Blockchain layers are the inevitable result of the shortcomings of older blockchains, or Layer 1 platforms as they have become known. Layer 2 platforms have been a hot topic in the industry since the Ethereum Foundation began embracing the concept as a concrete solution to Ethereum’s ongoing scalability issues. Especially over the past year, as interest in the crypto ecosystem has once again increased, the Layer 2 landscape has grown rapidly, with its total value rising to an all-time high of around $50 billion in June. While the recent market downturn has consistently dragged this figure down, user activity underlines the overall growth trajectory.
A notable feature is the distribution of value and utility across the L2 ecosystem, which has come to mirror that of the broader cryptosphere. General purpose platforms like Arbitrum One, Base and OP Mainnet handle the majority of the traffic, similar to how BTC, ETH and USDT dominate the crypto rankings. However, application- or use-case-specific blockchains such as gaming-focused Immutable
Sanket Shah, VP Growth & BizDev at Polygon – an original pioneer of the whole L2 concept way back in 2017 – recently shared another reason why application- or utility-specific chains can hold their own against general-purpose competitors:
“Differentiation is a key priority for many Layer 2s because using it can involve trade-offs, and the best part of coexisting is having a differentiated blockchain space. In other words, it’s all about finding the right utility for the L2.”
While targeting a segment like “the blockchain for gamers” or “the blockchain for payments” is one way to stand out, L2 platforms also differentiate themselves on specific features, such as Aztec Network and ZK-enabled privacy.
However, he warns about the risks of differentiating too far:
“A multi-layer ecosystem can become fragmented, which hinders communication between the chains. The risk of having too many Layer 2s who cannot work together is that they will end up in silos, and the end result is that they will simply fail to fulfill their potential.”
Polygon has had some time to think about this challenge. The Chain Development Kit (CDK) solution provides developers with a standardized stack for building sovereign, zk-compatible Layer 2s that can easily communicate with each other.
Then there’s the newest level on the stack: Tier 3s, which takes the specificity a step further. Layer 3s typically operate as a utility-specific platform that introduces a feature such as interoperability or customization that is not available at the two lower layers. An example is Orbs, which operates as a decentralized, serverless cloud for smart contract deployment, integrating with various Layer 1 and 2 platforms for underlying security.
Tier 1 – Still in play
What does all this top-layer development mean for the established group of Layer 1 platforms that don’t necessarily share Ethereum’s need for a Layer 2 ecosystem?
Well, a rising tide lifts all ships, it seems. Rather than pulling activity away from existing L1s, the proliferation of Layer 2 and 3 platforms appears to be having the opposite effect on growth and development. As Luigi D’Onorio DeMeo, COO at Ava Labs (developer of the Avalanche blockchain), notes:
“There are different types of Layer 1 blockchains on the market. Monolithic chains like Solana aim to increase the capacity and throughput of a single chain. Other ecosystems, such as Avalanche, build an interoperable network of L1s connected by a common communications protocol. In addition, they aim to scale up the capacity and throughput of one chain.”
These strategies are paying off. In June, Solana announced the launch of ZK compression of blockchain data directly at Layer 1, introducing improved scalability.
Meanwhile, Avalanche’s focus on developing its ecosystem and network has also paid off. The California Department of Motor Vehicles recently put 42 million vehicle records on chain using Avalanche as part of its ongoing efforts to reduce fraud and streamline the vehicle transfer process. Cosmos, another multi-chain L1, recently welcomed Router, a platform focused on chain abstraction, into its fold. Chain abstraction is designed to solve a very real UX challenge: that a multi-chain ecosystem can quickly become too complex.
Despite the complexity, the emergence of an L2 ecosystem has proven to be a worthy addition to the blockchain sphere. It provides much-needed alternatives for Ethereum users, creating the competitive edge for further development of established L1s while supporting the overall growth of the ecosystem.