Layer 2’s Bring the Spotlight Back from Layer 1’s With Growing TVL

By October 19, 2021Ethereum
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Smart contract platforms — Terra, Solana and Avalanche, to name a few — had a summer to remember. Terra’s LUNA rocketed 421% between June 1 and Sept. 30 and its fellow Layer 1s (L1s) Avalanche and Solana also delivered triple-digit returns.

Now Layer 2s (L2s), which make Ethereum transactions more affordable and faster by executing them off the Layer 1 mainnet, are showing signs of mounting a rally of their own. This may bring Ethereum back in the spotlight after Solana’s SOL, Terra’s LUNA and Avalanche’s AVAX hit all-time highs in September and October. ETH has yet to break its all-time high of $4,357, which it hit in May.

Both Ethereum L2s and these L1s tout their low fees and quick transaction speeds as advantages, placing the two groups in direct competition.

Total value locked across Ethereum L2s is at an all-time high of $3.80B as of Oct. 18, eclipsing last month’s previous all-time high of $3.59B. The previous high occurred at a time when ArbiNYAN, an upstart yield farm on Arbitrum, the leading L2 in terms of TVL, accounted for roughly one-third of the TVL across all L2 solutions.

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Preference for L2

Sushiswap, a decentralized exchange (DEX), is leading the charge on the L2 Arbitrum. As of Oct. 18, Sushi leads all DeFi apps, except dYdX, in value locked on L2s. TVL on Sushi’s Arbitrum deployment stands at $382.4M, a more than 87-fold jump from the paltry $4.3M achieved the day after the deployment on Sep. 1, according to DeFiLlama.

That jump in TVL contrasts with Sushi’s Ethereum L1 TVL, which has actually dropped 4% to $4.62B, over the same time frame, according to DeFiLlama.

This shows a clear divergence between the protocol’s L2 and L1 deployments. Users are choosing more efficient transactions despite the additional work of bridging to another blockchain.

L2 Growing

It’s not just Sushi — many OG DeFi protocols that originated on Ethereum are now seeing their L2 TVL growth rate outstrip that of L1.

Curve Finance, an automated market maker (AMM), comes in second among Ethereum-originating apps in terms of L2 TVL at $330.8M, according to DeFi Llama. And like Sushi, Curve’s L2 TVL is growing much faster than the protocol’s original L1 deployment. Since Curve deployed on Arbitrum on Sept. 13, its TVL has grown over 250 times larger to $327.8M from just $1.27M, according to DeFiLlama.

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