Ethereum’s Layer 2 Boom: A Blessing and a Challenge for the Crypto World

Another significant discussion in crypto in the year 2024 regards the numbers of L2 blockchain solutions developed on the Ethereum protocol. Some of the famous NFT projects like Pudgy Penguins, Bored Ape Yacht Club, and Azuki have already declared their independencies on L2 — let alone a plethora of more conventional businesses like Fox Corporations and even Flipkart.

This increase in L2s has been narrowed down as fake since many people consider it as hype. However, that being said, it might not be too far fetched to assume that within the upcoming year we might be struggling with thousands of L2s. This will be good for the ETH of ethereum successing ecosystem.

By way of background: Ethereum, or rather the Ethereum network Space, is an L1 blockchain. This is a common issue with Ethereum, where decentralisation and security are important aspects, however, it is not very scalable – which is the well-known blockchain trilemma of wishing for two of decentralisation, security and scalability but cannot get all three.

Thus, the Ethereum network becomes less scalable, and executions on it are awfully expensive. Thus, L2s compensated this; they are also referred to as rollup chains or safemasks. Although they mainly process transactions off the Ethereum network at a cheaper cost, by clustering them and then submitting the clusters to the Ethereum network.

However, this model is accompanied by two mainissues. The first one is fragmentation of the Ethereum community. Liquidity of the market is split between L2s and for users this is just frustrating. Users have tokens on individual blockchains and have to transfer them across to other channels and “intermediate.” Moreover, bridges and everything on one network ‘wrapped’ into another have been a critical point of attack in the past few years.

The second issue is the variability and uncertainty of these L2s’ transaction costs, which is very bad for the emergence of numerous applications. This is not good for those who need to perform instant transactions sometimes; one day, it can cost one cent to do an operation, and the next day, that price can be ten or a hundred times higher just because some meme coin is trending right now and occupies all the space in the block.

This means that the ecosystem has components such as inefficient liquidity, isolated users, weak UX, and susceptibility to exploitation, and a context that is still not favorable for applications to be built to operate financially independently.

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