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- Tier 2 costs began to increase as usage decreased.
- Optimism remained unaffected by the developments, while prices soared.
Despite market volatility in 2023, the Layer 2 (L2) sector saw tremendous growth. However, as growth in the industry increased, so did competition within the industry.
Low usage causes problems
Roll-ups on Ethereum are designed to make transactions cheaper, but a lack of users has the opposite effect. These Layer 2s take longer and cost more due to underutilized capacity.
The L2 paradox – or why a lack of users leads to rising costs for emerging L2 systems
Roll-ups on Ethereum would reduce fees for individual transactions. But the lack of users has had the exact opposite effect. They take longer to finalize and cost more.
Let me… pic.twitter.com/YyVtRhDnfT
— Joel John (@joel_john95) November 23, 2023
Examining the data from November 16, we see that most chains, including Polygon, were operating below capacity.
Ethereum processed more transactions than several emerging Layer 2 systems combined, creating a scenario where L2 capacity is underutilized, driving up individual transaction costs.
Source: L2BEat
Making comparisons
Comparing Ethereum to its L2 counterparts, Ethereum’s transaction fees increase with demand, while roll-ups see the cost per transfer decrease as transactions increase.
This is because a significant portion of the cost of rollups (95%) goes towards posting data to the main net, and if there are not enough transactions, the few transactions within a batch bear that cost.
This creates a cycle where L2s struggle to achieve economies of scale due to a lack of traction, resulting in an increase in costs, further hindering their economies of scale. Data shows that Ethereum’s transaction numbers are much larger than those in L2s such as the Arbitrum and Zk-sync era.
The impact extends to liquidity and user base, illustrated by Curve’s graph, where 93% of liquidity remains on Ethereum.
Despite incentives, users were hesitant to switch to new chains. L2s must evolve into self-contained ecosystems to survive. Otherwise, consolidation and mergers may be in the offing.
State of optimism
Optimism, as a Layer 2 solution, may face challenges due to the broader issues in the Layer 2 sector. If the L2 sector struggles to attract more users, Optimism could experience a similar lack of traction.
Read Optimism [OP] Price prediction 2023-24
This could lead to a situation where fees for individual transactions on Optimism remain high, hampering its attractiveness to users.
At the time of writing, OP was trading at $1.8571 and had grown 1.75% in the past 24 hours. The volume of OPs traded also increased dramatically during this period.
Source: Santiment