An Eye On Rollups
by Martin Gaspar
What Adoption Means For Ethereum
The adoption of Layer 2 (L2) rollup solutions (i.e., protocols) on Ethereum this year will be key to whether momentum can swing back to Ethereum from alternative Layer 1s (L1). Ethereum has been at capacity the last couple years and high fees stemming from this are causing defections to other L1s (SOL, AVAX, etc.), which are seeing impressive network growth. Aribitrum and Optimism, both optimistic rollups on Ethereum, went live last year but saw limited adoption. What will it take for them to see explosive growth and bring low fees to Ethereum? There are several key factors that can drive L2 adoption:
1. Integration With Centralized Exchanges
Currently, users must bridge to Ethereum L2s, which can be time consuming and costly. Being able to deposit and withdraw L2 assets via an exchange could make user onboarding a breeze and possibly lower the costs for the user.
2. Protocols Launching Exclusively On L2s
Right now, projects are still launching on Ethereum’s base layer and only then outlining plans to move to L2s. This does not help anyone since it is expensive to deploy smart contracts for developers and they are limiting their users to those who can pay the fees, which is not many. Potential users are uninterested given the fees and go use similar protocols on alternative Layer 1s.
Protocols need to launch on L2s so that users have a better experience and to incentivize users to go use the L2. This could be in the form of liquidity mining, for example. Consider derivatives trading protocol dydx. It moved to an L2 (StarkEx) in 2021 and later wound down its L1 platform, prodding users to switch to its L2, which has been a success, based on its trading volume. This goes to show that a killer product or protocol will drive users to use an L2.
3. Tokens For L2s
As we saw with DeFi protocols and L1s, token incentives help draw in new users. If Aribitrum and Optimism launch their own tokens, users will want to participate on their platform. Anticipation is high for the roll out of L2 tokens, and I believe it will just be a matter of time until we see them. Other L2s have hinted at tokens. zkSync, for example, explicitly states in its FAQ that it will have a native token.
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