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| By Marija Matic |
The Ethereum (ETH, “A-”) spot ETFs on the horizon. And as anticipation for them grows, it’s a good time to assess the health of Ethereum’s ecosystem.
That’s because understanding those metrics can reveal which projects — both established and emerging — are leading.
And they are the ones most likely to benefit from the additional attention that will come once the ETFs are finally listed.
A key piece of the Ethereum ecosystem — loaded with juicy opportunities — is its Layer-2 solutions.
Ethereum is renowned for its robust security. But this comes at the cost of slower and more expensive transactions.
To tackle these limitations, Layer-2, or L2, networks were introduced in 2021 to provide faster and more cost-effective transaction alternatives.
While transactions on Ethereum’s mainnet typically range from $2 to $5, L2 networks reduce these costs to just a few cents.
This dramatic reduction in fees has fueled a surge in L2 adoption. As of March 2024, the total value locked (TVL) in Layer-2 solutions had already surpassed $40 billion.
Among these Layer-2 solutions, the largest networks by TVL include:
1. Arbitrum (ARB, “B-”): $16.85 billion
2. Base: $6.90 billion
3. Optimism (OP, Not Yet Rated): $6.43 billion
4. Blast (BLAST, Not Yet Rated): $2.68 billion
5. Mantle (MNT, Not Yet Rated): $1.25 billion
These are the “dominators” of the Ethereum L2 networks, with Arbitrum holding the No. 1 position.
But Base has been making strides of its own. It has gained notable traction as the go-to Ethereum network for launching new tokens — including many memecoins and innovative projects — largely due to its strategic association with Coinbase.
In addition to the established players, new contenders are making waves.
As a general rule of thumb, dominators will be less susceptible to market volatility. But promising new projects can often have larger growth potential. And a significant amount of value has been bridged to emerging networks like Linea and Polygon Hermez in recent weeks.
But one newer entrant in particular is quickly gaining prominence. Taiko (TKO, Not Yet Rated) ranks fifth in transaction speed and it has already surpassed many established competitors in terms of TVL within just a month of its launch.
Despite its promising technology and impressive growth metrics, it will be essential to monitor user retention once initial incentives wane to assess its long-term viability.
New chains like Taiko often create substantial incentives for users and developers, leading to a surge in activity and liquidity. That’s why the true test of a project's staying power comes after those incentives have run their course. Then we can more clearly see how effective a chain is … and if it can sustain engagement.
And L2s are just the beginning.
Since June, Layer-3 networks — which operate on top of L2 solutions — have experienced a dramatic surge in activity, primarily fueled by the rise of next-generation video games.
This boost has significantly impacted Ethereum’s transaction throughput, propelling the entire ecosystem to a record 290.62 transactions per second as of yesterday.
While Ethereum's mainnet processed 12.54 tps, the combined power of L2 and L3 networks accounted for the impressive remainder.
Together, L2 and L3 networks are significantly enhancing Ethereum’s scalability, currently achieving a combined performance improvement factor of 21.17x.
Ethereum’s Stability Amid Layer-2 Token Volatility
Despite their usefulness, recent months have seen a decline in the prices of Ethereum’s L2 tokens. Not surprising, considering the broad market’s latest correction. Arbitrumin particular has been hit hard due to significant unlocks flooding the market.
Nevertheless, it still retains a 40% share of the L2 market and remains a popular choice for Layer-3 network development.
That’s because Ethereum's scaling solutions are integral to its robust activity. And not only are they poised for continued success. They also pay substantial fees to Ethereum for security services. Indeed, the top ten L2 solutions have given $103.12 million so far, which ultimately benefits ETH stakers, who receive that money as rewards.
What does this mean?
Well, while L2s are geared for a promising future, the near term can be volatile. Newer tokens’ monetary policies might not support price appreciation due to upcoming token releases. That would introduce additional weakness beyond the continued broad market correction.
Only time will separate the projects with lasting power from the ones that’ll wither under the pressure.
Investing in an L2 opportunity to gain exposure to the Ethereum ecosystem means accepting more risk for a potentially higher return.
ETH itself, on the other hand, is the safest play within its own ecosystem. Over the past year, Ethereum's inflation rate has been a mere 0.01% and is projected to stay low or even deflationary at times.
And, while liquidity rotates between the various L2 networks, Ethereum remains a constant beneficiary.
L2 tokens might outperform Ethereum during bullish rallies due to their high growth potential and smaller market caps. But if you have a lower risk tolerance or are looking for a steadier investment opportunity, Ethereum remains the safest blue chip within its ecosystem.
Its stable inflation rate, coupled with the ongoing security fees paid by L2 solutions, underscores ETH's enduring reliability and foundational strength amidst the fluctuating dynamics of the L2 market.
Best,
Marija Matić
