Layer 2 networks hit $13B TVL, but challenges remain.

Ethereum layer-2 networks reached a new milestone on November 10, which reached $13 billion in total value locked (TVL) in their contracts, according to data from the blockchain analytics platform L2Beat. According to industry experts, this trend of more interest in Layer 2 is likely to continue, although there are some challenges, especially in the areas of user experience and security.

According to L2Beat, 32 different networks will qualify as Ethereum Layer 2, including Arbitrum One, Optimism, Base, Polygon zkEVM, Metis and others. Before June 15, all of these networks combined had less than $10 billion worth of cryptocurrency locked up in their contracts, down from their April $11.8 billion peak TVL pool.

But since June 15, the growth of layer-2 TVL has turned positive. And on October 31, these networks' combined TVL reached a new high of nearly $12 billion. Since then, investment in Layer 2 applications has continued to climb, surpassing the $13 billion TVL mark on Nov. 10 and hovering around $13.5 billion at press time.

This increase in TVL is even more impressive when compared to the pace during the 2021 bull market, when total crypto investment was much larger than it is today. In the year On November 12, 2021, the market cap of all cryptocurrencies reached $2.82 trillion, with Layer 2s locking in less than $6 billion in their contracts. Today, the total market cap of cryptocurrencies is a more modest $1.4 trillion according to CoinMarketCap, but Layer 2s TVL is higher than ever.

In a conversation with Cointelegraph, Metis Decentralized Coordinator Elena Sinelnikova offered a theory as to why the bear market is continuing but Layer 2 is growing. According to her, Ethereum's high gas fees during the bull market had a lasting impact on users, prompting a desire to look for alternatives as demand began to return.

“at the moment [the] During the bull market, Ethereum was highly volatile at its peak, meaning transactions were slow and expensive due to the bull market. The transaction fee alone for one transaction would be hundreds of dollars, so it was unsustainable.

According to Sinelnikova, another reason why layer 2 networks thrived in the bear market was due to the successful marketing efforts of their development teams, which led to high user activity, hence high yields. They are deploying capital to attract new users and attract new business to DeFI. [decentralized finance]She said. “Different people from all parts of the ecosystem will always go where there is a big product. […] And this is happening naturally, and it is. […] Nature of business.

Related: Aave v3 Launches on Ethereum Layer-2 Network Metis

However, Sinelnikova cautioned that Layer 2s still face challenges in the area of ​​user experience. Optimistic rollout networks require users to wait seven days for withdrawal to work, leading to frustration. On the other hand, new zero-knowledge (ZK) proof-of-concept networks can process withdrawals in real-time, but they are still in their early stages of development and are more prone to crashes than older networks. The Metis CEO said his team is working on a “hybrid” Layer 2 network that combines the best of both worlds, giving users the option of opting out using the fast ZK prover or the seven-day bright process.

Kelsey McGuire, chief development officer of Layer 1 network Shardium, told Cointelegraph that Layer 2s face another serious challenge that is often overlooked: centralization. “Layer-2 solutions have gained popularity with scaling improvements over the past year, but they often introduce decentralization,” she said. She continued:

“At the execution level, where transactions take place, centralized sequencer nodes are used, which raises the risk of censorship or government interference. This centralized aspect in a layer-2 implementation challenges the core principles of decentralization and trustlessness that underpin the blockchain space.

McGuire expects competition from layer 2s to drive improvements to layer 1s, ultimately resulting in higher yields for the base layers themselves. As she explains, “There will likely be fewer and fewer new L1s, and we'll start to refocus on the base layer on real scale (like higher TPS combined with lower gas bills) rather than relying solely on L2s to expand.”

In addition to increasing their TVL, the number of layers 2s continues to increase. In the year On November 14, crypto exchange OKX announced that it was building a layer 2, and there were rumors that Kraken was also building one.