How L2 Chains are Transforming Blockchain Business Model

This article analyses the development of the fast-growing Blockchains (L2) niche market, since 2020 and highlights the new developments.

The Need for Vertical Scaling on Ethereum L1

Due to the Ethereum L1 chain’s capacity constraint, vertical scaling is required. It became clear that the world economy could not be sustained by a single chain such as Ethereum L1. Vitalik consequently put up an L2-centric scalable strategy in which countless chains are linked to the primary L1. With Ethereum L2s now hosting about 10 million MAUs compared to Ethereum L1’s 6 million MAUs, this vision has come to pass.

Advantages of L2 Chains

Compared to L1 networks, L2 chains have fewer fees, are easier to start, open new use cases, and draw in a larger user base. Entrepreneurs saw that while L2s had potential, teams had difficulties deploying their chains. These days, setting up an L2 chain is just as simple as setting up a smart contract that runs on Ethereum L1. Recent launches have been made possible by this simplicity of development, which would not have been possible without affordable L2 block space.

Shift from Infrastructure to Onchain Businesses

As infrastructure becomes more widely available, the emphasis moves to creating long-lasting blockchain enterprises. Developers can now quickly implement an L2 chain, which is why the market now values entrepreneurs who create high-growth, long-lasting on-chain enterprises over blockchains alone. Like startups, successful L2s strive for cost reduction, increased monetization, and growth.

Unbundling the L2 Stack Due to High Ethereum L1 Fees

Arbitrum and Optimism, two of the first phases of Ethereum L2s, have a tight relationship with Ethereum L1. These L2s must spend millions of ETH each month to settle transactions on the main chain, making it unaffordable to maintain this alignment. The large margins on Ethereum L1 presented an opportunity for entrepreneurs. By providing services at much lower costs, protocols like Celestia and EigenLayer seek to unbundle the L2 layer and may hasten the development of the Ethereum L1 core.

General-Purpose vs. Application-Specific Chains

L2 chains can be either specific to the application or general purpose from a commercial standpoint. They may theoretically be ZK or hopeful. Application-specific L2s are concentrated on providing the optimal user experience for specific scenarios of use, whereas general-purpose L2s seek to establish an entirely new hub for the web. The core team’s goals for their product are expanded upon in both forms of L2 architecture.

The technical architectures of competing efforts in the general-purpose L2 market suggest that this is a “winner takes most” market. A few prosperous L2s tend to draw the lion’s share of user attention and resources in this market, which generally follows a power law.

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