In this report, we look at how the Layer 2 ecosystem is shaping up and dive into the varying rollup solutions vying for adoption. We’ve seen already the scalability limitations of Ethereum today. In order to unlock the next phase of growth, the scaling torch has been passed over to Layer 2s, led by rollup solutions each with their own set of trade-offs.
- Layer 2 adoption has been slow thus far with ~$42m TVL on L2 in comparison to $4B TVL alone from L1 DEXs. A number of Layer 2 rollup mainnets are launching over the next few months, and this should trigger a flurry of phased dApp migrations.
- Across most rollup solutions ranging from zk-rollups to optimistic rollups, a core theme being addressed is the need for EVM compatibility/smart contract support.
- A potential concern to look out for is liquidity fragmentation. If adoption becomes fragmented across a number of different rollups in addition to liquidity on L1 vs L2, you’d lose some of the composability on Ethereum’s base layer that contributed to DeFi’s tremendous growth.
- Given some challenges faced with varying withdrawal times from different rollup solutions, layer 2s have a better chance of success if they end up becoming a homebase for users.