The growth of Layer 2 technology shows the potential for competitive Layer 1: Huobi Research Institute

London, United Kingdom –News Direct– Huobi Research Institute

With the major exchanges recently listing OP tokens, the focus has been on Layer 2 and its potential to eat away at Layer 1’s market share. However, Layer 2 TVL has retreated by more than 40%, far from expectations. New report from Huobi Research Institute – called “Layer 2 development: Market data analysis“Examines the engines behind the ups and downs of the Layer 2 market and its potential to compete with Layer 1.

Level 1 chain competition has always been the subject of controversy in the crypto world. Since 2022, fundraising has never stopped for Tier 1 chains, although the market has suffered some cataclysms. Layer 2 is an off-chain scaling solution, where the basic design philosophy lies in the transfer of storage and calculations that would be completed in-chain to off-chain, with certain parameters to ensure legitimacy and security; the end state is sent back to layer 1 and synchronized with the entire network.

The main battlefield of Layer 2 surrounds Ethereum – that no major changes will be made that would undermine the basic logic of the Ethereum network, but performance will be improved by 30 – 100 times. Such a concept sounds more feasible than ETH 2.0. Layer 2 chains are primarily used to provide higher productivity at a lower cost than more mature Layer 1 chains, with some speculating that the latter’s market share and revenue have been lost by the former.

Reports suggest that the ideal indicator to judge the effectiveness of Layer 2 would be that Ethereum’s reduced TVL is equal to TVL’s increase in Layer 2. However, analysis of recent TVL data shows that it is not yet in Ability to Eat Ethereum Revenue – Changes in TVL between Ethereum and Layer 2 do not always move in opposite directions, indicating a weak link between the two. From the end of January to the end of April, TVL on Layer 2 remained constant, as if it had not been affected by competition at level 1. An increase in TVL for Layer 2 was noticed in early May thanks to an official announcement from Team Optimism in late April: this original token, OP, will be issued. Optimism tokens were released to early supporters, and more air launches can be expected in the future. The increase of over 20% in Layer 2’s TVL seen during this period was simply in response to the expectation that OP and other top-level Layer 2 players would continue with air launches.

Since the announcement of the token issue, four projects in Optimistic Rollup, Arbitrum, Optimism, Metis and Boba have grown steadily. Arbitrum is a leader, representing over 50% of TVL for a long time, with Metis and Boba just behind Optimism. It is obvious that OP Rollup has achieved a higher acceptance rate in general and there has been a trend of concentrated distribution. OP Rollup’s growth is driven by demand, reflecting the recognition of its enormous potential to become an important infrastructure.

Meanwhile, ZK Rollup, another technology track in the current Layer 2 ecosystem, is also growing. There is a rising trend in TVL of massive ZK Rollup projects such as zkSync and StarkNet, and its future looks promising. Projects that are incompatible with EVM face difficulties, while projects that involve trade are the most vulnerable to market changes.

Huobi Research Institute researcher Mengchu Jiang said: “The potential of Layer 2 is very much alive – we hope this gives consumers some insight into the current Layer 2 market and how it will affect future developments.

To download the full report, click here.

About the Huobi Research Institute

The Huobi Blockchain Application Research Institute (called the “Huobi Research Institute”) was established in April 2016. It is committed to researching new developments in the global blockchain industry. Its goal is to accelerate the research and development of blockchain technology, to promote its applications and to improve the global ecosystem of the blockchain industry. Huobi Research Institute covers industry trends, emerging technologies, innovative applications, new business models and more. The Huobi Research Institute has partnered with governments, businesses, universities and other institutions to build a research platform that covers the entire blockchain industry. Its professionals provide a solid theoretical basis and analyze new trends to promote the development of the industry.

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