An Irish Journalist’s Take on the “L2-over-L1” Flippening
In the world of blockchain and decentralized finance (DeFi), the ongoing competition between layer 1 (L1) and layer 2 (L2) networks has been a topic of great interest. L1 networks, such as Ethereum, have traditionally been seen as the dominant players in the space. However, the rise of L2 networks, which offer scalability and lower fees, has sparked discussions about a potential “L2-over-L1” flippening.
It is important to note that while L2 networks offer advantages over L1 networks, the metrics used to measure their success are not exactly the same. When discussing second-layer networks, the indicator refers to the total value locked (TVL) on L2, including native tokens. In contrast, for L1s, the metrics reflect the sum of assets locked in decentralized applications (dApps) on a specific blockchain.
To gain insights into the state of L2 networks and their potential to surpass L1 networks, an analyst turned to L2Beat’s data for tracking second-layer blockchains and DefiLlama to analyze non-Ethereum L1s. The findings were intriguing, especially considering the predictions made by the analyst’s audience back in September 2021.
At that time, the analyst asked his followers about the likelihood of the “L2-over-L1” flippening occurring. While the majority believed that this event could take place in 2022, a surprising 20% of respondents answered that it would never happen. This divergence of opinions highlights the ongoing debate surrounding the future of L2 networks.
When comparing the size of the L2 ecosystem to that of L1 networks, the difference is significant. As of the date of the initial voting, the L2 ecosystem was 20 times smaller than the L1 ecosystem. However, during the crypto winter, this gap widened even further. The peak of this disparity was reached during the Terra/Luna collapse in Q1 of 2022, emphasizing the challenges faced by L2 networks.
Furthermore, the L2 landscape remains heavily concentrated, with only five networks responsible for over 90% of the TVL. These networks include Arbitrum (ARB), OP Mainnet (Optimism, OP), Base, Metis Andromeda, and Manta Pacific. This concentration of power raises questions about decentralization and the potential risks associated with relying on a few dominant players.
In terms of market dominance, Arbitrum (ARB), the largest Ethereum-based L1 network, is currently rebuilding its position after a slight decline. At the time of writing, it is on the verge of surpassing the 50% barrier, reaffirming its status as a key player in the space. Its closest competitor, OP Mainnet, has a market dominance of 28.65%, according to L2Beat’s data.
The discussion surrounding the “L2-over-L1” flippening is far from over. While L2 networks offer scalability and lower fees, they still face challenges in terms of adoption and network effects. The concentration of power among a few dominant networks also raises concerns about decentralization and the potential risks associated with relying on a limited number of players.
As the cryptocurrency and blockchain industry continues to evolve, it is important to closely monitor the developments in the L2 ecosystem. The potential for a “L2-over-L1” flippening remains a possibility, but it is yet to be seen whether L2 networks can overcome the dominance of L1 networks in the long run.
This article was originally published on U.Today.
