Why L2 Scaling May Be More Important Than Eth2.0 Merger

L2 is probably the most important part of Ethereum scaling in the next 12-24 months. Even more than the Eth2.0 merger. So I wanted to do some research on how L2 is developing and where they are going in the future.

The growth of L2 over the past 12 months has been phenomenal. The total value locked (TVL) has grown by about 100x from $50 million in January 2021 to about $5.5 billion today. While it looks like TVL has dropped slightly in USD terms, TVL in ETH terms is close to an all-time high.

Source: http://l2beat.info

L2’s average daily gas consumption is less than 1% of the Ethereum network. With the upgrade to Optimistic Rollup and Arbitrum (calldata compression), this chart may go lower in the short term. The expansion solution Arbitrum Nitro has recently been launched, and the Optimism upgrade will be launched next week.

Source: @PaoloRebuffo

Calldata compression may cause L2 Ethereum gas usage to drop in the short term. This is because the gas usage of Rollup to publish checkpoints to Ethereum L1 will drop. This is a good thing because it means that Rollup transactions will become cheaper with the same number of transactions.

For Rollups to truly scale, I’d expect L1 gas usage to be closer to 10-50% (or even higher). What does the Ethereum ecosystem need to get us there?

An important part is the cross-chain bridge. The bridge allows users to move tokens from L1 -> L2. Bridge protocols have seen huge development in 2021. If the cross-chain bridge Hop Protocol launches a token/airdrop, expect this to become even bigger, and we are seeing exchanges such as Coinbase providing better bridge support.

Dapps and infrastructure are also important. Many DeFi applications are already deployed on L2. As the bridge improves, expect to see more L2 deployments. Wallets are also important infrastructure. Metamask has supported L2 for a while, and other popular wallets such as Rainbow also support L2.

UX around bridges and multi-chain asset tracking should improve significantly in 2022. I think we will see most wallets race to bridge aggregation, just like they raced to launch DEX aggregation in the past.

This post focuses primarily on optimistic rollups, as they are the most widely available and accessible rollups today, but ZK rollups are also rapidly gaining traction. Note StarkWare and zksync as two of the leading projects in this category.

The key points are:

• L2 is getting cheaper

• Bridge UX and usability are improving

• L2 scaling is more important than merging, making Ethereum accessible to everyday users (low fees)

• L2 improvements create a flywheel where more usage means lower fees.