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L222 - The Daily Gwei #410
Will 2022 be the year of layer 2?
Right now seemingly everyone in the Ethereum community is chanting that 2022 is going to be the year of layer 2 - we even have a hashtag for it: #L222. There’s good reason to be excited as there are currently 19 live layer 2 networks, most of them are growing steadily with no native token incentives and integrations such as centralized exchange on/off ramps are rapidly rolling out. But will 2022 actually be the year of layer 2 or are we all just high on our own supply?
I personally don’t believe that any year is the year of one thing or another - usually what we see are trends playing out over a few months that define a given period of time. For example, in 2021 there were large trends around alt-L1’s, DeFi 2.0 and NFTs - all of these came in waves at different points in 2021 (some even began in late 2020). When it comes to layer 2’s I’d argue that they began trending in the second half of 2021 as many high profile launches happened in that window of time (Arbitrum, Optimism, dYdX, Immutable X and more). Though what people are hoping for in 2022 is for these layer 2 networks to experience explosive growth, traction and adoption.
The main thing that’s on everyone’s mind is around when these layer 2 networks are going to issue native tokens in order to incentivize usage and decentralize their validators/sequencers. My bet is that most of them do it in the first half of 2022 and we’ll see some nice growth that follows it, but I also think that it’s a bit of a red herring. Just because these liquidity incentives have worked for the alt-L1’s (so far) doesn’t necessarily mean they are going to work for the layer 2’s or translate to long-term sustainability. Given this context, I believe that layer 2 teams need to be very careful with how they distribute their tokens and incentivize usage - I would personally like to see tokens be paid out to the teams actually building the applications instead of just the mercenary liquidity farmers.
Speaking of the builders, the two main EVM-compatible/equivalent layer 2 networks that are live today, Arbitrum and Optimism, are quickly building out their ecosystems as more and more apps go live on these networks. The Polygon PoS chain, while not a “true layer 2”, is also continuing to build out its network and actually has more usage than most of the alt-L1’s. Immutable X is dominating the NFT space, dYdX continues to grow its perpetuals exchange, StarkNet is live & growing and zkSync’s traction is starting to pick up nicely. Of course, there are other layer 2 networks that are growing nicely as well and you can check them all out here.
All in all, I do expect 2022 to be a really big year for the layer 2 ecosystem, but it’s not like we’re going to achieve mass adoption this year. There’s still plenty of work to be done around the user experience, infrastructure and wallet interfaces before most people will even touch a DeFi product on layer 2 or otherwise - and that’s okay. As I’ve said before, it’s no longer an “if” when it comes to crypto/web3 mass adoption - it’s a “when”.
Have a great day everyone,
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All information presented above is for educational purposes only and should not be taken as investment advice.