Top 5 Layer-2 Crypto Projects To Watch In Anticipation Of Next Ethereum Upgrade
With the heavily anticipated Ethereum Cancun upgrade scheduled for Q4 of this year, the time is ripe to take a closer look at L2 protocols.
The EIP-4844 - or Cancun - upgrade promises to reduce fees on Ethereum L2 solutions by an order of magnitude. It will introduce a groundbreaking concept known as proto-dank sharding, aimed at significantly reducing the costs associated with Roll-Ups.
In today’s article, we cover the top 5 L2 protocols and evaluate them based on their long-term viability from a fundamental perspective and their investment potential. We’ll take into account their technology, funding, development, and ecosystem.
1. zkSync
zkSync is an Ethereum Layer-2 scaling solution based on zkRollup technology.
It significantly improves the scalability of the Ethereum network by aggregating multiple transactions into a single proof, which is then submitted to the Ethereum mainnet.
As zkSync doesn’t have a token yet, we can’t evaluate its tokenomics and have to focus on fundamentals instead.
The project has so far raised an astounding $458 million from almost every major crypto VC firm.
It has witnessed a huge growth in TVL and transaction volume, mainly due to airdrop farming. Its TVL currently sits at almost $200 million, up 10,000% since March 2023.
zkSync is expected to carry out a major airdrop likely in Q1 of the next year, although nothing has been confirmed yet.
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2. Arbitrum ($ARB)
With its strong fundamentals, significant backing, and active ecosystem, Arbitrum is my favorite among the 3 already released tokens on this list.
Arbitrum addresses the scalability limitations of Ethereum with its optimistic roll-up protocol while maintaining the security of the Ethereum blockchain.
Arbitrum raised $123 million in two funding rounds led by Lightspeed Venture Partners.
The project generated significant momentum a few months ago when it carried out one of the biggest airdrops in crypto history.
From the tokenomics perspective, ARB has a market cap of $1.6 billion with 13% of its 10 billion tokens in circulation. It has a 36-month vesting schedule and inflation capped at 2% per year. Large amounts of tokens will started coming into circulation as of March next year.
It has a TVL of over $2 billion, the highest of the Layer-2 protocols, and the 4th largest among all chains, only behind Ethereum, BSC, and Tron.
Post airdrop, its TVL slightly dropped, but then quickly picked back up and is now close to its all-time high, which is a sign of a strong community.
The platform supports several top-notch dApps, notably two of the best perpetual DEXs, GMX and gTrade.
What’s more, active addresses per day on Arbitrum surpass Optimism and the number of total addresses is more than double that of Optimism.
3. Polygon ($MATIC)
The oldest of Layer-2s on this list, Polygon combines Plasma chains, sidechains, and a modified version of the Proof of Stake consensus algorithm to solve Ethereum scaling issues.
In all rounds combined, Polygon raised $900 million from major VCs and is evaluated at $2 billion.
While Polygon’s TVL has experienced a significant decline it still stands at $966 million, outpacing other protocols like zkSync by a considerable margin.
However, the drop in TVL, along with a decrease in transactions, raises concerns. Of course, the pressure from recent forced sell-offs by Robinhood and Celsius has had a negative influence on Polygon’s performance.
The project’s native token MATIC has a market cap of $7 billion with 93% of tokens in circulation.
Polygon’s success depends on its ability to impress with its zkEVM and compete with the advanced capabilities of solutions like zkSync and StarkNet.
4. Optimism ($OP)
Like Arbitrum, Optimism uses optimistic roll-ups, which bundle multiple transactions together and submit a summarized version to the Ethereum mainnet. This reduces the burden on Ethereum, allowing for faster and more cost-efficient transactions.
Optimism raised $178.5 million in 3 funding rounds. Its current TVL is $890 million, close to its all-time high.
Optimism has encouraging metrics with a growing number of daily transactions, highlighting its ability to handle high transaction volumes.
Its native token OP has a market cap of $1 billion with 15% of tokens in circulation. It has a somewhat aggressive unlock schedule which started at the end of May and will last for the next 4 years.
On the bright side, the project set up a collaboration with Coinbase who decided to build their Layer-2 solution on Optimism’s technology.
5. StarkNet
StarkNet is a decentralized zk-rollup network that operates as a Layer-2 solution over Ethereum. It provides scalability, composability, and Ethereum-level security by producing STARK proofs off-chain.
The first aspect that draws attention to StarkNet is its jaw-dropping evaluation. The project raised $285.5 million but is valued at $8 billion.
This immense valuation has fueled speculations about an upcoming airdrop, which is expected to be among the largest in the crypto industry.
Starknet has a rapidly growing TVL, currently sitting at $21 million.
Despite its remarkable valuation, StarkNet faces challenges on the development front.
While protocols built on StarkEx - StarkNet’s scaling solution - have seen some adoption and are integrated with several decentralized exchanges, StarkNet itself is still in its nascent stages.
Unlike some competitors such as zkSync, which have gained traction with their mainnet launch, StarkNet’s transactions activity isn’t very high.
StarkNet is thus a project with a huge evaluation and amazing promises regarding its technology but with a lack of a substantial product (for now).
While it’s too early to make conclusions about StarkNet’s position in the market, its upcoming token launch and future developments will be critical factors in determining its success.
To Sum Up
In this post, we looked at the top 5 Layer-2 projects that could gather momentum around the Ethereum Cancun upgrade towards the end of 2023:
- zkSync is zk-rollup with firm fundamentals that has raised over $450 million and is expected to carry out a major airdrop soon.
- Arbitrum is an optimistic roll-up with strong fundamentals, solid tokenomics, significant backing, and an active ecosystem. In my opinion, the ARB token is a low-risk 10x-potential for the next bull run.
- Polygon is one of the oldest L2s that - like most old crypto projects - has suffered from a decline in TVL and market cap. It now needs to impress with its zkEVM and compete with the likes of zkSync.
- Optimism is an optimistic roll-up with encouraging metrics in terms of daily transactions and TVL although it lags behind Arbitrum.
- StarkNet is a zk-rollup with an immense evaluation and expectations of a huge airdrop. The product itself promises a lot but hasn’t delivered much yet.
As the L2 sector evolves, these evaluations are subject to change and I’ll keep you posted.
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Disclaimer: This content is for educational purposes only and should not be considered as financial or any other advice. Always do your own due diligence before investing your hard-earned money.
