2023 L2 Development Overview: Although the narrative of Layer 2 is strong, it lacks innovation, with Layer 1 competitive chains making a strong comeback.

Recently, with the maturation of Rollups technology and tools, new Layer2 projects continue to emerge and join the competition, creating high expectations in the market for Layer2 trends. However, DeFi researcher Ignas believes that current Layer2 projects lack innovation, following the conventional strategies of past Layer1 competition. On the contrary, Layer1 has shown meaningful innovation and change in recent years, indicating that the market landscape is still rapidly evolving.

Ethereum Layer2 Ecosystem Flourishing

With the airdrops of tokens from Optimism and Arbitrum, the market heat for Layer2 has been continuously increasing. Recently, many new services and tools for Layer2, even modular ones, have emerged. New players keep joining the competition, and terms like L2, modularization, DA, and Rollups seem to remain the focus of the market in 2023.

This article summarizes the key points of the Layer2 narrative this year.

Maturing zk Layer2 Networks

Due to the higher construction difficulty of zkEVM, a general-purpose virtual machine based on zero-knowledge proofs, zk Layer2 development is usually not as rapid as Rollups based on fraud proofs. However, with continuous development and research by various teams, zk Layer2 will gradually be implemented, including:

• Scroll launched its mainnet this month and implemented a solution close to zkEVM equivalence.
• Starknet is building a translation layer on its Cairo virtual machine to achieve EVM compatibility.

Many other projects are expected to continue to progress, and the market potential and possible airdrop opportunities of Rollups based on zero-knowledge proofs are gradually fermenting in the market.

Comprehensive Construction Tools

Teams that have developed Layer2 in the past, after completing the technical stack development, have released development frameworks to further amplify their benefits. These frameworks allow other developers to quickly establish new L2 or even L3 networks using their architecture, thereby expanding their ecosystem. These include:

• Optimism's OP Stack
• Arbitrum's Arbitrum Orbit
• Polygon's Polygon CDK
• zkSync's ZK Stack

More tools are expected to appear in the future, and the barriers to building Layer2 are gradually decreasing.

Exchanges Joining the Battlefield

With the enhancement of Web3 applications and narratives, many centralized exchanges are also trying to enter Web3 infrastructure to meet the future needs of their users. Currently, major players are focusing on wallets and Layer2 networks, with a focus on the latter, including:

• Binance launched opBNB, a Layer2 network based on OP Stack, in June.
• Coinbase introduced its own Layer2 blockchain Base in August.
• Kraken announced plans to launch its own zk Layer2 network this month.
• OKX announced a collaboration with Polygon to launch a zk Layer2 network this month.

Through the above examples, a clear trend can be seen where exchanges are starting to compete in the Web3 market, hoping to strengthen their brand by diverting users' attention to other chain applications and using a complete product line and usage scenarios.

Modular Network Narratives

With the increasing market attention on Layer2 networks, the issue of further reducing gas fees has been brought back to the forefront. Providing data availability layers (DA) and EIP-4844 through modularization are the two mainstream development directions in the market. Data availability layers are essential infrastructure for modularized Rollups, and recent market developments include:

• Celestia launched its mainnet at the end of last month with rising token airdrop popularity.
• Near announced the launch of NEAR DA this month to provide Ethereum Layer2 data availability layer services.
• Avail is expected to launch its mainnet next year.

As the data availability layer services that "assist Layer2 in further optimizing performance" gradually improve, market imagination for L2 applications is enhanced, allowing narratives to continue to extend.

Short-lived Prosperity of Layer2 Ecosystem

Lack of Innovation

However, not everyone is optimistic about the recent trends in Layer2. Cryptocurrency researcher Ignas presents a different view, believing that the recent market heat for Layer2 resembles the past "Ethereum killer" narrative. These networks lack innovation, utilizing similar structures, similar on-chain protocols, and liquidity mining to attract users to temporarily invest their funds.

The continuous emergence of Layer2 networks has fragmented liquidity and diverted market attention, leading the market to gradually lose interest in new Layer2 networks, thereby missing out on development opportunities.

Poor Token Economies

Currently, many Layer2 token economies are not rational. For example, ArbitrumDAO recently proposed providing staking rewards for ARB tokens to create value, distributing rewards from a treasury of 100 million ARB without any meaningful purpose. It is evident that the team has not thought through how to sustainably develop the project.

Following the Old Path of Layer1 Competition Chains

The last bull market was a testing phase for what were referred to as competition chains below Ethereum Layer1. During that time, competition chains mostly forked Aave and Uniswap V2 to establish similar protocols on their networks and provide liquidity mining rewards to attract users' funds.

It can be said that applications outside of Ethereum's layer had almost no innovation. Even non-EVM-compatible networks launched EVM sidechains, such as Near's Aurora, Polkadot's Moonbeam, and Cosmos's Kava, gaining higher visibility due to their early launch. However, fundamentally, these projects still lack innovation, with differences from Ethereum mainly in lower gas fees, faster speeds, and the amount of liquidity mining rewards they provide, without any new concepts in their underlying structure and operation.

With the beginning of the bear market, reduced liquidity mining rewards, and the disappearance of unstable brand halos, most on-chain funds return to the secure Ethereum network.

The positioning of each Layer2 is not clear, and the current market interest in them is mostly based on short-term activities and empty rewards, which are not sustainable.

Correct Strategies of Current Layer1 Competition Chains

However, it is the Layer1 competition chains that, after being tested by the bear market, have reshaped their development strategies and technical frameworks, demonstrating innovation and volume different from the past. This year has seen significant technological breakthroughs or strategic directions:

• Avalanche: Through the Evergreen subnetwork for scalability, focusing on asset tokenization, and clearly positioning itself to provide services for traditional finance and enterprises.

• Polygon: Transforming itself into a Layer2-centric hub, offering a range of tools and frameworks to meet diverse development needs, recently attracting OKX to join the ecosystem is a significant success.

• Near: Making its monolithic architecture modular with components, launching NEAR DA to provide data availability layer services to attract Ethereum's ecosystem; also abstracting blockchain difficulty by creating the blockchain operating system BOS to enhance user experience.

• Solana: Offering fast transaction user experience through its non-modular design, Solana's monolithic architecture, using Jito to reduce network crashes or Firedancer to improve client-side performance, lays a more stable operating structure.

• Fantom: Upgrading its network through Sonic without the need for sharding or modular structures, achieving 2000 TPS with one-second transaction finality, aiming to provide an environment for incubating innovative DAPPs.

• BNB Chain: Launching the opBNB network based on OP Stack to reduce costs and integrating with BNB Greenfield to achieve more efficient decentralized data utilization networks, focusing on DataFi for data tokenization and maintaining data privacy for AI large language model training.

• Cosmos: Although ATOM itself did not perform well in its value capture mechanism, with the thriving development of the Osmosis, Injective, and Kuji ecosystems, the Cosmos Hub has gained new growth momentum.

Market Continues Rapid Changes

Compared to Layer2, Ignas is now more optimistic about the development of Layer1 competition chains.

After settling down, competition chains in L1 have found clear positioning, continuous innovation, and specialization. At this stage, L2 has become the old L1—existing for airdrop activities to attract users or fork protocols for liquidity mining, lacking real innovation and diversified development.

As a result, tokens from previous competition chains now have more dazzling performances in the market. Compared to the previous bull market, they now offer more attractive and long-term value propositions.

However, there is still much room for long-term development, and whether it is competition chains or Layer2, there are many opportunities and risks to consider. It requires consideration of various factors to see the true direction of the industry's future, as the Web3 industry continues to evolve rapidly.