Layers 2 Ethereum: status and challenges

Ethereum has established itself as the leading environment for developing financial applications using smart contracts. However, with the growing popularity of the network, challenges such as scalability, high transaction fees and congestion have emerged, limiting the accessibility and efficiency of this blockchain.

To address these issues, a new generation of secondary layer solutions called "layer 2" (L2), has emerged from 2021, promising to improve Ethereum's performance while maintaining its security and decentralisation.

This brief sets out to take stock of L2s on Ethereum, exploring their major contributions, recent innovations and persistent challenges.

What are the most significant achievements of L2s?

It is undeniable that L2s have made a major contribution to reducing transaction costs in the Ethereum ecosystem, while enabling an increase in the number of transactions per second. The contribution has been even greater since the implementation of proto-danksharding as part of the Dencun update (March 2024).

"It has improved the use of Ethereum as a Data Availability provider and reduced fees on L2s by 90-95% in recent months," points out Jimmy Ragosa, Ethereum expert. "We are already noticing a x11 increase in terms of transaction capacity per second compared to the main blockchain and costs per transaction dropping below $0.01 on a majority of L2s," he details.

This performance gain is expected to continue in the coming years. "The implementation of PeerDAS (2025) and then Full Danksharding (2026-27) will further improve L2 scalability by a factor of 10 to 100 and more," adds Jimmy Ragosa. "And at the same time, all the L2s will be improving their sequencers, proof systems and virtual machines on their own", he insists.

Other victories can be seen on the accessibility side. "We can note an improvement in ease of use with account abstraction and the arrival of big names such as Coinbase who are advancing their strategy to push mainstream users to use blockchain directly when they didn't before," observes Stanislas Barthélémi, crypto expert for KPMG.

What are the key challenges?

1) Limiting liquidity fragmentation between L2s

Liquidity fragmentation occurs when the same types of digital assets are spread across different L2 solutions, each with its own liquidity pools. This means that instead of having a centralised and consolidated liquidity pool on a single platform, liquidity is spread across several L2s, such as Arbitrum, Optimism, Polygon, and others.

"Token liquidity is split across plenty of L2s and the user doesn't necessarily know which L2 has the best liquidity for each token. A solution that aggregates all liquidity would remove a big barrier to the adoption of decentralised finance (DeFi) from L2s," Jimmy Ragosa points out.

"The various L2 ecosystems are working on their interoperability layer to remedy this (such as Polygon's AggLayer project for example), but most of the time, these layers will only solve the problem between L2s using the same technology base," he points out. "There are other more independent initiatives such as LayerZero, NodeKit, AltLayer and others, while the Ethereum community is also looking to create a similar (tokenless) protocol as a public good, but this is of course longer to coordinate and harder to fund," he points out.

2) Improving the user experience linked to the multiplication of L2s

L2s come up against a certain complexity when several are used at the same time, which is one of the reasons for the success of monolithic L1s such as Solana, which have the advantage of centralising everything in the same place. Nevertheless, it is possible to make the process more fluid.

"This can be done at two levels: an abstraction protocol such as Socket that will enable developers to create apps that break down the barriers between L2s or improvements to existing tools such as DeFi wallets and exchanges that can abstract this difficulty by hiding it in the interface," says Jimmy Ragosa. "But it's not a silver bullet: it's still useful for a user to know where their funds are stored because not all L2s provide the same level of security," he warns.

3) Fully inherit L1 Ethereum security

L2 Ethereum is designed to inherit L1 security, but it also introduces new components and mechanisms that can be potential sources of vulnerabilities. Although L2s have made significant progress in terms of security, they are not yet fully equivalent to L1 in terms of decentralisation and maturity.

"One of the conditions for L2s to succeed will be to become Stage 2 rollups (according to the L2Beat methodology)," says Jimmy Ragosa. To date, Arbitrum and Optimism are the most advanced in Stage 1. "When this stage is reached, we will be able to say that any token or smart contract in these L2s inherits the same security conditions as on Ethereum", he insists.

We are talking here about proof of transaction sequencing systems, the ability to withdraw funds at any time even in the event of a crisis, and the fact that no group of players can exercise centralised control. According to Jimmy Ragosa, the first projects to transition to Stage 2 will take place within the next two to three years.

Which projects are best positioned?

Arbitrum (see our analysis) is undoubtedly the leading L2 player in terms of total value recorded on the blockchain. This is around $17 billion, representing a 40% market share.

Arbitrum can draw on Orbit, a suite of tools and services based on Arbitrum's technology foundation that enables developers to create and deploy their own custom scalability solutions. This includes the ability to launch sidechains and rollups specific to particular applications or needs.

At this game, its competitor Optimism seems to be further ahead thanks to its OP Stack solution (but its TVL is "only" $6.8 billion).

There is also Base, the second biggest TVL at $7.4 billion, which is being developed by Coinbase on the OP Stack. "Coinbase is probably the best onboarding ramp in the world, which inevitably benefits Base," points out Jimmy Ragosa.

Polygon (read our analysis) is also a project that could dig its furrow thanks to AggLayer, its solution presented as a response to the fragmentation of liquidity caused by the multiplication of Ethereum's layer 2s.

"It's also relevant to mention so-called intermediate infrastructure solutions, such as Celestia (read our analysis) and EigenDA, which take care of Data Availability on behalf of L2s and help to bring costs down," notes Stanislas Barthélémi. "As do EigenLayer (read our analysis) type restaking solutions to create decentralisation at sequencer and trustless bridge level," he points out.

What projects are further behind?

"We could mention Mantle, Blast, Linea or Mode (read our analysis) which don't really have a clear distinction or a strong ecosystem," points out Stanislas Barthélémi. Many projects have capitalised on a future airdrop of their governance tokens, which has attracted liquidity momentarily, but this is no guarantee of long-term adoption. "A smart contract with a points system in view of an airdrop and eventual L2 doesn't make it a good project with strong enough technical underpinnings," he warns.

"Blast is successful, but that's mainly due to its financial incentives and not its development team," says Jimmy Ragosa. "It can work in the short term, but rarely more than that," he assures. Generally speaking, ZK Rollups still have a long way to go before they overtake Optimistic Rollups. "Linea, Starknet or Polygon ZkEVM are more like outsiders at the moment," adds Jimmy Ragosa.

Optimistic vs. ZK Rollups: where does the battle stand?

Optimistic Rollups and Zero-Knowledge Rollups (ZK Rollups) are two types of L2 technology on Ethereum. Optimistic Rollups (Arbitrum, Optimism, etc.) assume that all transactions are validated by default and use proof-of-fraud mechanisms to verify disputed transactions, offering full compatibility with the Ethereum Virtual Machine (EVM) but requiring longer confirmation times.

In contrast, ZK Rollups use succinct cryptographic proofs (zk-SNARKs) to prove the validity of transactions, providing near-instant confirmations and increased security, although technically more complex to develop and often less compatible with the EVM. In the long term, ZK Rollups are seen as more secure and efficient, but their adoption is held back by technical challenges.

"Optimistic Rollups have a clear head start due to their ease of use," confirms Stanislas Barthélémi. "The lower costs and EVM compatibility have enabled them to enjoy much greater adoption than the ZK Rollups, which is also reflected in their greater TVL," judges Jimmy Ragosa.

While the ZK Rollups are still lagging behind due to the complexity of their development, "they nevertheless remain the most interesting technical proposition on paper. Vitalik's end game is the combination of rollups and zk-SNARKs", insists Stanislas Barthélémi. "In the long term, ZK Rollups will be technologically superior to Optimistic on all points, that's undeniable, so it's easy to think that they will be the winners in the end," notes Jimmy Ragosa.

Should we therefore consider that projects such as Linea, Starknet (read our analysis) or ZkSync (read our analysis) will necessarily win out over Arbitrum or Optimism?

"That's not guaranteed at all," temporises Jimmy Ragosa. "The lead in terms of adoption and maturity could allow Optimistic's developers to take the wind out of ZK Rollups' sails by adopting their technology for their own rollup as soon as zk-SNARKs become mature and thus retain their adoption lead," he anticipates.

Are there not too many L2s?

It's a fair question to ask: 57 L2 projects are listed on L2Beat. Not all of them are equal or equally advanced, but we wonder whether there will be room for everyone.

"Why create yet another different solution when maximum capacity has not yet been reached or differentiation is almost non-existent?" questions Stanislas Barthélémi.

"History is repeating itself, because we already wondered in the past whether there weren't too many L1s for the market," smiles Jimmy Ragosa. "It's inherent in permissionless environments: there's a glut of new projects as soon as it's been shown that a handful of them are profitable", he huffs. "The scenario is always the same: the first projects are a little too far ahead and some of them fall into oblivion, then we see an avalanche of new initiatives when 4 or 5 start to be successful", he explains. "The market should bring consolidation around less than a dozen serious projects with a minimum of adoption," prophesies Jimmy Ragosa.

The profusion of L2s stimulates innovation and the market should settle in order to bring out the best technological choices. It is therefore a "necessary evil".

Is there competition between ETH L2s and Solana-type L1s?

It might be thought so, as the many Solana-type L1s (read our analysis) or Sui (read our analysis) can hardly be compared to Ethereum in terms of security and decentralisation, the most important characteristics for an L1.

"The question of competition between monolithic L1s (Solana, Sui, etc.) and modular ones (Ethereum, Cosmos, etc.) no longer arises," points out Jimmy Ragosa. "L1s like Solana are now competing with Ethereum's L2s, because they have chosen to focus on the same goals of scalability and minimal costs by sacrificing a little of their decentralisation and resistance to censorship," he explains.

"While each side has its advantages (better user experience and adoption for alternative L1s, versus better roadmaps and security properties for L2s), I think Ethereum's L2s will have a better chance of improving on their weak points than L1s," says Jimmy Ragosa.

"That doesn't mean all L1s will disappear, but each will have to find its place," temporises Stanislas Barthélémi. "Solana is in the process of specialising in memecoins and stablecoin transfers, while Ethereum and its extensions are imposing themselves in the majority of DeFi use cases because they require more security," he agrees. "This competition is embodied in the choice of L1s to transform into L2 Ethereum to find their place in the market, such as Mantle, Celo or OKX," concludes Stanislas Barthélémi.

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