Arbitrum and Optimism: Two protocols management 80% of all Ethereum Layer 2 TVL

Ethereum’s main Layer 2 protocols, Arbitrum and Optimism, surged in reputation in 2022. Mixed, Arbitrum and Optimism account for four-fifths of all worth locked throughout Ethereum’s Layer 2s.

On January 12, these two protocols surpassed Ethereum’s day by day transactions — showcasing their scaling potential. Optimism alone processed 800,000 transactions that day.

“Layer 2” refers to off-blockchain scaling options that batch, roll-up, or in any other case improve transaction throughput. Layer 2s use separate protocols from the principle blockchain to course of transactions sooner or cheaper. Finally, all Layer 2-processed transactions settle in batches onto the common, Layer 1 blockchain.

Arbitrum botches main launch, cedes progress to Optimism

One of many main promoting factors of a Layer 2 is cheaper transaction charges. In keeping with Dune Analytics, Optimism’s transaction charges have traditionally remained decrease than Ethereum’s base blockchain. Nonetheless, Arbitrum’s value financial savings lately jumped sharply close to the tip of August 2022 and outcompeted Optimism. Since then, Arbitrum has maintained its low-cost lead.

Nonetheless, Arbitrum has struggled to regain credibility after its botched launch of a service referred to as Odyssey. In keeping with DappRadar, Arbitrum had $1.2 billion in whole worth locked (TVL) on August 29, 2022. At some point later, its TVL plummeted to $125 million and has by no means materially recovered.

Many attribute that precipitous drop to Arbitrum’s unsustainable incentives previous to the launch of Odyssey, which handed out NFTs as rewards for exercise on its platform. That preliminary use case was questionable, as customers had little monetary incentive to stay after they have been paid out.

Arbitrum later paused Odyssey fully. Builders then migrated the principle Arbitrum One platform to Nitro, a separate improve that promised higher throughput, decrease charges, and higher compatibility than Odyssey with Ethereum’s base layer.

Optimism tries the sluggish and regular method

In the meantime, Optimism’s TVL grew steadily all through 2022. DappRadar reviews that Optimism has about $650 million TVL at the moment.

Just like Arbitrum’s Odyssey NFT, Optimism launched OP Airdrop #1 alongside its Optimism Collective, an try at extra democratic governance of its ecosystem. It additionally launched an incentive program for builders curious about constructing on its platform. For what it’s value, OP Airdrop #1 didn’t coincide with as dramatic a drop in TVL as Arbitrum’s Odyssey launch.

In distinction to Arbitrum, artificial asset creation protocol Synthetix grew to become one of many first functions to decide to constructing on Optimism. The variety of transactions on Synthetix has steadily elevated since that dedication, with most occurring on the Optimism platform. Nonetheless, common dollar-denominated buying and selling volumes have halved since their peak six months in the past.

Learn extra: Arbitrum staff buys Prysm shopper, guarantees to stay “impartial”

In August 2022, researchers at Delphi Digital speculated that Synthetix v3 may construct on different Layer 2 platforms, particularly for atomic swap performance. Synthetix didn’t instantly point out Layer 2 platforms in its documentation for Synthetix v3. It solely mentioned that builders have been going to rebuild the platform from the bottom as much as account for newer DeFi requirements — not fully closing the door on the likelihood that it would construct on different platforms like Arbitrum.

In abstract, Arbitrum and Optimism noticed surges of their use in 2022. Regardless of a common decline in DeFi apps’ TVL, Arbitrum didn’t fully collapse and made it by a botched Odyssey launch, whereas Optimism continues to steadily achieve TVL. These two protocols account for the overwhelming majority of all liquidity backing Ethereum’s second layer scaling options.