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Posted on Mar 21, 2022Read on Mirror.xyz

Throughout On-chain Analysis of Major Layer 2 Platforms | CatcherVC Research

Arbitrum, Optimism, Metis and ZKSync are the most competitive Layer2 smart contract platforms for their TVL and development momentum.

Author: Web3er Liu, CatcherVC

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Intro

If the financial market represents an iterative history of human behavioural patterns, the Internet and Web3 represent the chronicles of communication system expansion and security optimization. From ARPANET, the originator of the Internet launched in 1969, to the congested Ethereum system due to the NFT frenzy in 2021, the evolution of decentralized networks mainly revolves around speed and security. However, the current development progress for Layer 1 and 2 projects almost entirely becomes technological narratives about gas fees.

Since the explosive growth of the entire crypto industry at the beginning of 2021, the 24-hour transactions volume on Ethereum has remained over one million, and the average transaction fee once soared to $50. For example, during the NFT frenzy and “519 Flash Crash” events, the gas fee for one transaction cost hundreds of dollars. The high gas fee stopped countless users from sending transactions.

(Image Source: The Block)

(Image Source: The Block)

(Image Source: Etherscan)

In response to the high gas fee, Su Zhu, founder of Three Arrows Capital, said: “Ethereum has abandoned its users, and newcomers can no longer afford to use this chain.” Thereafter, the entire blockchain industry bashed Ethereum’s congestion and took on a prolonged debate.

Related reading: 《The Battle of the Year: Public Blockchain Competition Triggered by the Three Arrows Capital

Debate: Layer1 versus Layer2

Similar to the history of Christianity in the 16th century, KOLs separate into two schools, which advocate for “New Public Blockchain” and “ETH 2.0 and Layer2”. While Solana and Avalanche were fighting for the top “New Public Blockchain,” Layer 2 networks also gained more traction. Specifically, since the launches of Arbitrum, Optimism and zkSync in 2021, these networks have gradually accelerated the development of the Layer 2 ecosystem. For instance, TVL, the total amount of locked funds in Layer 2, has increased by more than 600% in the past six months, reaching $6 billion US dollars. According to multiple data sources such as ETHTPS.info, on Mar 15, 2022, about 150,000 transactions were processed through Layer 2, weighing more than 12% of Ethereum Mainnet’s.

From TVL and development momentum perspective, Arbitrum, Optimism, Metis and zkSync are currently the four most competitive Layer 2 smart contract networks.

(“Layer 2 Total TVL”, Image Source: L2BEAT)

(“ETH Mainnet vs Layer2 networks’ TPS”, Image Source: ETHTPS.info)

Considering that the Layer2 user scale is much lower than the Ethereum Mainnet, Layer2 user activities are more active than Layer1’s. And, since Layer2 indicators are hard to query, CatcherVC uses “number of transactions per day/number of unique addresses” (the average number of daily transactions per user) and “TVL/number of unique addresses” (the average number of values locked per user) to measure the network activity. By arranging the on-chain data website such as Dune Analytics, L2Beat, and L2Fees, we computed the following chart:

(Collected on March 15, 2022 by CatcherVC)

According to the comparison chart, Layer2 networks, such as Optimism, Arbitrum, and Metis, are more active than ETH Mainnet. However, the Layer2 ecosystem is still in its early stage. The user scale is small, and the TPS of most networks is less than 5% of Ethereum’s. In brief, the utilization rate shows that Layer2 networks have tremendous potential for value-added and traffic capability.

1. Optimism

Optimism **completed a $150 million funding round **on March 17, 2022. Its daily average TPS is about 0.35, only 2.5% of Ethereum’s. In the past week, the net money inflow was $12 million, and **the total value on the chain reached $630 million, with a TVL exceeding $450 million. Thus, Optimism ranked 4th among Layer2 networks. **Optimism developers updated the code and the number of new contracts more than 40 times per day and 30 times a week. Furthermore, DefiLlama is tracking 25 projects on Optimism, including Uniswap, Curve and Synthetix, etc.

(Image Source: Dune Analytics)

Compare the “number of daily transactions” to “number of daily active addresses,” we can see that the **average daily transaction per user for Optimism is 12 to 16, six to eight times more than Ethereum’s. **Because active users can equally share gas fees in Optimism in the same period, the network utilization rate of Optimism will continue to rise with its growing user scale. Thus, the gas fee may further decrease to motivate users to transact actively, creating an echo mechanism for its users in return.

(Image Source: Dune Analytics)

(Active Ethereum Unique Addresses, Image Source: Etherscan)

2. Metis

Metis raised $8 million in the previous funding round. The project adopts an architecture similar to Optimism and “Executes transactions on Layer2, saves transactions, and initiates challenges for validators on Layer1. “ Its design is a branch of the Optimistic Rollup design.

**In the past week, Metis’ net money inflow was $200 million, and the TVL exceeds $740 million, **ranking the 3rd among Layer2 networks. DefiLlama is tracking 13 projects on Metis, such as NetSwap. As its average daily TPS is only about 0.25, less than 2% of Ethereum’s, its adoption rate has more room to grow than Optimism.

(Image Source: L2BEAT)

According to Dex Screener, Metis showed strong Defi activity. Specifically, the main DEX on Metis can reach $30 million in average daily trading volume, with Hermes protocol contributing the largest share of DEX trading volume on Metis. Metis reaches 70% to 80% of Arbitrum and Optimism’s daily trading volume. As major Defi protocols, such as Uniswap and Curve, have not launched on Metis, its number of users is far less than that of Arbitrum and Optimism’sOptimism’s (only 20% of Optimism). Thus, this makes Metis’sMetis’s Defi market has more potential to grow. Recently, Metis announced that it would launch the NFT cross-chain bridge and support IPFS local storage soon.

(Image Source: Dex Screener)

3. Arbitrum

Arbitrum is another leading Layer 2 solution that completed a $120 million Series B funding round in 2021. With a larger capital volume and a more diverse ecosystem, the TVL of Arbitrum exceeds $3 billion, accounting for more than 50% share of the total Layer 2 networks’ TVL. DefiLlama is now tracking 66 projects on Aribitrum, with major Defi projects deployed, such as Uniswap, SushiSwap, Curve, Beefy, and Yearn. Its daily average TPS is 0.7, which equals nearly 5% of Ethereum’s.

(Image Source: The Block)

(Image Source: Nansen)

Arbitrum is not in a good state in terms of net inflows of funds, as it lost $57 million in the last week. In the past six months. The whole chain was down twice due to the failure of a single Sequencer node design, which made the investors question its reliability. In this regard, the founder of Arbitrum said that they would introduce a decentralized form of multiple Sequencer nodes to resolve the problem.

Arbitrum recently released a sidechain plan on about AnyTrust, making its sidechain performance and cost the same as Polygon. Its sidechain will upload the root hash status for each block to Ethereum Layer 1 and switch to Rollup mode when the state of its nodes is underperforming. Overall, AnyTrust will run alongside the Arbitrum network and is expected to come close to Polygon’s performance and fees.

(“TVL of Optimistic Rollup Solutions is much higher than ZK Rollup’s”, Image source: Footprint Analytics)

4. ZKSync

ZKSync is a ZK Rollup Layer 2 solution. It completed a $50 million Series B funding round in November 2021, led by a16z. Because of the difficulties of zero-knowledge proof theory and technology, the progress for ZK projects’ EVM compatibility is plodding. Compared to OP Rollup networks, an EVM-compatible solution, such as Optimism, ZK networks’ ecosystem, TVL, and user activities, are significantly behind.

**ZKSync net money inflow was $23 million in the past week, and its TVL exceeds $1.3 billion. **DefiLlama is only tracking one project on ZKSync, which is ZigZag, while there are currently ten protocols running on ZKSync, according to its official website. Currently, ZKSync’s average daily TPS is about 0.2.

(Image Source: L2BEAT)

While ZKSync’s on-chain metrics are not as strong as other OP Rollups,** its EVM-compatible Testnet, called ZK-EVM, has launched in February 2022** and is generally favoured by KOLs in the industry. Since ZK Rollup can achieve higher TPS and ensure more secure transactions than OP Rollup, with the official launch of ZK EVM, ZKSync might become the leading network among all Layer 2 solutions.

Summary

Overall, the Layer 2 solutions are still in the primitive early stage. Compared with the Layer 1 public blockchains and Defi projects that have been explosive in 2021, the primary Layer 2 projects seem undeveloped and undervalued. As ETH 2.0 rolls out, Layer 2 is on the eve of the outbreak and will surely accelerate its development with VCs’ funding. At last, may Layer 2 refine the current blockchain industry.