Layer 2s Showed Their Utility But TVL Growth Lagged

Layers 2s had a banner year in DeFi but their TVL still lags.

Layer 2s Showed Their Utility But TVL Growth Lagged

Big Story 2021: This article is part of our Year in Review series.

If 2021 was a monster year for Ethereum, it was also a monster year for gas prices.

Trades on DEXs regularly cost upward of $50 and deposits into DeFi protocols were often $100 or more, making it difficult for everyday users to take advantage of the new frontier of open finance.

That’s where Layer 2s came in. At over $2B, Arbitrum leads the way in terms of value locked on its solution, though well-funded alternatives like Starkware and zkSync are gunning for market share.

Arbitrum is the Latest Layer 2 to Join the Ethereum Scaling Race
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Layer 2 protocols offered lower transaction costs at faster speeds than Ethereum, and did so, theoretically, while maintaining the security of the world’s most valuable smart contract platform.

Layer 2s do this by executing transactions off Ethereum’s main chain but posting the data back to the Layer 1, ensuring its integrity.

Even so, Layer2 didn’t exactly take off. Total value locked on Layer 2s peaked at $7.2B in November and slowly dropped to around $5.2B in December. In contrast, DeFi’s largest protocol, the AMM Curve Finance, has more than four times that amount of value locked in its smart contracts.

True Test

Almost no Layer 2s have tokens, which may be the reason for their less than exponential growth. Regardless of the economics behind them, tokens often get people excited about using a product.

With influential VCs investing in Layer 2s such as Paradigm and Three Arrows Capital, there’s a good possibility that the protocols will introduce tokens in 2022. Project’s like Optimism are opening their platform to all developers. It’s safe to say that next year will be a true test for Layer 2 adoption.