Bankless: A Review of Ethereum L2 Development in 2022

Written by: Ben Giove

Compiled by: DeFi Dao

The year 2022 was a bleak one for Crypto, with stablecoins, hedge funds, lending institutions, and exchanges imploding in terrifying ways. Most of the sector collapsed, but there were still some growth points amidst the carnage. One major example of long-term growth is the Layer-2 ecosystem.

Ethereum's outstanding scaling solutions quietly experienced an explosion in 2022, achieving many milestone advancements at both the infrastructure and application layers, with extraordinary growth in key KPIs.

With that in mind, let’s review L2's year in 2022 and see if 2023 will be another breakthrough year.

Metrics Snapshot

TVL

L2 TVL in ETH; Source: L2Beat

The dollar value of assets bridged to L2 fell from $5.7 billion to $4.1 billion, a decrease of 28.6%. However, this may be attributed to the drop in cryptocurrency prices rather than user fund withdrawals, as the TVL in ETH terms rose from 1.6 million to 3.4 million, an increase of 120.6%. This indicates that, excluding price effects, L2 saw a significant influx of liquidity in 2022.

Trading Volume

Monthly trading volume of Arbitrum; Source: Dune Analytics

Throughout 2022, Arbitrum's trading volume surged significantly, driven by increased traction from native dapps like GMX and the Nitro upgrade, which greatly reduced transaction fees. The network's trading volume grew from 5 million in Q1 to 34.9 million in Q4, an increase of 590%.

Monthly trading volume of Optimism; Source: Dune Analytics

Optimism also experienced a substantial increase in trading volume, likely due to the surge in activity following the launch of OP and subsequent incentive programs. Optimism processed 3.2 million transactions in Q1 and 30.3 million in Q4, representing an increase of up to 846.7%.

Users

Monthly active users of Arbitrum; Source: Dune Analytics

As mentioned earlier, driven by the use of applications like GMX and the Nitro scalability upgrade, Arbitrum experienced strong growth in active users throughout 2022. The average monthly active users of L2 surged from 91,800 in Q1 to 6.05 million in Q4, an increase of 559.1%.

Monthly active users of Optimism; Source: Dune Analytics

During 2022, Optimism's user base also saw a significant increase. Riding the wave of the previously mentioned token launch and incentive programs, the number of monthly active addresses on Optimism skyrocketed from an average of 33.1K in Q1 to 403.4K in Q4, a growth of 1118.7%.

Highlights

The Rise of GMX

GMX emerged as a breakout L2 application in 2022. As on-chain activity dwindled and prices fell, the usage of this decentralized perpetual exchange based on Arbitrum soared, effectively leveraging the increased throughput of L2 by facilitating $81.4 billion in trading volume and generating $33 million in revenue. GMX has become a core foundation of Arbitrum, accounting for 39.5% of the network's TVL, with many projects like Dopex, Vesta Finance, Rage Trade, and Umami Finance built on GMX and integrating the platform's liquidity token GLP.

This growth, along with a robust token model that incorporates revenue sharing, has led the GMX token to become one of the best-performing assets in all of cryptocurrency, rising 87.4% and 487.2% against the dollar and ETH, respectively, in 2022.

L2 Token Airdrops

Several well-known L2s launched tokens in 2022.

The most notable was Optimism, which airdropped 5% of its OP supply to early users and stakeholders. This token launch catalyzed a rise in user activity and liquidity on the network, with its TVL increasing by 86.9% since the launch on May 31.

Another L2 that launched a token was zk-rollup provider StarkWare. StarkWare announced a massive $8 billion funding round in May and launched their STRK token in mid-November, although it is not yet tradable.

OP, and of course STRK, have yet to fully unlock their value accumulation potential in decentralized Optimism and StarkWare sequencers, respectively. Nonetheless, their launches are an exciting first step in L2 token design and will continue to serve as important strategic tools for each network.

zkSync Launch

zkEVM is considered the holy grail of scaling solutions as it combines the network effects and developer tools of EVM with the massive throughput of zk-rollups.

However, it seems that no one is heralding zkSync, but they launched zkEVM, zkSync 2.0, mainnet in October. Notably, the network is still in "baby alpha," the first phase of a three-phase rollout, currently not open for contract deployment or end-user access, but reaching production stage still represents a significant achievement in scaling.

Lows

dYdX's Departure

A major low point for the L2 ecosystem in 2022 was dYdX's impending acquisition by Cosmos.

In June, the perpetual exchange announced that it would migrate from StarkEx and choose to launch its V4 as a specific application blockchain built using the Cosmos SDK.

This was a substantial blow to the current L2 landscape, as dYdX is the largest decentralized perpetual exchange, facilitating $461.2 billion in trading volume over the past 12 months. This move by dYdX also led to speculation that many other well-known dapps would migrate from Ethereum, avoiding the L2 ecosystem in favor of building their own sovereign chains.

Currently, this mass exodus has not yet occurred. However, dYdX's decision serves as a stark reminder that L2 will continue to face fierce competition.

Centralized Gatekeepers Still Exist

Calling this a "low point" may be a bit harsh — but many L2s still operate under major trust assumptions. For example, both Arbitrum and Optimism have yet to fully implement trustless anti-fraud measures and decentralized sequencers. Additionally, each network can still be upgraded by core teams (albeit with a time-lock delay).

This is understandable, as upgrades are new technology, and these centralized gatekeepers serve as guardrails to prevent the loss of user funds. However, these trust assumptions remain a source of risk as we enter 2023.

Outlook

2023 promises many exciting developments for existing and new L2s.

Let’s discuss a few of these aspects:

Arbitrum

First, Arbitrum has many catalysts to stimulate its growth in 2023.

In addition to the seemingly endless innovative DeFi applications launching on L2, the network is poised to benefit from the recovery of Arbitrum Odyssey. Odyssey is an initiative designed to encourage activity on the network's well-known dapps by rewarding users with NFTs. The Odyssey was delayed in its second week due to a spike in gas fees, but this initiative should resume in the near future.

Moreover, Odyssey could potentially serve as a precursor to the launch of the Arbitrum token. This token may be airdropped to early users and Odyssey participants, while being used by dapps for incentive programs. Arbitrum has been tight-lipped about the details of its token, but if (when) it does launch, it is likely to lead to a significant surge in user activity and liquidity flowing into the network.

Optimism

Optimism is also expected to see another year of strong growth in 2023.

With the ongoing rollout of OP incentives and an upcoming second airdrop, Optimism is poised to achieve significant scalability improvements with the launch of Bedrock. Bedrock is currently live on the testnet and is an upcoming network upgrade expected to reduce the cost of submitting calldata to L1 and support "alternative proof systems" like zk-proofs. Bedrock (along with the upcoming EIP-4844, which will greatly reduce gas costs for all L2s) should lead to a substantial increase in Optimism's scalability.

Optimism is also expected to see more adoption of OP Stack, a development framework that enables the creation of custom L2s. OP Stack is likely to gain further traction with the launch of Aevo, a decentralized options exchange from Ribbon Finance that will be built on an L2 utilizing that stack.

"Alt" L2s

These two major optimistic rollups are not the only L2s gearing up for a big year in 2023.

Many L2s will achieve milestones, such as the mainnet launches of Polygon and Scroll's zkEVMs.

As mentioned earlier, zkSync will continue its phased rollout to support smart contract deployment and ultimately cater to the usage of eager degens like myself.

Additionally, other networks, such as Fuel, a highly scalable ORU utilizing Swell as its programming language, will also see further traction as developers become increasingly familiar with their tools.

As we have seen, L2s were a rare growth point in the ecosystem in 2022.

There were many highlights, as well as some low points, but Ethereum is scaling, and 2023 is set to be another explosive year for L2s.