Home News Layer 2 of Ethereum is on Fire -What does that mean for the price of ETH?

James Carter

24 Feb 2023

Layer 2 of Ethereum is on Fire -What does that mean for the price of ETH?

Scaling up Ethereum’s second layer, Arbitrum, is growing very quickly because it can do a lot more transactions per second by putting transactions together off-chain in groups called “roll-ups.” On Thursday, the protocol’s daily fees hit nearly $300,000, which is the highest level since June 2022. Cryptofees.info says that means Arbitrum is the seventh-best cryptocurrency protocol for making money.

Layer 2 of Ethereum is on Fire

Fees have gone up along with the number of transactions that happen on the protocol every day, which is now more than 1 million per day. In fact, the increase in transactions made headlines earlier this week when arbitrage transactions surpassed Ethereum network transactions for one day. At the beginning of the year, there were around 200,000 arbitrage transactions every day.

Daily Active Addresses, which are a good indicator of the number of daily active users on the protocol, have also recently reached new record highs of more than 130,000. It was less than 50,000 at the beginning of the year.

The number of unique addresses that have been registered on the protocol keeps growing quickly and should soon reach 3 million.

Analysts at Bernstein said in a note earlier this week, “Arbitrum is seeing aggressive growth in users, active users, transactions, and revenue. This is due to more people using it and the scaling up of DeFi and gaming applications on the chain.” Bernstein noticed that GMX and other decentralized exchanges based on Arbitrum were growing very quickly.

DeFi Llama says that the total amount of money that has been traded on GMX has recently passed $100 billion. Most of this trading has happened via arbitrage. The most GMX swaps were made on Arbitrum every day in December, which was on Wednesday.

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DeFi Llama data shows that the total trade value locked (TVL) in Arbitrum’s Decentralized Finance (DeFi) protocols is about $3 billion. This makes it the chain with the fourth-highest TVL. In fact, Arbitrum and Optimism, another Ethereum layer-2 scaling protocol, are the only two chains whose TVL has grown quickly in the last month.

Due to recent growth, Arbitrum’s market share of all TVL in DeFi protocols has increased to about 3.6%. This is up from less than 2.5% last month and only about 1.0% last year.

Here’s How Arbitrum’s Growth Benefits ETH

The recent growth and success of Layer-2 scaling protocols like Arbitrum, Optimism, and Polygon should be seen as good news for the Ethereum network and, by extension, ETH. They fix two of the biggest problems with the Ethereum network: the slow speed of transactions and the high cost of using the network.

Arbitrum can handle about 40,000 transactions per second, while Ethereum can only handle 14 transactions per second. There are already other layer-2 scaling solutions that can handle loads like these. The protocol’s roadmap says that Ethereum will get a number of upgrades in the coming years. One of these is “sharding,” which will be put into place and should greatly increase the network’s TPS.

But there is a need for scalable blockchains right now because more and more people are using crypto. Layer-2 Ethereum scaling solutions can compete with Ethereum’s more centralized but scalable layer-1 competitors (like Solana) to host Decentralized Applications (dApps) and projects. This keeps these projects within Ethereum’s “zone of sovereignty,” even if they aren’t building directly on the Ethereum blockchain.

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And transactions on layer-2 solutions like Arbitrum only cost a few cents each. This solves another problem on the Ethereum network that might have made Ethereum users want to try other chains. At the time this article was written, the average cost of a transaction on the Ethereum network was about $2.

Since they use Ethereum’s consensus layer to settle transactions, protocols like Arbitrum contribute directly to the growth of the Ethereum network when they grow. So, if Ethereum layer-2s are really popular, that can only be good for ETH in the long run.