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Increased competition in L2s as fees reduce 10x
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This week, we evaluate the increased competition among Layer 2 (L2) networks on top of Ethereum. As the Dencun upgrade is expected to dramatically reduce costs to use L2s, the fight among these networks is likely to accelerate as the top players seek to specialize in their niche.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether
- Bitcoin fees climbed by over 50%, recording a spike in Ordinals fees on February 3
- Ethereum fees increased by more than 30%, with EigenLayer deposits and speculation surrounding the new ERC-404 standard contributing to increased demand
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
- Bitcoin broke its eight-week trend of inflows into exchanges, with nearly $300M BTC being withdrawn on net as Bitcoin ETFs continue growing in AUM
- Over $1B in ETH left CEXs this week, with many of those funds ending up in EigenLayer, which recorded $3B in deposits this week as they removed their deposit caps temporarily
Ethereum’s Dencun Upgrade & The L2 Wars
Ethereum’s long-awaited Dencun upgrade has officially been scheduled for March 13. After a successful implementation on the Holesky testnet, the upgrade is set to happen in just over a month.
The Dencun upgrade will implement nine Ethereum Improvement Proposals (EIPs), out of which EIP-4844 is the most anticipated. EIP-4844, also known as proto-danksharding, introduces a new type of transaction called blob-carrying transactions. Blob-carrying transactions only include a reference hash to the blob’s data stored off-chain. This allows verification based on the hash without bloating the consensus layer with sharded blob data.
Blobs enable more data to be posted to Ethereum while simplifying off-chain transaction verification. Unlike calldata, blobs aren’t permanently stored, reducing overhead. Their data becomes inaccessible after approximately 3 weeks.
This long-awaited upgrade is forecast to cut costs for Ethereum’s L2s by at least 10x, making Ethereum more scalable and efficient. By leveraging rollups and temporary blob storage, the developers aim to increase throughput and reduce fees for users.
Source: ITB Ethereum L2 fees
2 Cent Transactions Coming Soon — L2s transactions are expected to drop by 10x from a current average of $0.23
- Average fees on the major L2s have ranged from $0.15 to $0.60 in 2024
- Complex smart contracts powering many dapps can still cost over $1
- This is expected to accelerate the transition towards Ethereum’s roll-up centric roadmap as L2s become more competitive with a lower cost to use
The increased attractiveness of L2s is also likely to accelerate competition between them as they fight to bring users on-chain.
Source: ITB ETH L2s Perspectives
Arbitrum Leads in DeFi — Arbitrum consistently has over 50% of the ETH transaction volume between the top optimistic rollups
- Arbitrum has consolidated as the DeFi leader amongst L2s, with $2.7B in total value locked across 500+ applications
- DEXs on Arbitrum have processed over $1.7B in volume in the last week alone per DeFiLlama
- Arbitrum’s first mover advantage and diverse range of DeFi applications have helped it secure the number one spot among L2s on Arbitrum
Looking beyond financial applications, however, Optimism stands out.
Source: ITB ETH L2s Perspectives
Optimism Leads in Distribution — The Optimism Stack has gained traction as the most used L2 infrastructure
- Optimism Mainnet has frequently had over 60% of the number of daily active addresses out of the top optimistic rollups
- User activity has increased as popular apps like WorldCoin and Farcaster have deployed on Optimism
- Coinbase’s Base is also part of the “superchain” a consortium of L2s using the OP stack, which share a fee with the Optimism DAO
Horizontal vs Vertical Expansion — Optimism and Arbitrum have taken opposite approaches seeking growth
- Arbitrum Orbit enables the creation of L3s on top of the Arbitrum One L2, while the OP Stack deploys multiple L2s in parallel to Optimism Mainnet
- L3s on Orbit can take advantage of the liquidity and applications that are already available on Arbitrum L2, an approach that favors faster transactions and lower costs
- Meanwhile, the OP Stack facilitates developer creativity by being able to quickly spin off L2s, which can be app-specific like Aevo or general-purpose like Mantle
There are currently 39 L2s deployed on top of Ethereum per L2Beat. As the Dencun upgrade decreases the costs to use all of these networks by an order of magnitude, it is likely that the L2 wars are just getting started.
Ethereum’s Dencun Upgrade & The L2 Wars was originally published in IntoTheBlock on Medium, where people are continuing the conversation by highlighting and responding to this story.
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