What is Layer 2?
Ethereum’s success is dependent on several factors, including the evolution of Layer 2 scaling technology. This guide explains Layer 2 and why it's set to play a major role in Ethereum’s story.
✨ Ethereum sits at the heart of the token ecosystem, but it faces scaling challenges.
✨ Many Layer 2 projects are working on solutions to prepare Ethereum for mass adoption.
✨ Ethereum’s Mass Adoption Mission highlights some of the key projects working to help the network scale.
Ethereum is the most active network in the token ecosystem. The world’s second-biggest blockchain launched in 2015 with an ambitious vision to decentralise the Internet. Today, it holds a place at the forefront of the token movement. Ethereum runs smart contract-based decentralised applications covering decentralised finance, NFTs, and more. But while the project has been an enormous success, it has not yet fulfilled its potential. Ethereum has faced challenges as it’s grown in popularity, most notably concerning scaling. In its current form, Ethereum is not ready for mass adoption. However, many talented teams are working on solutions to help Ethereum thrive. Our Ethereum’s Mass Adoption Mission Collection highlights the best of them, and you can learn more about it in this feature.
Since the blockchain movement launched, enthusiasts have hoped that the technology will hit mass adoption. Bitcoin launched following the failings of the traditional finance system off the back of the Great Financial Crisis. The world population adopting Bitcoin and token technology could lead to a more open system that levels the playing field and benefits millions of regular people who are closed off from today’s finance system.
Tokenization expands upon the world Bitcoin created. It offers new use cases that could help regular people invest and influence the world around them. However, the path to mass token adoption has not been smooth.
Tokenization could usher in a huge technological and cultural shift that redefines our understanding of value forever. But this is an ambitious end goal that will not be achieved overnight. It could take decades for the movement to truly flourish.
While Bitcoin, Ethereum, and other tokens have had occasional bursts of mainstream interest, crypto has not yet hit mass adoption. The token market has historically followed boom-and-bust market cycles, surging in popularity roughly every four years before winding down for prolonged “winter” periods.
With every new market cycle, the token ecosystem welcomes a wave of new adopters. While many of them typically leave once the market crashes, some stay and make contributions to the ecosystem. As a result, token adoption has been faster in its first 14 years than the early lifecycle of the Internet.
Of all the token projects that have gained adoption, Bitcoin and Ethereum are by far the biggest. While Bitcoin has grown in popularity as a “digital gold,” Ethereum has found success as the centre point for the decentralised Internet.
Ethereum is the main hub for the decentralised finance and NFT ecosystems, two of crypto’s top use cases today. Ethereum currently has around 240 million unique wallet addresses, trailing only Bitcoin. It’s also the world’s most used blockchain, processing over 1 million transactions daily. Ethereum aims to create a decentralised Internet where applications run free from the control of any central entity. It could help people own their identity and data, a vision that gave rise to the term “Web3.”
Owing to its qualities as a censorship-resistant, decentralised network that’s controlled by no single party, Ethereum devotees believe that it could serve as a global settlement layer that replaces the traditional finance system. However, Ethereum has many issues to address.
The biggest challenge Ethereum faces today concerns scaling. Ethereum has attracted thousands of developers and millions of users since it launched. But as new adopters have entered the ecosystem, the network has become more congested.
Due to the way Ethereum processes transactions, the cost of interacting with the network increases as more users try to access the network. The problem worsens during bull market cycles when ETH rises in price.
As Ethereum users need ETH to pay for transactions, using the network becomes more expensive in traditional money terms as ETH increases in price. During periods of peak congestion in the 2021 market cycle, some activities such as minting NFTs set users back hundreds of dollars a time.
If Ethereum is to serve as a base layer for the decentralised Internet, it needs to be affordable. Ethereum creator Vitalik Buterin has previously said that “the Internet of money should not cost 5 cents per transaction,” but Ethereum fees far surpass that figure today.
Ethereum currently has just over 200 million users worldwide. If the network grew to 1 billion users, it would become more congested and transaction fees would likely surge without some significant changes.
In response to the network’s scaling issues, Ethereum is working on solutions to prepare the network for growth. One of them is adding 64 shard chains designed to spread the network’s load.
Ethereum currently runs one base chain, and it’s hoped that adding new chains to the network will reduce congestion. With 64 new chains, the network should be able to handle increased traffic.
Ethereum is also prioritising Layer 2 development. Layer 2 refers to separate blockchains that get built on Ethereum to help the network scale. In the token ecosystem, Ethereum is referred to as a “Layer 1” network because it acts as a base chain for activity. Layer 2 networks run on top, carrying traffic away from the base chain while adopting the network’s security and censorship resistance. In turn, they can make the network more accessible by processing more transactions and reducing fees.
The key Layer 2 solutions in development today come in the form of rollups. Layer 2 rollups come in two varieties: Optimistic Rollups and ZK-Rollups. They bundle or “roll up” transactions on their own networks on top of Ethereum.
Buterin has said that rollups will be key to Ethereum’s future, going as far as to say that Zero-Knowledge Proof-based technology and ZK-Rollups could be as disruptive as blockchain itself.
While the Layer 2 ecosystem is still in its nascent stages, projects like Optimism, Arbitrum, zkSync and StarkNet are preparing to help Ethereum scale as new adopters join the network. As Ethereum gains adoption, it’s likely that Layer 2 will also see growth.
The Ethereum Ecosystem has evolved as the token ecosystem has grown. Innovations like decentralised finance and NFTs have brought Ethereum closer to fulfilling its Web3 vision.
While it’s still unclear how the future of tokenization will play out, Ethereum is currently well-positioned to become the hub for token activity. Enthusiasts believe that the ecosystem could evolve beyond finance-based applications and NFTs to support developments such as decentralised identity and social media, decentralised gaming and Metaverse projects, DAOs, and other community-based social ventures. Some argue that Ethereum could grab market share from the traditional finance system. This is because it can serve as a borderless, credibly neutral base layer for settling transactions.
But if the network is to support these new use cases, it must become more scalable. If it fails to scale, it would exclude millions of people due to its expense.
The Ethereum’s Mass Adoption Mission Collection has been curated to focus on the tokens that could help the network hit 1 billion users in the future.
The Collection features Ethereum’s native token, ETH. As the token for paying Ethereum transactions, ETH is arguably the most important token in the ecosystem. Every Ethereum user needs ETH to pay for transactions, so it is an intrinsic part of the network’s story.
Ethereum’s Mass Adoption Mission also features several Layer 2 scaling projects working to lower network costs and attract new users. Optimism, one of the top Optimistic Rollup projects, features in the Collection.
The Collection also includes Polygon. Launched as a low-cost alternative to Ethereum, Polygon found success by attracting the network’s key decentralised finance projects. It’s since evolved into a sprawling ecosystem of its own. A key step on Polygon’s roadmap is the development of a “zkEVM” solution. This project will use ZK-Rollups to make Ethereum more accessible.
Ethereum’s Mass Adoption Mission also features several top ZK-Rollup solutions, including Loopring and StarkWare’s StarkNet. Additionally, it includes dYdX and Immutable X, two solutions that leverage ZK-Rollups with StarkWare’s help.
Ethereum’s Mass Adoption Mission also features Aave, one of the leading decentralised finance projects in the token ecosystem. Through its latest V3 project, Aave showed its commitment to helping Ethereum scale, offering support across Polygon and Layer 2 networks like Arbitrum and Optimism. In the future, it’s likely that all of Ethereum’s top projects will run on Layer 2 to help the network scale.
Now that you’ve read our feature, you should have a clearer understanding of how tokenization could hit mass adoption, and the role Ethereum will play in the story. Ethereum’s Mass Adoption Mission focuses on the projects that will help the network overcome its hurdles and prepare for the token ecosystem’s first 1 billion users. As the ecosystem expands, the Collection will grow as promising projects emerge. To discover more, head to the token.com app to learn and explore the Collection for yourself. While tokenization is still preparing for mass adoption, you can learn about the key developments in the ecosystem today.
Please note: Investing in cryptoassets is risky. Due to the volatile nature of the cryptocurrency market, investors run the risk of losing their funds when they make an investment. Returns from cryptoasset investing are not guaranteed, therefore users should always be aware of the risks.