Ethereum is currently at a crucial crossroads that will likely have a significant impact on its future as the cryptocurrency market has continued to change. Between July and September, ETH’s price and market size plummeted by 10%, but the asset still surpassed Bitcoin by 2%.
Furthermore, according to Messari’s State of Ethereum in Q3 2023 study, Layer-2 (L2) transactions accounted for nearly 66% of all ecosystem transactions on the mainnet, or two times as many transactions as Layer-1 (L1) transactions. There have been numerous discussions over Ethereum’s scalability, security, and dedication to decentralisation as a result of this trend towards L2 solutions.
It is impossible to ignore the current L-2 revolution.
The L2 solutions are progressively serving as Ethereum’s scaling strategy’s foundation. The Messari analysis indicates that there was less activity on the Ethereum mainnet in Q3, with a 48% decrease in the total amount of ETH burned. For the first complete quarter following “the Merge” (a software update that changed the platform’s consensus process from a proof-of-work protocol to a proof-of-stake system), this led to a net supply inflation.
More significantly, the study notes that Layer-2 transactions increased by 20%, with average daily transactions on Ethereum trending slightly lower for the quarter, at about $1 million, largely due to a surge in activity on developer-friendly ETH L2 solution Base and increased adoption of the decentralised social network friend.tech.
Elena Sinelnikova, co-founder and decentralisation coordinator of the MetisDAO Foundation, a high-performance ETH scaling solution, offered her analysis of these events, noting that it is not surprising that the majority of Ethereum transactions are now being carried out via Layer 2 platforms, adding:
“L2s are still a work in progress, but they are faster, cheaper, and slightly more secure. For instance, ZK Rollups are attempting to ensure that they operate with Ethereum without any problems whereas Optimistic Rollups are still working on their Fraud Proof mechanisms.
Felix Xu, co-founder and CEO of Arpa Network, a provider of decentralized/secure computation frameworks, holds a slightly similar viewpoint and thinks that Layer 2’s are becoming more popular because of their strong emphasis on decentralisation and security. Furthermore, he said:
These essential qualities are maintained by Layer 2s even when they are not connected to the mainnet, guaranteeing a safe environment for users and developers. when a result, I anticipate that Ethereum’s dominance will only increase, especially when additional assets from other chains enter the ecosystem.
A problem with decentralisation?
While L2 solutions unquestionably provide significant scalability, they also have some drawbacks. According to Kunal Goel of Messari, the total value locked (TVL) of Ethereum fell by 19% in the third quarter, with DEX volumes falling by 24% and NFT volumes falling by 49%. Additionally, transactions on the scaling platform Optimism increased by 40%, however some activity on Arbitrum decreased by 36% as a result. Despite this, with 600,000 average daily transactions, the latter L2 offering continues to be the largest, as opposed to 400,000 for each of Optimism and Base.
All of the aforementioned options, according to Sinelnikova, have the problem of relying on a single sequencer, which gives rise to a single point of failure. “Having most transactions on centralised Layer 2 solutions is risky for the entire Ethereum system,” she said.
The U.S. Office of Foreign Assets Control (OFAC) sanctioning Tornado Cash addresses in particular forced major Ethereum relays to censor transactions, further complicating the network’s ongoing decentralisation quandary. Finally, as the Ethereum network has grown, it has come under increased regulatory scrutiny.
Beyond the Cancun-Deneb upgrading
The Cancun-Deneb update, which promises to make roll-up transactions more cost-effective than ever before, is a significant advancement coming to the Ethereum network in the near future. For example, the launch of EIP-4844, or proto-danksharding, which will drastically lower the prices of roll-up transactions, would increase the competitiveness of the ecosystem’s L2 solutions.
Therefore, it makes sense that L-2 systems will continue to develop and become more user-friendly as we move towards a future dominated by crypto-enabled technology, putting an increased emphasis on balancing scalability with the fundamental notion of decentralisation. We are in for some interesting times!