The last two summers in the cryptocurrency industry have been defined by distinct trends. In 2020, DeFi began its surge into relevancy as protocols like Curve, Compound, and Yearn came into existence and the TVL of DeFi surged to over $10 billion. In 2021, NFTs captured the mainstream media’s attention and saw projects like CryptoPunks and Bored Ape Yacht Club reach multi-billion-dollar valuations. Based on current trends and predictions, many think Summer 2022 will be remembered as Layer 2 Summer.
For the past few years, Ethereum has had an issue with transaction congestion. Simple acts such as sending a token or making a swap on a decentralized exchange could cost upwards of $50 and take hours. Consequently, several projects were created in an attempt to solve this scaling problem and make smart contracts usable by everyone. Some of these blockchains include Binance Smart Chain, Avalanche, Fantom, and Solana.
These solutions were all successful in making transactions faster and cheaper and drew in several users from Ethereum as a result. However, these chains sometimes sacrificed centralization and security for their speed. For example, Binance Smart Chain has only 21 validators, compared to the over 200,000 on Ethereum, and Solana has had seven outages this year alone. Additionally, even though these blockchains reached several billion dollars in total value, they were never able to dethrone Ethereum or even lower its market dominance below 50%. Ethereum’s proven track record of decentralization and security makes it the best choice for anyone who is worried about potential censorship or outages, regardless of its high fees.
In an effort to keep Ethereum’s level of security and decentralization while not sacrificing speed or cost, layer 2 solutions were created. They have a combined $2 billion on their chains, and that number is only expected to increase as more cryptocurrency exchanges adopt and integrate the layer 2s and allow users to directly withdraw to them instead of the main Ethereum chain.
When DeFi Summer started, there was only around $1 billion locked in DeFi protocols, and that number skyrocketed to $10 billion a few months later. This same phenomenon could happen with layer 2 solutions, especially as more DeFi dApps like Aave and Uniswap deploy to their ecosystems. Additionally, the upcoming Ethereum merge, in which the Ethereum blockchain will switch from proof of work to proof of stake and will likely become a deflationary asset, will bring more excitement back to Ethereum and consequently to the layer 2s.
A few weeks ago, Optimism announced that they would be airdropping their governance token, OP, to anyone who had used the platform. This has caused a frenzy of excitement within the cryptocurrency community, as it is likely that Arbitrum will follow suit and airdrop their own token shortly. These are two of the biggest airdrops in recent history and could net their recipients several thousand dollars. It will also incentivize more people to bridge their funds from other blockchains to these solutions, and it is expected that layer 2s will provide their governance token as liquidity incentives on their top dApps.
The increased integration and adoption from exchanges and companies, incentives provided by airdrops, and hype surrounding the Ethereum merge could be the perfect storm to create a Layer 2 frenzy over the next few months. The best way for potential investors to capitalize on this trend would be by vying for protocol airdrops by bridging funds and genuinely interacting with their ecosystems.
Even though Layer 2 Summer is yet to be confirmed, most signs are pointing toward it becoming a reality, which will be beneficial for Ethereum and smart contracts as a whole.
By Lincoln Murr