Welcome to another edition of “O HODLER”, the best newsletter in the Brazilian crypto market.
Today is the day to talk about one of the main narratives on the market, Layers 2 and the main projects of this narrative.
As the focus here is on having good results, we are going after them because this fight is going to be good and we mere mortals can take advantage of this moment in the market to profit from these projects.
The 3 projects that we are going to see are consolidated projects that are the big bets of VCs to be the great acceleration of technology adoption.
Let’s dive headlong into this narrative and projects.
🤔 What are Layer 2s?
For those who don’t know anything, let’s start from the beginning. Imagine that the blockchain is a major highway with a single one-way lane.
Every transaction is like a car that needs to travel along this highway. When there are many cars (transactions), the highway becomes congested, which leads to delays and higher costs (gas fees).
Now, imagine that the second layer (Layer 2) solutions are like secondary roads or expressways that are built to help alleviate congestion on the main highway.
These secondary roads allow more cars (transactions) to move at the same time, without having to congest the main road.
Layer 2 solutions, or Layer 2s, look like this. They are technologies that increase the transaction processing capacity of a blockchain without compromising security.
They are designed to solve scalability issues that are common in many tier-one blockchains, allowing more transactions to be processed faster and at a lower cost.
💡 Narrative as thesis
The main points for this narrative thesis are the scalability and the cost reduction.
Layer 1 blockchains like Bitcoin and Ethereum have scalability limitations. They can only process a limited number of transactions per second, which can lead to slow transaction times and high fees when the network is congested.
Layer 2 solutions offer a way to increase the transaction capacity of these networks without compromising security.
By processing off-chain transactions, second-tier solutions can significantly reduce transaction fees. This can make blockchain transactions more accessible and viable for a variety of uses, from micropayments to high-value transactions.
Not to mention the innovation process that second layer solutions open up. They can support a variety of applications and services, from games and NFT marketplaces to decentralized finance (DeFi) and more complex smart contracts.
⚠️ Optimism and its Superchain
Optimism is a second layer solution that uses a technology called Optimistic Rollups to increase the transaction capacity of the Ethereum network.
Optimistic Rollups are a scalability solution that execute transactions off the mainchain and then post the result to the mainchain, enabling higher transaction throughput at a lower cost.
In October 2022, Optimism introduced the OP Stack, an open source development stack that powers the OP Mainnet. the idea of Superchain was introduced, which refers to a group of second layer (L2) blockchains built on the OP Stack.
The Stack consists of several software components (i.e. code libraries) that together form the Optimism L2 rollup and can be used to create highly customizable L2 blockchains. Essentially, the goal is to simplify the creation of L2 blockchains.
The Bedrock Update, released on June 6, 2023, was the first official version of the OP Stack and brought several key improvements. These include lower fees, 70% reduced filing times, better proofing modularity, and better node performance.
The next step after the Bedrock upgrade is for Optimism to upgrade to the Superchain. The Optimism L2 rollup chain is the first member of the Superchain.
Coinbase’s next L2 Base will be the second member, with a mainnet announcement expected later this year. Worldcoin has also pledged to build on the OP Stack, after raising $240 million. BNB Chain also announced the testnet for opBNB, its EVM-compatible L2 chain based on the OP Stack.
The ultimate goal is aSuperchain” composed of a network of rollups built using the OP Stack. This ecosystem of interoperable chains will share sequencing, proofing and bridging infrastructure, promoting seamless communication between networks.
Optimism is currently the third Layer 2 by Total Locked Amount (TVL), but with the vision and partners already building into the OP Stack, it wouldn’t be surprising to see it become the leader in the coming years.
Many people are optimistic about Arbitrum and underestimate Optimism. The arrival of Coinbase and Binance user bases is huge, and this is believed to be just the beginning.
Arbitrum is another second layer solution that uses a technology called Arbitrum Rollups to increase the scalability of the Ethereum network.
Similar to Optimism, Arbitrum performs off-chain transactions and then posts the result to the main chain. However, Arbitrum takes a slightly different approach to resolving disputes that may arise during the process.
The Arbitrum ecosystem is made up of:
• Arbitrum One: The ecosystem’s core rollup.
• Arbitrum Nova: Second rollup for projects with high transaction volume expectations.
• Arbitrum Nitro: Software stack that powers Arbitrum’s L2.
Arbitrum Nova is a sidechain with up to 90% lower gas fees compared to Arbitrum One. While offering lower security, Arbitrum Nova is ideal for gaming, social applications, and other high-bandwidth applications. Opensea and TreasureDAO recently launched marketplaces on Nova.
In March 2023, Arbitrum, like Optimism, introduced an open source framework available to everyone. It is called “Arbitrum Orbit” and allows the creation and deployment of L3s without the need for formal permissions or approvals.
The difference between OP Stack and Arbitrum Orbit is that L3s will be built on top of Arbitrum One, while OP chains (L2s) will be independent networks sharing security with each other.
The main technical difference between the two chains is that Optimism uses single-round fraud proofs whereas Arbitrum uses multi-round fraud proofs.
Using the SAP key and in simple terms this means that the Optimism method is faster but potentially more expensive due to higher gas rates as it is run on L1. The Arbitrum method takes more time but is more economical.
Furthermore, Optimism uses the Ethereum Virtual Machine (EVM), while Arbitrum has its own Arbitrum Virtual Machine (AVM). This means that Optimism’s programming language is limited to Solidity. Arbitrum supports all EVM programming languages.
Will she be the queen of L2? Calm down, there’s a third in this story.
Polygon is a platform dedicated to improving the scalability of Ethereum, a goal they achieve using a variety of solutions. Its flagship product is the Polygon PoS sidechain, which currently handles 2-3 million transactions daily from 300-400k addresses.
Polygon has been adopted by a variety of projects due to its flexibility and easy integration with the Ethereum network and among the featured ones I like the most.
Polygon has also ventured into the app-chain thesis, releasing its own solution, Supernets, which allows developers to establish customizable app-chains.
Additionally, Polygon’s zkEVM, its EVM-equivalent ZK-rollup solution, made its mainnet debut in late March and has since amassed over 177k unique addresses and 20-50k daily transactions.
Polygon 2.0 is the latest addition to their L2 product pipeline and seeks to unify these platforms to create a seamless user experience. Designed as a conglomerate of L2 chains powered by ZK technology, Polygon 2.0 utilizes a unique cross-chain coordination protocol for seamless interoperability between zkEVM, PoS and Polygon Supernets.
⚠️ Opportunities and risk
In summary, second layer solutions are an emerging and promising area of innovation in the cryptocurrency space.
We have several other projects such as BASE, MANTLE, BNB and ZKSynk that we can address in the next reports, but I wanted to focus on the 3 main ones in the market.
These projects alone are likely to see 3x growth over the next 12 months.
Polygon is seen as the main L2 and in my view it has Optimism as its rival.
Both are focused on mass adoption and have already struck many key partnerships with Web 2 companies, bringing in millions of users.
On the other hand, Optimism is making up for lost time and bringing Coinbase, Binance and other entities with a large network of institutions.
However, as with any new technology or investment trend, it is important that investors do their own research and fully understand the risks before becoming involved.
⚠️ Did you like it?
I hope you enjoyed one more news.
Stay tuned for future editions of “THE HODLER” to keep up with market news and stay informed about trends and opportunities in the world of cryptocurrencies.
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Until the next edition!