquired independent teams/projects.

Or to put it another way.

Before the proliferation of L2, Polygon PoS was referred to as L2, but is now defined as an EVM sidechain.

The Polygon zkEVM will certainly be the first zkEVM to go into production.

As you would expect from a founder, Mihailo fully supports the Polygon zkEVM as the most comprehensive solution.

Polygon recently announced that their zkEVM is now the first zkEVM to hit a major milestone: we are entering our testnet, which contains a complete open-source ZK proof system.

It’s worth noting that the testnet version of the Polygon zkEVM has limited throughput capabilities, which means it’s still a long way from being ready in its final form as an optimized scaling machine.

One thing that’s impressive about Polygon is their business development team. They really manage to get big brands on board. This isn’t specific to L2, but they’ve recently worked with Starbucks and Robinhood.

They have an impressive track record of gaining brand adoption, so I’m sure the pipeline will help with adoption of their L2 solution.

MATIC is a token that I assume will be used as a fee token throughout its suite of scaling solutions, which could give the token quite a bit of intrinsic value.

L2 Value Capture

There are many predictions that L2 will be a more lucrative play than the ALT L1 rotation trade in the coming years.

But how do L2 tokens gain value?

OP's revenue model is based on the transactions it sends to the base layer sorter for processing. The sorter fee consists of two parts, L2 execution fee and L1 data fee.

Currently, they are investing these revenues into public goods to build the ecosystem, thereby bringing in more users and revenue.

Optimism or any L2 can decide to distribute revenue to stakers, but this is meaningless until the L2 is sufficiently mature.

Chains built using the OP stack may decide to use OP tokens to power their chains, which would create more demand for the tokens.

STARK’s token will be used as a fee token instead of ETH. Although Starkware says users will also be able to pay in ETH “for a good user experience.” This means that ETH will most likely be automatically converted to STARK via a DEX.

ImmutableX already requires a 20% protocol fee on every trade to be paid in IMX. If you don’t currently have IMX, they will convert the fees by purchasing IMX on the open market (maintaining a seamless user experience), and then distribute those fees to stakers.

MEV will become another way for L2 tokens to capture value. L2s could see more complex MEVs and coordination of validators and sequencers. MEV auctions sell the power to sequence transactions, with the winner gaining the power to sequence blocks. The proceeds from the auction can then be sent to the DAO’s public goods pool or redistributed to token holders through buybacks or burns.

If Rollups have millions of users, then clearly they have many ways to capture significant value.

What’s L2’s next game?

All L2s will reward their communities for being loyal and active participants. L2s want to get their tokens into the hands of the community.

You can now earn OP by using dapps, there will be ongoing airdrops for ecosystem participation, for example OP now also has an ongoing mission.

As for other L2s, you should explore all ecosystems, bridge, play with dapps, use testnets, become an active member of the Discord community, etc.

The Rollup-centric roadmap will pay dividends for ETH, and I expect the strongest L2 will eventually gain value. However, the distribution of tokens will take years, just as the effective distribution of Ethereum took years. We will see low circulating supply for a long time, and you must consider fully diluted valuations when assessing value.

Entering the next cycle, L2 tokens will also have a shiny new status. We all know that retail investors love shiny new tokens…