Overview Scalability challenges have long plagued blockchains.Bitcoin and Ethereum can only process a few dozen transactions per second, and the network fees can surge to exorbitant levels during peak use periods.Within Ethereum, a galaxy of complementary networks known as ‘Layer 2s’ emerged to overcome these bottlenecks.Some have grown so quickly that they are among the largest blockchains in the world in their own right.They each offer tokens that have garnered multibillion-dollar valuations from investors as well.
There has always been a question about how these blockchains would exist in a world where Ethereum can scale, as it has long planned, and the resulting impact on these tokens vis-a-vis ether.That question is about to be answered.Next month Ethereum will undergo a significant update, known as Dencun, that could boost its throughput to 100,000 transactions per second.
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Key Background Layer 2 protocols boost the performance of Layer 1 blockchains, such as Ethereum, by offloading and batching transactions to a secondary layer.
These transactions then get cryptographically linked together and posted to the main network as a single entry.
Other networks, such as Bitcoin have their own L2 protocols, but their size is comparably smaller than Ethereum’s counterparts.
Not all L2s are built the same way.The largest category is rollups, where transactions are bundled and added to Ethereum en masse.Still, there is significant variance in how these approaches operate.They subdivide into optimistic rollups and ZK-rollups.
Optimistic rollups group transactions into a single block, assuming by default that each transaction is valid (thus the ‘optimistic’ moniker), and then anchor them back onto Ethereum every minute or so.ZK-rollups bundle multiple transfers into a single cryptographic proof that is then verified to be accurate by the base Ethereum chain.The significant difference between the two is that zk-rollups transactions can be proven correct.
In contrast, optimistic ones provide a challenge period for users to dispute something (similar to how someone can dispute a credit card charge).
Optimistic rollups are far more popular today, the biggest being Optimism and Arbitrum in terms of the total value of assets locked on the network.Among ZK-rollups, some of the prominent ones are Loopring, StarkWare and Matter Labs zkSync, which house a much smaller amount of assets.
zkSync Era is posting the highest throughput numbers of any L2, including market leader Arbitrum.However, it is interesting to note that Ethereum currently posts faster transactions per second than any L2s.Their max daily TPS numbers are many multiples higher than what Ethereum can process.
There are some other notable L2 networks, the largest of which is Polygon, which has grown to become its own ecosystem and has a token, matic , with a market capitalization of $8 billion.
Key Statistic Over the past year, ether has outpaced its L2 competitors, with the notable exception of ImmutableX (IMX), a platform focused on gaming that surged on the back of a few big announcements in December.
However, most of these tokens have surged past ether over the past three months, likely due to investor anticipation of a spot ether ETF this spring.L2s can trade as high-beta plays on top of ether..
