Layer 2s Flex and Efficiency Thrives

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This article is part of our On the Radar 2022 series.

Layer 2s are on the rise and blockchains are getting faster and cheaper than Ethereum. This drive toward greater efficiency is likely to accelerate and shape the evolution of DeFi in 2022.  

Capital is becoming more efficient as well with protocols like Balancer, an automated market maker (AMM), earning yield on unused liquidity by depositing it in Aave, a lending protocol. 

Monthly active addresses on Ethereum hitting an all-time high of 10M in May, according to analytics provider Glassnode, the demand is clear for the smart contract platform. 

But with deposits in DeFi protocols costing more than $100 when gas is high, there’s no way that Ethereum’s L1 will be usable with more users. That’s where blockchains like Solana, Avalanche, and Terra have swept in and made their mark — all three projects sport total value locked (TVL) numbers above $10B as of Dec. 21, according to DeFi Llama. Terra stands out at $19.91B as of Dec. 21.

Layer 2s stand to gain ground against non-ETH Layer 1s in 2022 — all solutions combined account for $5.44 in TVL as of Dec. 21, according to L2BEAT.

Indeed with both non-ETH Layer 1s and Ethereum Layer 2s set to compete for users based on speed, UX, affordability, and functionality, efficiency may be a watchword in 2022.

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