How Layer 2 Networks Have Impacted the $13B TVL, But Challenges Remain

Ethereum Layer-2 Networks Reach New Milestone

Ethereum layer-2 networks recently achieved a major milestone on November 10, with their total value locked (TVL) reaching $13 billion, according to blockchain analytics platform L2Beat. Industry experts believe that this trend of growing interest in layer-2s will continue, although certain difficulties remain, particularly in terms of user experience and security.

L2Beat identifies 32 different Ethereum layer-2 networks, including Arbitrum One, Optimism, Base, Polygon zkEVM, Metis and more. Before June 15, these networks’ combined TVL was less than $10 billion and had been declining since April’s peak of $11.8 billion.

However, from June 15, layer-2 TVL began to grow and, by October 31, had reached a new high of close to $12 billion. This growth continued to the $13 billion mark on November 10, and is now close to $13.5 billion.

This surge in TVL is especially remarkable when compared to the rate of growth during the 2021 bull market, when the overall crypto investment was much higher. On November 12, 2021, when the total cryptocurrency market cap was at its all-time high of $2.82 trillion, layer-2s had less than $6 billion locked within their contracts. Now, the total market cap of crypto is $1.4 trillion, yet layer-2s TVL is at an unprecedented level.

Layer 2s Growing in Bear Market

In a conversation with Cointelegraph, Metis decentralization coordinator Elena Sinelnikova proposed a theory for why layer 2s are becoming increasingly popular in spite of the bear market. According to her, Ethereum’s high gas fees during the bull market left an indelible impact on users, leading to a desire for alternatives when demand started to come back. She also noted that successful marketing efforts of layer 2 development teams have resulted in high user activity and, therefore, high yields.

However, Sinelnikova warned that layer 2s still face challenges in the realm of user experience. Optimistic rollup networks require users to wait seven days for a withdrawal to be processed, while newer zero-knowledge (ZK) proof networks can process withdrawals instantly, but are still in an early stage of development and tend to crash more often. The Metis CEO stated that her team is working on a “hybrid” layer 2 network that will combine the best of both worlds, giving users the option to withdraw using either an instant ZK prover or a seven-day optimistic process.

Kelsey McGuire, chief growth officer for layer 1 network Shardeum, told Cointelegraph that layer 2s face another serious challenge that is often overlooked: centralization. She stated that while layer-2 solutions have gained popularity for their scalability enhancements over the last year, they often introduce a trade-off in decentralization.

McGuire believes that the competition between layer 2s will drive advancements in layer 1s, leading to increased throughput for these base layers. As she said, “There could be fewer and fewer new L1s, and we’ll start to see a shift towards true scalability (high TPS with low gas fees) at the foundational layer instead of just relying on L2s to deliver scalability.”

Along with the increasing TVL, the number of layer 2s is also growing. On Nov. 14, OKX, a crypto exchange, declared that it is constructing a layer 2, and there have been rumors that Kraken is developing one too.

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