Arbitrum's airdrop in March 2023 paved the way for a year of flourishing Layer 2. Due to the wealth effect, a large number of users flocked to other Layer 2 projects that have not yet issued tokens to interact, especially zkSync and StarkNet, the remaining four major Layer 2 projects, and even the Goerli test network projects have attracted users to get involved. On the other hand, the new public chain track, whether it is user activity or the innovation ability of new projects, seems exhausted in the bear market. Layer 2 projects are in fierce competition with each other, showing their strengths in technology, ecology, and operations. Here, we take stock of the characteristics of each project in the Layer 2 track and speculate on the new trends of Layer 2 in the future.

This research report is produced by HTX Ventures, the global investment arm of Huobi HTX, which integrates investment, incubation and research to identify the best and most promising teams in the world. As a pioneer in the industry for 10 years, HTX Ventures explores, reveals and assists the industry's cutting-edge technologies and emerging business models, providing financing, resources and strategic consulting for projects to develop together.Blockchainecosystem.

HTX Ventures was founded in 2017, covering the entire investment cycle, focusing on investing in Layer 1 and Layer 2 solutions. To date, HTX Ventures has achieved a 60x return on investment, with investments covering more than 20 countries and regions, more than 120 fund partners, and has supported more than 200 interdisciplinary projects, including 60%'s project, which was eventually listed on Huobi HTX.

Since 2013, Huobi HTX has been the world's leading digital assetexchange, has the infrastructure and resources to provide expert consulting services and provide a wide range of resource networks, liquidity pools and users to HTX Ventures portfolio projects.

The rise of Layer 2

along withcryptocurrencyAs the track continues to develop, the chain needs to carry more and more users and interactions. The Ethereum mainnet can only process about 15 transactions per second. The large amount of usage demand makes the network congested, and the high fees exclude some potential users. Ethereum needs to adopt an expansion solution to solve the above problems, which is why Layer 2 was born. Layer 2 mainly solves scalability problems, transaction costs, transaction speeds and other issues. Layer 2 submits transaction packages to the Ethereum mainnet regularly to have similar functions as the Ethereum mainnet.Safetyand degree of decentralization.

According to technical classification, Ethereum Layer 2 has four solutions: state channel, Plasma, Validium, and Rollups. However, with the development and evolution of technology, the Rollup solution has proven to be the most successful in improving performance, reducing costs, and providing a better user experience. Currently, Rollup is considered the preferred Layer 2 solution for Ethereum expansion.

The Rollup solution was first proposed in 2018 to solve the scalability problem of the Ethereum main chain by moving transaction data off-chain and using different verification methods to improve performance, reduce costs and increaseSafetyThese technologies have become one of the main expansion solutions in the Ethereum ecosystem, providing a solid foundation for the future development of decentralized applications and the Ethereum network. The main types of Rollup include:

• Optimistic Rollup: Using the Optimism execution method, transactions and status updates are performed off-chain and then submitted to the main chain. If there is no dispute, the transaction is confirmed, otherwise dispute resolution is required. Representative projects include Arbitrum, Optimism, Base, Metis Andromeda, and Boba Network.

• ZK-Rollup：ZK-Rollup（Zero knowledge proof Rollup was proposed by Barry Whitehat in 2018. It introducesZero knowledge proofTechnology to ensure the validity of off-chain transactions, thereby improvingSafetyThe core idea of ZK-Rollup is to store transaction data off-chain and then use zero-knowledge proof to verify its validity to reduce the burden on the main chain. Representative projects include zkSync, Starknet, Scroll, Loopring, Polygon zkEVM.

At present, due to the high technical difficulty of ZK-Rollup, most Layer 2 projects that adopt this solution are developing slowly, and the Optimistic Rollup solution still accounts for the largest share of the entire Layer 2 track. According to l2beat statistics, there are currently 33 active Layer 2 projects, including 11 Optimistic Rollup and 12 ZK-Rollup. There are 15 projects that are about to be launched.

Current Status of Layer 2 Projects

Since the crypto market entered a bear market in 2022, Ethereum DeFi TVL market share still accounts for 54.06%. And new public chains such as Solana, Avalanche, Cosmos, and PolkadotTokenThe price has dropped, while Ethereum has risen by more than 20% in the same period. In 2023, the new public chain landscape has undergone a major reshuffle. For new public chains, it is impossible to become the killer of Ethereum. As a Layer 2 project, it can attract funds, users and developers on Ethereum, and its performance in the bear market is indeed much better than that of new public chains. Layer 2 not only consolidates Ethereum's position, but also acts as a flywheel to help drive the value of ETH. The Layer 2 track is likely to become the catalyst for the next bull market.

Total Value Locked All Chains (Source: DefiLlama)

Currently, Layer 2TokenThe market capitalization is $$9.25 billion and the recent 24h Trading Volume is $$1.13 billion. Optimism and Arbitrum have market capitalizations close to $1 billion. However, Starknet stands out today in terms of the total number of developers working on its protocol, while zkSync leads in terms of daily addresses and total trading volume in the past month.

The top 7 Layer 2 projects by market capitalization (Source: coinmarketcap, Oct. 17, 2023)

according toL2According to BEAT data, as of October 17, 2023, the total TVL of Layer 2 is 10.6 billion US dollars, an increase of 136.8% from the end of 2022. Arbitrum One has the largest TVL, which is $5.80 billion, accounting for 54.69% of the entire Layer 2 project market share. Optimism is second with 24.98%.

Top 10 Layer 2 projects by TVL (Source: l2beat.com, Oct. 17, 2023)

2.1 Arbitrum

Arbitrum was built by the Offchain Labs team. It uses the optimistic rollup technology to scale Ethereum. Arbitrum One uses fraud proofs and has on-chain call data availability, which means that all data for each transaction is fully sorted, bundled, and submitted to the mainnet. Because Arbitrum uses fraud proofs, its withdrawal cycle is about seven days.

The most exciting thing in March 2023 is undoubtedly the Arbitrum airdrop, which has brought a wave of wealth. Since the release of the airdrop rules, the TVL of Arbitrum One has been rising all the way and has reached$5.80 billion, second only to Tron and Ethereum itself. TVL accounts for 54.69% of the entire Layer 2 ecosystem, the number of unique addresses also exceeds 11 million, and the number of projects exceeds 330.

Arbitrum weekly active addresses (Source: dune, @Henrystats)

Arbitrum Ecosystem Inventory

Arbitrum’s application ecosystem can be divided into two categories: DeFi and consumer applications. Among DeFi ecosystem projects, DEX, lending, and perpetualcontractThere are four projects with a locked amount exceeding 100 million US dollars, namely GMX, Uniswap V3, Radiant, and AAVE V3.

2.2 Optimism

Optimism was created by a group of Ethereum developers. It is a second-layer expansion solution based on Optimism Rollup technology. It can handle large-scale transactions while maintaining Ethereum’sSafetyHowever, there are still some differences between Optimism and Arbitrum in terms of technical implementation:

Currently, in terms of TVL, Optimism is now 2.6 billion US dollars, ranking second in Layer 2. There are 173 protocols on Optimism, and the number of unique addresses has exceeded 5 million.

Optimism Unique Users over time (Source: dune, @Marcov)

Optimism Ecosystem Inventory

There are relatively few native projects on Optimism, and there are almost no well-known projects except the DeFi track. There are two projects with a locked amount of over 100 million US dollars, namely Synthetix and Velodrome.

2.3 Base

The Base network was announced by Coinbase on February 23 and launched on the mainnet in August. Base is based on OP Stack technology. The launch of Base will help Coinbase develop and deploy its own decentralized applications. In the future, it will be combined with Coinbase Wallet and SmartcontractwalletThe account abstraction technology allows Coinbase customers to easily access the financial service protocols carried by Base.

More than a month after its launch, BASE surpassed the daily transaction volume of Layer 2 competitors and Ethereum itself, reaching more than 1 million on September 14. The total number of users is currently 2.1 million, TVL $548 million, and there are more than 100 ecological projects.

Base all transactions and Users Daily (Source: dune, @sixdegree)

Base Ecosystem Inventory

The popularity of the Base ecosystem is mainly attributed to friend.tech. Other projects are mainly Defi, and many of them are imitations of other chains.

2.4 Zksync era

Developed by Matter Labs, zkSync uses zero-knowledge proofs to bundle multiple transactions into a single proof that can then be used on Ethereum.BlockchainzkSync Lite is version 1.0, and zkSync Era is essentially version 2.0 of zkSync. The project has not yet issued a coin, and its valuation is around 4 billion.

Currently, the TVL of zkSync Era network has reached $428MAccording to Dune Analytics data, the number of single addresses in zkSync Era has reached 1.9 million, and 1.7 million ETH have entered the zkSync Era network across chains.

zkSync Ecosystem Inventory

According to Deflama data, there are 9 DeFi projects included, mainly DEX projects. And there are 34 projects officially launched, includingwallet, cross-chain, NFT, etc., but there are fewer innovative projects and there is still a certain gap from the OP system's ecology.

2.5 Starknet

StarkNet is a ZK Rollup protocol released by StarkWare Ltd on the Ethereum testnet in November 2021. StarkWare Ltd focuses on creating cryptographic proof systems to improve variousBlockchainScalability and privacy of the network, which utilizes zk technologyTwo projects, StarkEx and StarkNet, were created. StarkEx provides dedicated Rollup technology services for each application and will be officially launched in 2020. Projects developed based on StarkEX include Sorare, immutableX, dYdX, etc. StarkNet can deploy any smartcontractA general-purpose Rollup with more than 50 ecological projects already online.StarkNet's TVL is currently approximately $131 million.

Considering that StarkWare is currently valued at US$8 billion, the value of the StarkNet ecosystem project is self-evident.StarkNet 已经于 2022 年 11 月 16 日宣布在以太坊主网上部署了其原生代币$STRK，用于投票、质押和支付费用，代币分配仍待决定。

Inventory of some projects in the Starknet ecosystem

Due to the high throughput and customizability of StarkNet, developers can create innovative, high-performance, and tailor-made dApps on StarkNet. This opens up many new possibilities for developers, making the Starknet ecosystem have some innovative projects, focusing on DeFi, NFT, and Game fields.

2.6 Others

In addition to the above well-known Layer 2 projects, there are some other projects worth paying attention to:

• Linea:The zk rollup project supported by Consensys has launched its mainnet. Currently, there are more than 100 projects with a TVL of $25.5M.

• Scroll: The popularity of the project is second only to zkSync and Starknet in the zk rollup track, and the mainnet was launched not long ago. Scroll received $30 million in Series A financing in April 2022 and $50 million in financing in July 2023, with a valuation of $1.8 billion. Scroll's goal is to build an EVM-compatible zk-Rollup, and the team is mainly composed of Chinese.

• Polygon zkEVM: Ethereum Layer 2 built on ZK Rollup technology, formerly known asHermez Network, a company acquired by Polygon for $250 million. The mainnet Beta version is now online, with a TVL of $54.93 million.

• Loopring: Used to support DEX protocols, based on StarkWare.Unlike other public networks, external developers cannot build their own general protocols or products on Loopring, they can only call loopring's API. And because Loorping focuses on building its own products, the Loopring protocol is not just a network, it is a collective.

• Immutable X: Built on Starkware, for specific applications, focusing on NFT and gaming ecosystems

• Aztec: Focusing on privacy, inventing the PLONK proof system

• Kakarot:At Starting from October 2022, it is aCommunityDriven projects,makeWritten in Cairo language, it uses the ZK-STARK proof system to provide provable computing power. It allows developers to deploy EVM on it applications and enable end users to interact with these applications using their favorite tool chains.

• Taiko: Describes itself as a "fully decentralized, Ethereum-equivalent zk-rollup". Currently in the testnet stage. Taiko can accurately handle all Ethereum behaviors; using the same hash function, gas price, encryption algorithm, etc. The disadvantage of Type 1 ZK-EVM is that it takes a long time to generate proofs, and users will have to wait for a long time to transfer ETH from Taiko. L2 Bridging back to Ethereum L1 takes several hours.

In addition, multiple Layer 2 application chains are built on StarkEx, including Sorare, rhino.fi, ApeX, dYdX, etc. Among these projects,Data is sent to Ethereum as calldata and published on-chain. In Validium mode, data is stored off-chain and only hashes are stored on-chain. While the Rollup mode ensures higher security (users can recreate the ledger state simply by interacting with the Ethereum blockchain), the Validium mode ensures lower costs and higher privacy.

3. OP VS ZK

Layer 2 projects have been launched on the mainnet this year, and the competition in the field is very fierce. The discussion about Optimistic rollup or zk rollup has never stopped. Although ZK Rollup theoretically has stronger performance, much faster finalization time than Optimistic Rollup, and higher security, Optimistic Rollup has better compatibility and lower threshold. In addition, judging from the data performance of Layer 2 projects, Optimistic Rollup has a first-mover advantage. Therefore, the two solutions will coexist in the medium and long term. The following is a comprehensive comparison of the advantages and disadvantages of Optimistic Rollup and ZK Rollups from the perspectives of technology, user experience, and ecological development.

3.1 Technology Comparison

• working principle

Optimistic Rollup works by processing off-chain transactions using a sidechain connected to the mainnet. The sidechain is responsible for handling the calculation and verification of transactions and periodically sends a summary of its status to the mainnet. In Optimistic Rollup, there is a premise called the "Optimism" hypothesis, where the sidechain assumes that all transactions are valid and only submits proofs when fraudulent transactions are detected.

ZK Rollups is the process of combining multiple transactions into batches for execution on the main chain. Once the transactions in the batch are executed, the Zk rollup operator submits a summary of the changes required for each batch. In addition to this, the operator is also responsible for providing a proof of validity, which is a zero-knowledge proof (ZKP) to ensure the accuracy of the changes made.

• Proof of effectiveness

In Optimistic Rollup, transactions are initially assumed to be valid and then subsequently challenged if found to be invalid. To determine if a transaction is valid, a user must challenge a set of transactions in Optimistic Rollup. This is where fraud proofs are used to prove the validity of transactions. The accuracy of transactions in the case of Optimistic Rollup depends on game-theoretic incentives.

In Zk Rollup, transactions are verified through zero-knowledge proofs, which are cryptographic protocols that allow the correctness of computations to be verified without revealing any computation inputs or outputs. This means that ZK Rollup can process transactions off-chain while ensuring their validity without compromising the security and privacy of the network. Mathematical proofs ensure the accuracy of validity proofs in zk-rollups.

• Transaction Finality

Optimistic Rollups will force users to wait for a challenge period before withdrawing funds, resulting in a delay in the finalization of transactions, which is generally 7 days. In contrast, ZK Rollups can withdraw funds based on validity proofs without a waiting period.

3.2 Cost Comparison

In theory, Rollups can aggregate hundreds of transactions into one transaction on Layer 1, which can save gas fees hundreds of times. From the user's perspective, low gas fees and fast confirmation of transactions are the main needs of users. Optimistic Rollups require lower costs due to the minimum data published. There is no need to provide transaction proofs unless challenged in special circumstances. Therefore, Optimistic Rollups may achieve better cost efficiency. In contrast, Zk Rollups will add too much overhead to create and verify proofs for different transaction blocks, resulting in higher costs. In addition, it is also important to note that high-end hardware is required to create zero-knowledge proofs. The on-chain verification costs associated with Zk Rollups will also be more expensive.

实际中，各个解决方案之间的gas费存在一定差距。根据10月19日L2Fees.info的数据，在以太坊主网发送ETH需要花费约0.46美元、swap交易需要约2.31美元gas费。Layer 2项目发送ETH的费用普遍在0.02美元以下。

Layer 2 fees (Source: l2fees.info)

3.3 Ecological Development

Zk rollup is a strong competitor of op rollup, but currently due to its greater technical difficulty, its product launch and ecological development are much slower than the op-based L2.Therefore, Arbitrum and Optimism have the first-mover advantage, launched earlier, have more funds and cooperative applications, and have more projects and native projects. In 2023, most ZK projects will be launched on the mainnet, indicating that zk technology is much more mature and stable. However, in the current zk rollup ecosystem, the top 5 ecosystems in terms of TVL are mostly DEX, and there is an extreme lack of native projects and innovative ecological projects, such as games and social networking.

4. New Narrative: Rollup As A Service

With the gradual growth of some dapps and the expansion of various new applications, especially indefiIn the field of games, a single dapp can no longer meet the project's pursuit of user experience and profitability. These projects require higher-performance infrastructure to carry huge traffic and customized needs. Many applications have begun to adopt the app chain solution, such as dYdX. The concept of App chain has become a hot topic in 2022. Different projects can customize their dedicated chains according to their own application scenarios and needs, allowing dapps to exclusively enjoy the resources on a chain, and on the basis of ensuring that they are not separated from other ecosystems, they can obtain lower operating costs and higher performance, bringing users a better user experience.

There are many options for these dapps, such as building a dedicated chain using Cosmos SDK, or as a subchain of BNB Chain or Avalanche, but there is also a way to develop a Layer 2 chain, which can not only attract Ethereum's huge user base, but also achieve good interoperability between the already successful Layer 2 projects. In order to enable a dapp to quickly launch a Layer 2 chain, RaaS was born. This has also become a battleground for the leading Layer 2 projects.

Optimism, Arbitrum, zkSync, etc. are all trying to extend their own L2 technologies and solutions, and by providing modular solutions to meet different chain deployment scenarios and needs, they can achieve the goal of expanding their own ecosystems and build their own ecological super chains. The first to stand out is the OP Stack developed by Optimism.

4.1 The Super Chain War Started by OP Stack

OP stackIt was proposed by the Optimism development team for a highly scalable, interoperable blockchain modular stack. OP stack decouples different functional layers and combines all layers in the form of an API software stack. OP stack is maintained by the OP collective organization.Allows anyone to build their own L2 blockchain on Ethereum using Optimisitc Rollup.

Functions implemented by OP stack:

• Create a shared, standardized, open source code base;

• The modular blockchain construction process is simplified. The ready-made code base based on OP Stack can realize the rapid deployment of modular blockchain.

• Developers can easily abstract the various components of the blockchain and modify it by plugging in different modules. (op rollup can be quickly switched to zk rollup)

The Layer 2 projects developed through the OP stack have formed a super chain ecosystem. At present, there are 19 projects that have joined or plan to join the OP Stack super chain ecosystem, coveringexchange, public chain, client, NFT, games, derivatives and many other fields. Including opBNB, Zora, Base, Wordcoin, DeBank, the super chain ecosystem has the following attributes and advantages:

OP Stack brings greater possibilities to Optimism. Including in terms of revenue, Base alone can currently bring an additional $4.5 million in revenue to the OP Treasury each year. BASE needs to pay 2.5% of the total fees it generates to the Optimism Collective and comply with Optimism's "super chain" standard, leaving a path for future interoperability. In exchange, BASE, as a member of the Optimism Collective, has a governance role.

4.2 Arbitrum Orbit & ZK Stack

Arbitrum Orbit and L3：The Orbit development framework allows the creation and deployment of L3 on the Arbitrum mainnet. L3 Rollups, also known as application chains, play a vital role in settling transactions onto the Arbitrum chain. They are the foundation for the next stage of Arbitrum's scaling journey. Orbit is designed to be compatible with the upcoming Arbitrum Stylus upgrade. This compatibility opens up the possibility for developers to build dApps in C, C++, and Rust, and expands the versatility and reach of Arbitrum.

ZK stack： On the evening of June 26, zkSync announced the launch of ZK Stack, a modular open source framework for building customized zkRollups, which aims to give developers complete autonomy, from choosing data availability modes to using the project's own Token decentralized sorter. It is expected to be launched before the end of the year.

Among the existing RaaS projects, most are based on Optimistic Rollup. The main reasons are:

• Ecosystem always comes first. RaaS based on OP has better compatibility, greatly reducing the threshold for project migration/development, allowing more project parties to quickly deploy, quickly build a more prosperous ecosystem, and gain first-mover advantage.

• The threshold is lower and does not rely on computing power support. Optimism-based RaaS also verifies the validity of transactions through fraud prevention, so the requirements for machine performance and reserves in terms of computing power are lower. This is also a limiting factor that prevents many RaaS from starting.

• Easier to expand. The development threshold of RaaS based on Optimism is lower. Unlike ZK RaaS, which pursues performance, it has more underlying customization and requires providers to participate deeply in development. At the same time, due to the limitation of the computing power of generating ZKP, ZK RaaS is difficult to deploy on a large scale like Optimism RaaS.

Although OptimismRollup has obvious advantages in ecological layout, RaaS based on ZK also has some advantages, such as performance and security. In the short term, the ecological advantage of RaaS based on Optimism is unshakable, but from the perspective of long-term demand and value creation, it is believed that RaaS based on ZK is likely to gain a larger market share in the future.

5. Challenges and opportunities

Arbtrum's airdrop triggered a Layer 2 craze, but behind the fomo, it also raised a series of questions:

1. Speculators are too enthusiastic and ignore the development of the project itself. The technological progress of blockchain itself isAICompared with other industries, the wealth-creating effect is too obvious, so users do not enjoy the technological advancement brought by the products, which is actually very detrimental to the development of the industry;

2. Although it is a bear market, the game of funds and mutual cutting in the market have become more intense;

3. Everyone’s expectations for Layer 2 are much higher than those for the public chain. The Ethereum ecosystem carries too much capital, and the public chain narrative and opportunities have shifted to Layer 2.

Many Layer 2 projects have not yet issued tokens, and their wealth-creating effect may continue until the next bull market, which also encourages users and investors to pay attention to these projects. Some of these projects are still experimental, and Layer 2 still has some risks and problems:

• Centralization Risk：These scaling solutions are in the early stages of decentralization and have certain risks. Layer 2 sacrifices decentralization and processes transactions and data off-chain, requiring a sorter to package transactions and upload them to the mainnet. Currently, there is only one entity running the "sorter", which poses a risk of centralization. The Arbitrum network had a sorter problem that caused a large-scale outage.

• Liquidity is too fragmented:This phenomenon exists in both Layer 1 and Layer 2 networks. As the number of Layer 2 projects increases, each project adopts different expansion solutions, and the composability between dapps is limited, resulting in fragmentation problems, and liquidity is divided into Ethereum and different Layer 2s, increasing the liquidity costs of the project party.

• The ecosystem is too limited:Layer 2 Project TPSXiaobai NavigationTheoretically, it can reach tens of thousands, but in reality, the maximum is around 30. This is because current applications do not require such high performance. Layer 2 lacks a blockbuster application that can truly leverage the strength of the infrastructure.

Future Trends

• Data availability trends:All of the above zk rollup projects use a hybrid approach to deal with the storage problem (data availability) of transaction proofs, providing a rollup version of traditional on-chain data storage and a validium version of off-chain data storage. There are also some on-chain infrastructures that provide data availability, such as Celestia. This more decentralized approach may become the preferred solution for Layer 2.

• Decentralized Sorter：Decentralized sorter is one of the solutions to solve the security and fairness of Layer 2. There are already some projects (Espresso, Astria and Radius) developing shared sorters.

• The implementation of EIP4844 and danksharding will further reduce the cost of L2 rollup and promote the adoption rate of Layer 2 projects.

• Interoperability AgreementThe demand is increasing to maintain the composability and liquidity of the Ethereum ecosystem.

About HTX Ventures

HTX Ventures is the global investment arm of Huobi HTX, integrating investment, incubation and research to identify the best and most promising teams in the world. As a pioneer in the industry for 10 years, HTX Ventures explores, reveals and assists the industry's cutting-edge technologies and emerging business models, provides financing, resources and strategic consulting for projects, and jointly develops the blockchain ecosystem.

The article comes from the Internet:HTX Ventures latest research report: Layer 2 status and development trends

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