Posted:
- Layer 2 fees began to rise as usage declined.
- Optimism remained unaffected by the developments, as prices surged.
Despite the market volatility in 2023, the Layer 2 (L2) sector observed massive growth. However, as growth in the sector increased, so did the competition within the sector.
Low usage causes trouble
Roll-ups on Ethereum were designed to make transactions cheaper, but a lack of users is having the opposite effect. These Layer 2s take longer and cost more due to underutilized capacity.
The L2 Paradox – or why a lack of users leads to rising costs on emergent L2s
Roll-ups on Ethereum are supposed to bring costs lower for individual transactions. But the lack of users have had the exact opposite impact. They take longer for finality and cost more.
Let me… pic.twitter.com/YyVtRhDnfT
— Joel John (@joel_john95) November 23, 2023
Examining data from 16th November, we find that most chains, including Polygon, were operating below their capacity.
Ethereum processed more transactions than several emerging Layer 2s combined, creating a scenario where L2 capacity is underused, causing individual transaction costs to rise.
Source: L2BEat
Making comparisons
Comparing Ethereum to its L2 counterparts, Ethereum’s transaction cost rises with demand, while on roll-ups, the cost per transfer drops as transactions increase.
This is because a significant portion of the cost of roll-ups (95%) goes to posting data on the main-net, and if there aren’t enough transactions, the few within a batch bear that cost.
This creates a cycle where L2s struggle to reach economies of scale due to a lack of traction, resulting in a surge in costs, which further hampers their economy of scale. Data shows Ethereum’s transaction numbers far exceed those on L2s like Arbitrum and Zk-sync era.
The impact extends to liquidity and user bases, illustrated by Curve’s chart where 93% of liquidity remains on Ethereum.
Despite incentives, users were hesitant to move to new chains. L2s need to evolve into standalone ecosystems to survive. Otherwise, consolidation and mergers might be on the horizon for roll-ups.
State of Optimism
Optimism, as a Layer 2 solution, might face challenges due to the broader issues in the Layer 2 sector. If the L2 sector struggles to attract more users, Optimism could experience a similar lack of traction.
Read Optimism’s [OP] Price Prediction 2023-24
This could lead to a situation where costs remain high for individual transactions on Optimism, hindering its attractiveness to users.
At press time, OP was trading at $1.8571 and had grown by 1.75% in the last 24 hours. The volume of OP being traded also surged during this period.
Source: Santiment