Ethereum Layer 2 engagement grows again in October

L2 engagement moved up in the second week of October, coinciding with a market-wide recovery. Ethereum once again faces the question of seeing L2 as a welcome addition, or as parasitic. 

L2 chains on Ethereum had higher engagement in the second week of October, partially driven by renewed interest in meme tokens. L2 growth is also driven by wider Base adoption with activity concentrated on Aerodrome and meme token launches. 

All L2 chains saw more than 9.51M active wallets, in line with the overall trend of near-peak engagement. In September, weekly wallet engagement backtracked a bit, but may be back to growing, thanks to the share of Base transactions and users. Base increased its throughput, achieving a higher count of complex transactions, in most cases swaps and DeFi actions. 

L2 increased engagement in the second week of October, after a strong performance in Q3. | Source: Growthepie

Most of the L2 activity is still concentrated in the top 5 of chains. However, there are around 34 high-profile L2, some with niche or single-purpose uses tied to gaming, NFT or decentralized trading. 

Beyond that, a wider circle of 107 networks has been created, with several different approaches to proving validity. The chains include optimistic rollups, multiple projects claiming to offer ZK-rollups, as well as Validium or other consensus tools. For some chains, the promised tools are not live yet and may take years to develop. 

From the point of view of end users, those chains serve their purpose, with minimal transaction fees and fast apps. However, not all have achieved true decentralized proofs, especially ZK-rollups. New L2 with decentralization in progress may be no different than a database of transactions and a multisig wallet to bridge assets. The transactions may also be driven by bots or not be tied to unique users, inflating the reported effect of L2.

Some L2 are not entirely on board with Ethereum’s idea of scaling. Some of the L2 are also built around a specific app or DEX, instead of launching on Ethereum. This also means the L2 is extracting most of the fees from end users, but pays only minimal fees itself for using the L1 chain for security. The most recent addition to this type of L2 was Uniswap’s Unichain, to launch by the end of the year. 

L2 are not the main use case for Ethereum

The currently existing L2 have convinced some users that they are the go-to solution for scaling Ethereum. Those projects were the first to appear and claim to be decentralized. This was enough to draw in liquidity, with more than $10B in ETH and another $10B in stablecoins, as well as additional bridged tokens. 

Users have shifted to L2, but skeptics note that not all of those chains are beneficial to the Ethereum ecosystem. For some, Ethereum must continue to scale on its own and offer direct benefits to end users, instead of relying on L2 as its main customers. The other option, according to critics, is to only allow scaling from truly decentralized, secure chains, while being aware of novelty L2 with potentially compromised security and intentions to go for a money-grab from Ethereum.

Some L2 remain risky as their bridged or native assets are controlled by the team, and not by decentralized consensus as promised. Currently, only Arbitrum and Optimism work without a central coordinator, but are still not a fully decentralized network with consensus between nodes.

L2 pay out rent to Ethereum’s L1, but those fees are mostly negligible compared to the current gas price economy. Even during more active periods, rent paid to L1 is still limited. At the same time, Ethereum has around 445K daily active addresses. For some, the solution is to retain the L2 that boost the fees on Ethereum, and do not work to extract fees from apps. 

Ethereum plain transactions are just under $2, which may be reasonable for some users. Yet composable transactions, lending, borrowing or other app activities can run up to $25 even during normal gas conditions. More than 92% of Ethereum blocks also contain MEV boost to make composable fast transactions possible. Even with private block-building, Ethereum also has to handle the risks of dark pools which still manage to attack transactions with higher fees.