A year after Bitcoin’s historic rally, the crypto-verse is enjoying a new lease on life. Amid the upswing is a new breed of “layer two tokens” — cryptocurrencies native to projects built on top of “layer 1” blockchains like Bitcoin and Ethereum. These solutions take blockchain scalability to the next level, enabling faster processing times and lower gas fees. This allows developers to focus on improving user experience and expanding the applications of the Blockchain — from Decentralized Finance (DeFi) to virtual worlds.
Despite their young age, these technologies are already significantly impacting the crypto market. According to layer two analytics platform L2beat, the total value locked in layer two has risen from $4.1 billion at the start of this year to $10.6 billion.
Most layer 2s use a combination of scaling solutions, including side chains and rollups. With the help of these technologies, they can process more transactions per second than traditional blockchains like Bitcoin and Ethereum.
Some, like Polygon Network, are based on the Ethereum blockchain but run on separate “layers,” or networks that operate alongside the main chain. This increases transaction processing speeds and lowers gas fees by offloading some of the main chain’s work to the secondary network. Others, such as Arbitrum Orbit, are agnostic, meaning any blockchain can use them. The network uses a zero-knowledge rollup scaling solution that processes transactions off-chain, compresses the data, and then supplies it back to the Ethereum mainnet as proof of validity. This reduces main net gas fees by up to 10x while ensuring that all transactions are secure.
Other layer twos, such as Optimism and Coinbase Base, are built on the Ethereum platform but offer features that make them more independent of the main chain. Optimism, for example, has a TVL of over $2 billion thanks to its optimistic rollup scaler and supports 400 protocols. Its native token, MATIC, is used for participation in the network’s governance and payment of transaction fees and staking. In addition, the network’s OP Stack makes it possible for apps to be deployed quickly on a single, unified chain, avoiding the need for bridging.
Several exchanges, including OKX and Kraken, are launching their layer two blockchains this summer. Coinbase is set to launch its own with the launch of its Blockchain as a Service product, BASE, later this month.
As with all investments, conducting research before purchasing these tokens is essential. Crypto markets are volatile, and prices can swing dramatically in response to changes in sentiment. Investors should always seek expert advice and apply risk management practices when investing in cryptocurrencies. Traders looking to capitalize on this upward trend in cryptocurrency should consider buying ARB, OP, MATIC, and IMX. However, these are not substitutes for a diversified portfolio with other assets and currencies. You can trade them on the Bitfinex, Poloniex, and Binance platforms.
