Ethereum Layer 2 Network Effects

Over the past six months, there has been significant uncertainty surrounding the price performance and popularity of the Ethereum blockchain. Market participants have been favoring more centralized alternatives like Solana, and Layer 2 solutions such as Base, Arbitrum, and Optimism. This trend is believed to stem from the stigma around Ethereum's high gas fees, coupled with the current meme coin trend perpetuated on sites like Twitter and 4chan. With traders' attention focused on high-risk, high-reward meme coin assets rather than projects with practical use cases, it's easy to understand this sentiment. In previous cycles, hyped-up tokens with huge Fully Diluted Valuations (FDVs) were pushed onto retail users who were left "holding the bag" as supply inflated and whales suppressed upward price movements through constant selling. Some of these coins, including Serum, Maps, and OXY, had FDVs several magnitudes higher than their circulating supply at the time of release.

Why has Ethereum hype haltered ?

Since the start of the bull run in September 2023, we have seen little price movement from Ethereum, which is unusual compared to previous cycles. Typically, Ethereum moves second, just after Bitcoin. So, why has this occurred? We believe it is due to the ongoing belief that trading altcoins on-chain on Ethereum is too expensive for retail traders. When high gas prices occur, it can cost $50 to swap a coin for Ethereum. Thus, this cycle has seen a slowdown as both developers and participants move to lower-cost chains such as the adjacent Layer 2 blockchains and Solana. As shown in Figure 1, during the peak climb from October 30th to the start of January, Ethereum fees were very high, averaging above 40 gwei most days, making it nearly impossible for retail investors with small portfolios to trade on-chain. This was also highlighted in March this year. Figure 1 Average Base Gas Fee - Wevr

This aligns with Figure 2, which shows the daily transactions occurring on Base Layer 2. Figure 2 Average Daily Transactions - basescan As seen, there was some usage throughout October; however, a massive increase in transactions and activity within the Base Layer 2 blockchain occurred in March, which also coincides with the time when Ethereum had extremely high gas fees.

What is a layer two blockchain and why are they effecting ethereum network traffic?

Layer 2 blockchains are essentially secondary frameworks or protocols built on top of an existing blockchain system, commonly referred to as the mainchain or Layer 1. The primary goal of these Layer 2 solutions is to enhance the scalability and efficiency of the mainchain without compromising on security or decentralization.

One of the main reasons Layer 2 solutions are essential is due to the limitations in scalability inherent in many Layer 1 blockchains like Bitcoin and Ethereum, as disscussed previously discussed. These blockchains can only process a limited number of transactions per second, which leads to bottlenecks during high usage periods, resulting in higher transaction fees.

Layer 2 solutions address these issues by handling transactions off the mainchain. This is done while still leveraging the robust security mechanisms of the mainchain. Common types of Layer 2 solutions include state channels, sidechains and rollups.

• State Channels: These involve two parties engaging in numerous transactions outside of the main blockchain (off-chain), which can be settled as a single transaction on the blockchain.
• Sidechains: These are separate blockchains that are connected to the mainchain via a two-way peg, allowing assets to be interoperable between the sidechains and the mainchain.
• Rollups: These execute transactions outside the mainchain but post transaction data on it. Rollups are divided into two types: zero-knowledge rollups (ZK-rollups) and optimistic rollups, each with unique mechanisms for handling transaction validation.

Why the fuss surronding layer twos

The fuss surrounding Layer Twos is due to their cheaper swap prices. This has been further benefited from EIP-4844, also known as proto-danksharding, whereby Layer Twos can more efficiently write data using blobs instead of writing data as call data. Previously, a factor holding back Layer Twos was their ecosystem and the number of altcoins based on Layer Twos. However, with the shift toward Layer 2s, developers have also transitioned over. With an increased number of meme coins existing on Layer Two networks, it has become very appealing for retail traders to engage in trading.

Will the memecoin madness continue.

As discussed earlier, meme coins have already played a significant role in the bull market thus far, with coins such as Dog Wif Hat, $Bitcoin, and Bonk delivering huge returns in the past 3-6 months. Retail investors are more inclined to take a risk for a large return when they have a lower capital base. In crypto, $50 can potentially turn into $20,000; however, this is not the norm. For every big return, there are 100 scam coins that have rugged. Nevertheless, the risky nature of trading meme coins is what makes it so appealing to the public. With this sentiment and the ease of access now with Solana and Layer Twos, I expect the meme coin madness to continue.

Conclusion

Following the recent Bitcoin halving, the cryptocurrency market finds itself in a state of uncertainty, presenting a mix of challenges and opportunities for investors. At Wevr, we understand the complexities of these market shifts and are committed to providing our clients with the most accurate and timely data to navigate them confidently.

We invite you to explore our comprehensive resources and consider the diverse range of pricing options we offer, tailored to meet your investment needs. Visit us at Wevr.ai for more details.Wevr is also preparing to launch a series of new features designed to enhance your investment strategy and capitalize on the momentum of the cryptocurrency market. Stay ahead of the curve by connecting with us on twitter and following our blog for the latest updates and insights into this dynamic and evolving investment landscape.