Blockchain layers are the inevitable result of the shortcomings of legacy blockchains, or Layer 1 platforms as they’ve come to be known. Layer 2 platforms have been a hot property in the sector ever since the Ethereum Foundation began embracing the concept as a concrete solution to Ethereum’s ongoing scalability challenges. Over the last year, in particular, as interest in the crypto ecosystem has resurged, the Layer 2 landscape has grown rapidly, with total value locked increasing to an all-time peak of around $50 billion in June. Although the recent market pullback has invariably dragged that figure down, user activity underscores the overall trajectory of growth.
One noticeable feature is the distribution of value and utility across the L2 ecosystem, which is coming to reflect that of the broader cryptosphere. General-purpose platforms such as Arbitrum One, Base, and OP Mainnet are carrying the majority of traffic, similarly to how BTC, ETH, and USDT dominate the crypto ranking tables. However, application- or use-case-specific blockchains such as gaming-focused Immutable X and Sorare are also contributing to the diversity and catering to a wide array of user and developer needs.
Sanket Shah, VP Growth& BizDev at Polygon – an original pioneer of the entire L2 concept since way back in 2017 – recently shared another reason why application or utility-specific chains may be holding their own so well against general-purpose competitors:
“Differentiation is a major priority for many Layer 2s because using one can come with trade-offs, and the best part of co-existing is having a differentiated blockchain space. In other words, it’s all about finding the right utility for the L2.”
So, while targeting a segment as “the blockchain for gamers” or “the blockchain for payments” is one way to stand out, L2 platforms are also differentiating themselves on specific features, such as Aztec Network and its ZK-enabled privacy.
However, he cautions against the risks of differentiating too far:
“A multilayered ecosystem can become fragmented, which inhibits cross-chain communication. The risk of having too many Layer 2s that can’t engage with one another is that they become siloed, and the end result is that they’ll simply fail to deliver on their potential.”
Polygon has had some time to consider this challenge. Its Chain Development Kit (CDK) solution provides developers with a standardized stack for building sovereign, zk-enabled Layer 2s that can easily interact with one another.
Then there’s the newest level on the stack – Layer 3s, taking specificity a step further. Layer 3s typically operate as a utility-specific platform that introduces a feature such as interoperability or customizations not available on the two lower layers. One example is Orbs, which operates as a decentralized, serverless cloud for the deployment of smart contracts, which integrates with several Layer 1 and 2 platforms for underlying security.
Layer 1 – Still in the Game
What does all this upper-layer development mean for the established group of Layer 1 platforms that don’t necessarily share Ethereum’s need for a Layer 2 ecosystem?
Well, a rising tide lifts all ships, it seems. Far from drawing activity away from existing L1s, the proliferation of Layer 2 and 3 platforms appears to be having the opposite effect on growth and development. As Luigi D’Onorio DeMeo, COO at Ava Labs (developer of the Avalanche blockchain), points out:
“There are different types of Layer 1 blockchains in the market. Monolithic chains such as Solana aim to increase the capacity and throughput of a single chain. Other ecosystems, such as Avalanche are building an interoperable network of L1s that are tied together by a common communication protocol. In addition, they pursue scaling the capacity and throughput of a single chain.”
These strategies are yielding results. In June, Solana announced the launch of ZK compression of blockchain data directly on its Layer 1, introducing enhanced scalability.
Meanwhile, Avalanche’s focus on developing its ecosystem and network has also been paying off. The Californian Department of Motor Vehicles recently put 42 million vehicle records on-chain using Avalanche as part of its ongoing efforts to reduce fraud and streamline the vehicle transfer process. Cosmos, another multi-chain L1, recently welcomed Router, a platform focused on chain abstraction, into its fold. Chain abstraction is designed to solve a very real UX challenge –that a multi-chain ecosystem can quickly become too darn complicated.
Complexity notwithstanding, the emergence of an L2 ecosystem has proven to be a worthy addition to the blockchain sphere. It provides much-needed alternatives for Ethereum users, creating the competitive imperative for further development of established L1s while supporting the overall growth of the ecosystem.
