Will this summer usher in the "Layer 2" boom?

In 2020, with the emergence of protocols such as Curve, Compound, and Yearn, the total value locked (TVL) in DeFi has soared to more than $10 billion. In 2021, NFTs captured mainstream media attention, with projects like CryptoPunks and Bored Ape Yacht Club reaching multi-billion dollar valuations. Based on current trends and forecasts, many believe that Summer 2022 will be dubbed "Layer 2 Summer".

For the past few years, Ethereum has had a problem with transaction congestion. Simple actions like sending tokens or trading them on a decentralized exchange can cost upwards of $50 and take hours. As a result, several projects have emerged to try to solve this scalability problem and make smart contracts available to everyone, some of these blockchains include Binance Smart Chain, Avalanche, Fantom, and Solana.

These solutions have all succeeded in making transactions faster and cheaper, and have therefore attracted some users of Ethereum. However, these chains sometimes sacrifice security for speed. For example, Binance Smart Chain has only 21 validators, while Ethereum has over 200,000 validators, and Solana has seen seven outages this year alone. Also, the combined value of these blockchains is in the billions, but they have never been able to replace Ethereum. Ethereum's strong track record for decentralization and security makes it a great choice for anyone concerned about potential censorship or disruption, despite its high fees.

In order to maintain Ethereum’s level of security and decentralization without sacrificing speed or cost, second-layer solutions emerged. More and more cryptocurrency exchanges are adopting and integrating the second layer.

The "DeFi Summer" of 2020 started with only about $1 billion locked in DeFi protocols, and that number soared to $10 billion a few months later. The same phenomenon may also occur in second-layer solutions, especially as more DeFi dApps such as Aave and Uniswap are deployed into their ecosystems. Additionally, the Ethereum merger is coming, and the Ethereum blockchain will switch from proof-of-work to proof-of-stake and potentially become a deflationary asset.

A few weeks ago, Optimism announced that they would be airdropping their governance token, OP, to anyone using the platform. This caused a frenzy in the cryptocurrency community, and Arbitrum will likely soon follow suit and airdrop their own token. These would be two of the largest airdrops in recent history and could net their recipients thousands of dollars. It will also incentivize more people to connect their funds from other blockchains to these solutions, and the second layer is expected to offer their governance tokens as a liquidity incentive for their top dApps.

Increasing integration and adoption by exchanges and companies, incentives provided by airdrops, and hype surrounding Ethereum mergers could be the catalyst for the “Layer 2” boom. The best way for potential investors to capitalize on this trend is to compete for protocol airdrops by bridging funds and actually engaging with their ecosystem.

Most signs point to a "Layer 2 Summer" becoming a reality, which will benefit Ethereum and smart contracts in general.

By Lincoln Murr, Amy Liu