Analysing Layer2s in 2022 Part Two

This article is an original Web3 annual review by Coinlive and GeniiData; please cite the source if you intend to reproduce the content.

(2) L2 development trend (Quantitative Analysis)

The performance of crypto assets in 2022 is very poor. With the continuous decline of assets, currency prices and yields, market liquidity is reduced, and a large amount of capital outflows accelerates the decline.

At present, the stablecoin interest rates of mainstream lending platforms is even lower than that of U.S. treasury bonds, which further reduces the market's preference for risky assets.

In this market situation, the development of L2 is one of the few unique innovations in the market. With the increased speed of L2 expansion plans, the lower gas fees for users, and the ability to attract users with small funds to participate in especially DeFi, this is also a good time for the development of Layer 2.

1. Active User Inflow

Thanks to rollup's high-speed, low-fees and good infrastructure environment, many Ethereum mainnet projects have been deployed on L2, bringing a lot of traffic and activity to L2.

Among them, Arbitrum and Optimism have become the biggest beneficiaries. At the same time, the high performance of L2 also inspired many critical innovations, such as GMX. These innovations bring much needed quality users, developers and eyes to L2s.

Judging from the number of Arbitrum and Optimism addresses, it has been on a good growth curve throughout 2022. We also see an acceleration in growth across several periods in the year. Some bullish catalysts included: Optimism launching higher compatibility with fiat currency and Arbitrum introducing Nitro.

Source：geniidata.com

2. Transaction volume and fees

Not only has the number of L2 users increased significantly, but the quality and activity of users are also at an all-time high.

At present, the number of addresses on the Ethereum mainnet is as high as 170 million, but the number of addresses of Arbitrum and Optimism, which account for more than 80% of the transaction volume on L2, is still at the million level. Even with fewer addresses, the daily transaction volume of L2 in November 2022 has already surpassed Ethereum mainnet.

Source：geniidata.com

The figure below shows the characteristics of L2's low fee rates very clearly. In the case of almost similar transaction volume, the transaction fee on L2 is only about 4% of the Ethereum main network. This is a huge reduction from a cost perspective compared to gas fees on Ethereum L1.

3. TVL

The growth of users and transactions naturally bring about the influx of funds. After observing the TVL data on the L2 chain, the overall performance is better than most market assets. This is due to the gradual maturity of L2 technology and adoption. At present, the overall TVL of L2 is 4.25B USD. Arbitrum and Optimism (both based on optimistic rollup) are currently ranked second in Layer 2, and their market share is about 80%. This is also due to the first-mover advantage of optimistic rollup, and some DeFi, games, NFT and other project parties have begun to build on them.

Source：L2BEAT，TVL

According to the L2Beat, the overall TVL has dropped by about 25% from 5.7B at the beginning of the year, but this decline is mainly caused by the drop in the price of ETH.

Taking ETH as a constant unit, the overall TVL has increased by 200% compared to the beginning of the year. The growth trend is very distinct and stable in the bear market.

Source：L2BEAT，TVL（币本位）

4. Market capitalization

According to market data, projects that have issued tokens in L2s have also experienced a large value retracement this year. In terms of total market cap, as of December 19, 2022, the current market value of issued L2 tokens has not reached 1 billion US dollars.

In terms of market cap for specific projects on L2, Immutable has a market value of $301 million, Loopring has a market value of $279 million, Optimism has a market value of $217 million, dYdX has a market value of $91 million, and metis has a market value of $71 million.

Using various L1 public chains and their projects as a benchmark, L2 projects still have a lot of room for growth in market value.

3. Core Projects on the L2 track

There are many projects on the L2 track. Due to space and capacity limitations, this article mainly introduces four core projects: Arbitrum, Optimism, zkSync, and Starkware.

(I) Arbitrum

1. Project introduction

Arbitrum is a leader in Ethereum's L2 expansion plans. It uses Optimistic Rollup technology to improve the scalability, speed and privacy of on-chain contracts, and its developer-friendly design is fully compatible with EVM.

Arbitrum's multi-round fraud proof uses a binary protocol to disassemble the challenged points layer by layer and find the first opcode of the block that caused the disagreement. Once found, simply execute this opcode on-chain.

Team Information:

The team behind Arbitrum is Offchain Labs. Offchain Labs was co-founded by Ed Felten, a former White House technical official during Obama's tenure and a long-term professor at Princeton University. The other two co-founders are Steven Goldfeder and Harry Kalodner. The three officially founded Offchain Labs when they were at Princeton University.

Fundraising status:

- Closed a $3.7 million seed round led by Pantera Capital in March 2019

- In April 2021, $20 million in Series A financing was completed, led by Lightspeed Venture Partners, with participation from Polychain Capital, Pantera Capital, Coinbase Ventures, Alameda Research, and SNZ.

- In August 2021, completed Series B financing of $120 million at a valuation of 1.2 billion US dollars. Lightspeed Venture Partners led the round, with participation from IOSG Ventures, Polychain Capital, Ribbit Capital, Redpoint Ventures, Pantera Capital, Alameda Research, and Mark Cuban.

2. Technology and product performance

Arbitrum currently has three versions: Arbitrum One, Nitro and Nova. Nitro is an upgrade to One, improving compatibility with EVM and reducing transaction costs. Built on AnyTrust technology, Arbitrum Nova is designed for games, social applications, and more cost-sensitive projects.

Arbitrum One

Arbitrum uses the Optimistic Rollup mechanism where all transaction verifiers are assumed to be honest. There will be a challenge period upon submission of transaction to Ethereum L1. At this time, anyone can challenge the nodes that may be producing error states.

As mentioned earlier, the multi-round fraud proof adopted by Arbitrum is also a cheaper and more efficient solution than a single round fraud proof adopted by Optimism.

Arbitrum has the following performance advantages:

l Scalability: The off-chain virtual machine design allows the application to interact with Ethereum L1 only at the beginning of the execution process and when it needs to withdraw or deposit funds from Ethereum. Arbitrum's design reduces the execution cost of series operations and improves the scalability of applications.

l Privacy: On the Ethereum main chain, the design and status of all applications are public, and any user can view them easily. For Arbitrum, specific contract details and data for applications need not be published on-chain. The blockchain only records application state hashes and public operations such as receiving funds, sending messages, etc, hence increasing privacy.

l Interoperability with Ethereum: Arbitrum is compatible with Evm and also runs on Solidity which is a familiar language to Ethereum developers for contract writing. This ease of adoption and gentle learning curve allows for more developers to come onboard to build.

Arbitrum Nitro

In September 2022, Arbitrum released the Nitro mainnet based on the WASM architecture. This is an upgraded version of One, and improved performance, cost, and experience.

Nitro optimized Arbitrum's interactive fraud proofs so that Arbitrum can run on WASM, replacing the specially designed AVM (Arbitrum Virtual Machine) architecture. At the same time, the Geth core will be built into Arbitrum. Geth is the most common Ethereum client at present, and this improves compatibility with EVM. Finally, Nitro also uses Go to rewrite and simplify ArbOS components to minimize the cost of use for users.

From the data, it can also be seen that the Nitro upgrade has brought about a qualitative improvement. From the image below, we can see that the daily transaction fee has decreased significantly after September Nitro.

Source：geniidata.com

Arbitrum Nova

At the same time as the upgrade of Nitro, the team also launched Nova, which is based on AnyTrust technology. Compared with Nitro, the security is reduced, but the performance is higher and the cost is lower.

Its principle is similar to a combination of rollup and side chain. Unlike Arbitrum One, which puts all transaction data on Ethereum, Nova sends these data to the data availability committee instead. This means Ethereum layer1 only records the hash value of batch processing, hence greatly reducing transaction costs. At the same time, only when the committee fails to complete the work will it fall back to on-chain data, which is equivalent to the way Nitro handles it.

The Arbitrum team is also very clear about the positioning of this product. This higher performance is very suitable for gamefi projects.

3. Token Economy

The current official announcement is no token issuance yet, as they prioritize building and waiting for a better market for token release.

4. Development Trend & Ecosystem Prospect

Arbitrum is currently the most complete and EVM-compatible rollup project, which makes it very easy for developers to migrate applications on Ethereum to it.

In the past year, Arbitrum has enjoyed a large amount of traffic and capital inflow from Ethereum L1. This also makes Arbitrum the leader amongst rollup projects, and an astounding TVL that is even bigger compared with the older public chains. According to the latest data from DefiLlama, Arbitrum's TVL has surpassed Polygon, ranking fourth.

Data source: defillama.com, the data does not include liquidity staking and double-counted funds.

With the deployment of many projects on Arbitrum, users and transaction volume have also increased significantly. At present, the daily transaction volume can reach about 500,000 (0.5m), which is equivalent to 50% that of Ethereum mainnet. At the same time, the number of daily addresses is growing steadily and there is no sign of slowing down.

Source：geniidata.com

At present, more than 300 projects have been deployed or launched on Arbitrum, including cross-chain protocols, DeFi, infrastructure, and NFTs amongst others.

In addition to attracting the migration of mature projects on Ethereum, Arbitrum also led to the creation of innovative projects, such as GMX and MAGIC, with critical use cases that appealed to users even in a bear market.

GMX created a new way of trading derivatives, and innovatively established GLP, a token based on LP yield. This encouraged developers to think of more creative ways to maximise the value of GLP, leading to composability and the creation of more GMX-based projects targeting GLP.

GMX itself also developed rapidly, with TVL reaching 400 million U.S. dollars, and shortly after its launch, it became the protocol with the fourth largest revenue.

Source：tokenterminal.com

In general, Arbitrum is one of the strongest L2s leaders in the space, with many active projects and users building and using it. The ecosystem is strong, interconnected, and ready to scale. All this success without even having launched their token or providing any token incentives. Hence, we think it is wise to follow-up and keep tabs on their development in 2023.

(II) Optimism

1. Project introduction

Optimism is the first Ethereum L2 to develop an Ethereum Virtual Machine (EVM) compatible Optimistic Rollup solution. Optimism is similar to Ethereum in its capability of processing transactions on a large scale while maintaining the security of Ethereum.

Optimism adopts a single round of fraud-proof, which means the computations for every layer-2 transaction must be executed on layer-1 to verify the state root, making the fraud-proof instant. Compared with Arbitrum's multi-round verification, Optimism boosts faster transaction finality.

Team information:

●Jinglan Wang, the founder of Optimism, is a software development engineer of Plasma Group who helped to build Ethereum's Plasma expansion technology. She has worked in Handshake, IDEO, etc.

●Karl Floersch, Chief Technology Officer of Optimism, worked as a researcher at the Ethereum Foundation, participating in research on consensus protocols (PoS) and scaling (sharding).

●Kevin Ho, co-founder and product manager of Optimism, joined the team in 2019 and has participated in creating Optimism since.

●Mark Tyneway, the co-founder of Optimism, has worked as a software engineer in IBM, Digital Promise, and other Internet companies with rich development experience.

Fundraising Status:

In January 2020, Optimism completed a $3.5 million seed round of fundraising led by Paradigm and IDEO.

In February 2021, Optimism completed a US$25 million Series A fundraising led by a16z.

In March 2022, Optimism completed its Series B fundraising of US$150 million, led by a16z and Paradigm, with a valuation of US$1.65 billion.

2. Technology and Product Performance

Optimism aims to improve Ethereum by increasing transaction speed and throughput, knowing that faster transaction settlement and lower transaction costs can significantly enhance the user experience. Layer 2 expansion solution based on Optimism Rollup technology. Transaction data summaries will be submitted to the Ethereum layer 1 network, taking advantage of the consensus mechanism of Ethereum to obtain network security guarantees. Optimism executes transactions on L2 and passes them in batches to L1 for finalization. Depending on the type of transaction, this reduces gas costs by about 5-20.

As a project of the same Optimistic Rollup series, Optimism also has the advantages of Arbitrum mentioned above: high TPS, low cost, and EVM compatibility.

3. Token Economy

The project token OP was listed on the exchange in May this year, and token holders will receive the following economic values:

●By effectively redeploying Sequencer revenue, the value of token holders increases.

●The value of contributors and builders comes directly from retroactive public goods funding and the markets it supports. Builders can also benefit symbiotically: it is best to construct an ecosystem with well-funded tools, education, apps, and infrastructure.

●Optimism's ongoing airdrops, project incentives provided by the Optimism Ecosystem Fund, and benefits provided by public goods bring value to users and community members.

Governance value

Optimism adopts a more decentralized governance method than Arbitrum, and Optimism will be jointly managed by the Optimism Foundation and Optimism Collective members. Optimism Collective is a large-scale experiment in decentralized governance. Its core governance structure is two equal houses: the Token House and the Citizens' House.

Token House will be established by distributing OP via Airdrop to thousands of addresses engaging in positive-sum, community-oriented behavior so those token holders can vote on the distribution of project incentives.

Meanwhile, according to the opinions of Token House, they will grant citizens SBT status, establish a Citizens' House, facilitate and manage the fund's distribution process of retrospective public goods.

OP holders can also participate in the governance of the Optimism Foundation, report the dismissal of a director of the Optimism Foundation, and veto changes to the founding documents of the Optimism Foundation.

Token distribution

The supply is capped at 4,294,967,296 tokens, with a circulating supply of 214,748,364 and an inflation rate of 2%.

20% allocated to retrospective public goods funding;

17% allocated to investors;

19% allocated to core contributors;

25% allocated to the Ecosystem Fund;

19% includes the airdrop, of which 5% is allocated to the first airdrop. The remaining 14% will be reserved for future airdrops;

It is worth noting that the allocation of the remaining 14% of the OP token supply will be reserved for future user airdrops. Due to the game-ability of the airdrop, the Optimism Foundation will be responsible for determining the airdrop metrics as fairly as possible. These airdrops aim to distribute tokens to addresses that positively impact the Optimism community.