LAYER-2SCALING

Research Summary

The report provides an in-depth analysis of blockchain ecosystems, focusing on Layer 2 solutions. It discusses the scalability trilemma, the concept of rollups, and the differences between optimistic and zero-knowledge rollups. The report also highlights the importance of Ethereum Layer 2s and introduces the concept of Layer 3s.

Key Takeaways

Understanding Blockchain Ecosystems

  • Definition of Ecosystems: In the context of blockchain, ecosystems refer to Layer 1, Layer 2, or Layer 3 platforms on which applications are built. These platforms have their own currency, economic activity, and unique cultures.
  • Scalability Trilemma: The report discusses the scalability trilemma, which postulates that a blockchain can only have two of the following three properties: decentralization, security, and scalability.

Layer 2 Solutions

  • Role of Layer 2: Layer 2 solutions aim to make more efficient use of scarce blockchain space by moving data and computation off-chain. They use compression techniques to reduce the amount of data stored on Ethereum.
  • Types of Rollups: The report explains the two types of rollups used in Layer 2 solutions: optimistic rollups and zero-knowledge rollups. These differ in their approach to verifying transactions and their associated advantages and drawbacks.

Ethereum Layer 2s

  • Importance of Ethereum Layer 2s: Ethereum Layer 2s are highlighted as a key area of focus due to Ethereum’s status as the leading chain by number of active protocols, stablecoins, and user activity. Tokens worth 7 million ETH have moved to L2s in the last 12 months.
  • Leading L2s: The report identifies Arbitrum, Base, and Optimism as the top three L2s, holding approximately 74% of the total value locked (TVL) of all L2s.

Layer 3 Solutions

  • Introduction to Layer 3s: Layer 3s run on top of L2s and are customized around specific applications or use cases. They provide more specific usability, interoperability, and application functionalities, leveraging the increased transaction throughput and lower transaction fees of L2s.

Actionable Insights

  • Focus on Promising Ecosystems: The report suggests focusing on a small handful of promising ecosystems rather than chasing every trend. This involves getting exposure early and waiting for shifting trends to work in one’s favor.
  • Consider Ethereum Layer 2s: Given the significant activity and value locked in Ethereum Layer 2s, these platforms could be a worthwhile area of focus for those interested in the blockchain space.
  • Explore Layer 3 Opportunities: Despite being highly experimental and further out the risk curve, Layer 3s present opportunities due to their specific usability and application functionalities. It may be beneficial to keep an eye on developments in this area.
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