Layer 2 or L2 solutions are a way for Ethereum to scale blockchains. Before layer 2 solutions came into existence, Ethereum ran the blockchain in a monolithic manner, implying all the actions were done on the blockchain itself from transaction processing to maintain security and data integrity. However, with Ethereum adapting a modular system that makes use of a multi-layer system, resulted in delegating some of the work to other layers in the network.
Layer 2 operates on top of Ethereum also referred as Layer 1. Other known Layer 1s are Bitcoin, Solana, Binance Smart Chain and more. These Layer 2 solutions usually execute transactions outside of their underlying network and once done, they send back compressed forms of the transactions back to the network. In this way while L2 performs the execution part, Layer 1 takes care of security and storage. Arbitrum and Optimism are the most popular layer 2 solutions running on top of the Ethereum network. In today’s article, we are looking at how these two projects will perform in 2022.
Arbitrum is an optimistic rollup that has been consistently competitive in the rollup landscape and has so far emerged as the predominant L2 for DeFi with a great ecosystem of innovative applications and a strong community.
The total value locked of Arbitrum stands at $1.47b according to DefiLlama, which is the fourth largest of any L1 or L2 and good for a 2.98% share of TVL across all networks.
<source: defillama>
Arbitrum averaged 614.28K Monthly Active Addresses (MAA) in Q4, good for 81% and 729% quarter-over-quarter (Q/Q) and year-over-year (Y/Y) growth respectively. The L2 is on pace to exceed that number in January 2023, as it’s currently set to clock in at 632K MAAs for the month, with 590.62K clocked for January.
<source: Dune>
Arbitrum’s transaction counts have grown concurrently with user counts, experiencing Q4 growth of 200% and 1900% Q/Q and Y/Y respectively. Since October 2022, Arbitrum has processed 53% of the number of transactions validated on Ethereum L1 over that same period.
<source: Dune>
Optimism is another optimistic rollup, and alongside arbitrum, has emerged as one of Ethereum’s leading scaling solutions. One of the distinctive differences of optimism over arbitrum is that they had recently launched their own token (OP), which has been performing comparatively better considering the current market conditions.
Optimism’s DeFi TVL currently sits at $811.84M. This places the rollup as the second largest L2 by TVL behind Arbitrum ($1.47B) and seventh largest of any network tracked by DeFi Llama. Optimism has seen its overall TVL share soar over the past year, rising from 0.2% to 1.2%. Its share within L2s has also grown dramatically, increasing from 14% to 35% during this time.
<source: Defillama>
Optimism has experienced massive growth in active addresses in 2022, with total daily active addresses (DAA) in Q4 soaring 1768% when compared to Q1.
<source: Artemis>
One of the distinctive attributes factoring the spike in growth was the Optimism quests program similar to Arbitrum Odyssey where users earned NFTs in exchange for interacting with dapps on the network.
Optimism’s transaction count surged over the course of 2022, with total Q4 transactions increasing 851% relative to Q1. This growth trickled down in Q4, with transactions growing 145% Q/Q when compared to Q3.
<source: Artemis>
Optimism has several catalysts on the horizon that should help sustain its growth over the next several months, starting with 10M OP distribution this month followed by Bedrock upgrade which is set to further reduce transaction costs, and increase transaction speeds.
On the other hand, Arbitrum should benefit from network effects through its expansive DeFi ecosystem that is likely to help it maintain, or even grow its lead, in TVL among L2s. The Arbitrum token is the elephant in the room, it is expected that the Off-Chain labs may eventually release the ARB tokens soon to maintain its competitive footing.
Many experts are predicting 2023 to be the year for Layer 2 projects as crypto adoption is gaining traction among both retail and institutional user groups. With numerous catalysts on the horizon that should help it remain on this trajectory for both the projects, they appear poised to build on its strong foundation of applications and continue on its growth trajectory in 2023.
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