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Ethereum’s core chain (Layer 1) has reached its limits, a fact foreseen from the outset. A single chain, no matter how powerful, couldn’t handle the global economic engine.
Enter Vitalik Buterin’s vision: a “roll-up-centric” future. This plan involves scaling Ethereum “vertically” by leveraging thousands of connected layer 2 chains, each technically or brand-related to the main layer 1. This vision, once experimental, is now a reality. Today, layer 2 chains boast nearly 10 million monthly active users, compared to layer 1’s 6 million.
Layer 2 chains offer a compelling package: easy launch, lower fees, and innovative use cases, attracting more users than Layer 1. The product-market fit was clear, but deploying these chains presented hurdles. Thankfully, those hurdles are fading. Today, deploying a layer 2 chain is as simple as deploying a smart contract on layer 1. This development boom has unleashed a wave of new layer 2 projects, many enabled by the cost-effectiveness of layer 2 blockspace.
With layer 2 chain deployment becoming commonplace, the focus is shifting from infrastructure creation to building enduring on-chain businesses. Developers can now easily deploy layer 2s, leading the market to prioritize entrepreneurs crafting sustainable, high-growth on-chain ventures. The most successful layer 2s see themselves not as fancy data structures but as true startups. Their mission isn’t just solving scalability; it’s achieving (i) user growth, (ii) innovative monetization strategies, and (iii) cost-efficiency.
Ethereum’s high fees have temporarily “unbundled” the layer 2 stack. The first generation of layer 2s, like Optimism and Arbitrum, were tightly linked to the Ethereum layer 1. This tight coupling, however, proved expensive. Both protocols shell out millions in ETH monthly to Ethereum for settling transactions.
Entrepreneurs noticed this “lucrative margin” on Ethereum layer 1. Protocols like Celestia and EigenLayer are aiming to “unbundle the layer 2 stack” by offering services to layer 2s at a fraction of the cost compared to Ethereum layer 1—100x to 1,000x cheaper. These competitions will likely push Ethereum layer 1’s core development forward as well.
Within the Layer 2 landscape, two distinct philosophies emerge: building “movements” and crafting user-centric products. This translates to general-purpose vs. application-specific chains, mirroring the technical division of optimistic and ZK rollups.
General-purpose chains envision themselves as the internet’s next asset hub, fostering a broad ecosystem. Application-specific chains, on the other hand, laser-focus on delivering the ultimate user experience for a particular use case (think “XYZ”). In both scenarios, the layer 2 architecture is a seamless extension of the core team’s product vision, not the sole objective.
The competition amongst general-purpose layer 2s is likely to become a “winner-takes-all” affair due to their inherent technical similarities. This market, much like others, is expected to follow a power law where a handful of dominant layer 2s capture the lion’s share of user attention and resources. The current top contenders in the Ethereum layer 2 space, as depicted in the omitted screenshot, exemplify this trend.
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