Ethereum is powering the future of decentralised finance (known as “DeFi”). The blockchain hosts thousands of applications and millions of active users as it drives a new era of financial authority. But as DeFi’s leading blockchain, it must be well-equipped to scale as an influx of apps and users join the network. 

Currently, there are limitations with the Ethereum protocol due to its (relatively) slow speeds and high transaction fees. These issues have led to the emergence of Ethereum Layer 2 (L2) projects – designed to improve network performance and enable the continued expansion of the DeFi revolution.

Related: How to buy Ethereum in Australia

What are Ethereum Layer 2s?

An Ethereum Layer 2 project is a network that operates on top of the main Ethereum blockchain (known as a “Layer 1”). Layer 2 projects allow decentralised applications (dApps) to funnel transactions and other processes off the main blockchain – which can reduce congestion, increase finality speeds and cheapen gas fees. Layer 2 chains make use of Ethereum’s privacy and decentralised infrastructure while reducing the burden on its main network.

How We Ranked Ethereum Layer 2s

There are several metrics we can use to determine which Ethereum Layer 2s maintain the healthiest ecosystem. A strong userbase, constant dApp development and high transaction volumes tend to indicate the long-term security and viability of a L2 project.

• Total Value Locked (TVL). This is the dollar-amount of cryptocurrency locked up in smart contracts on a blockchain. It encompasses staking services, DeFi savings account and so on.
• Monthly transactions. Monthly transactions can suggest a certain L2 is ideal for traders due to its low gas fees and fast settlement times. This metric can also point toward the popularity of decentralised applications on the network. 
• Ecosystem and dApps. A huge reason for DeFi’s success is dApps – so the more popular platforms within an ecosystem, the more likely it will maintain a healthy userbase over time. Usually, high-profile decentralised exchanges (DEXs), NFT marketplaces, DeFi protocols and games will contribute to a thriving ecosystem.

Checkout out our guide on analysing cryptocurrencies for more details.

Best Layer 2 Networks

Arbitrum

Arbitrum is an L2 scaling solution for the Ethereum network with a focus on helping developers create new Ethereum Virtal Machine (EVM) dApps in just minutes. Arbitrum can do everything Ethereum does – but faster and cheaper.

Arbitrum dominates the Ethereum L2 world, capturing nearly 50% of the market share. It has by far the highest total value locked (TVL) and monthly transaction data of any EVM scaling solution. It boasts hundreds of the DeFi ecosystem’s most popular applications, including Uniswap, 1inch and Beefy Finance.

Arbitrum’s governance token, ARB, allows holders to vote on proposals and participate in economic/development decisions of the L2. 

View live ARB price.

Optimism

Optimism is a community-focused Layer 2 framework that offers DeFi projects lightning-fast transaction speeds and lower costs to transmit data to and from the base Ether blockchain. Optimism is an optimistic rollup chain, which means a large batch of transactions are “rolled” together and then processed on the Layer 1 network.

Optimism is a clear number two when it comes to on-chain metrics, trailing only Arbitrum in Total Value Locked and market share. It is also home to the vast majority of popular Ethereum dApps, like Slingshot, Aave and Sushiswap. The network’s native governance token is OP.

View live OP price

Polygon

Polygon (MATIC), originally intended as a competitor to Ethereum, is now a scaling solution that intends to connect multiple blockchains to the network in order to reduce costs and improve efficiency. The L2 uses what’s known as “sidechains”, a web of independent networks that help decongest the main Ethereum blockchain.

The network constantly jostles with Optimism as the L2 with the second-most total value locked and on any given day can boast more than USD $300m in transaction volume. 

The Polygon team has also developed a separate zero-knowledge Ethereum Virtual Machine (zkEVM) network that has a greater focus on security and superior transaction speeds to its counterpart.

BASE

BASE is a relatively new L2 solution developed by global cryptocurrency exchange Coinbase. Like most other L2s, BASE uses rollups to bundle transactions together to optimise using EVM dApps. 

BASE is built atop Optimism’s open-source stack, meaning it shares the same excellent scalability, interoperability and ease of development. Additionally, BASE is designed to be the blockchain for Coinbase use cases – allowing it to leverage the hundreds of millions in assets currently held on the exchange. 

BASE supports all of the main EVM apps you would want – AAVE, UniSwap and Banxa, along with some more unique offerings such as Friend.tech. And despite the L2’s relative infancy, it still boasts excellent on-chain metrics, coming in the top five for TVL, market share and monthly transactions.

Loopring

Loopring is an Ethereum Layer 2 project that provides low fees and high speeds for trading, lending and engaging in other financial activities using ETH. The protocol uses zero-knowledge Rollups, allowing for near-instant finality.

Loopring’s key mission is to combine the benefits of centralised exchanges (liquidity and efficiency) and decentralised exchanges (greater freedom, cheaper transactions, no third-party) on Ethereum. The team also plans to improve the L2s interoperability by building support for chains other than Ether, such as Qtum and Neo.

Given its unique vision, Loopring lacks the same mass of dApps that some of its competitors do, but still offers impressive financial services (lending/borrowing, earning, NFT management and a trustless wallet). It ranks in the top 15 for total value locked.

The LRC token is native to Loopring’s L2 for Ethereum. View LRC price live.

ImmutableX

ImmutableX is an Ethereum L2 scaling solution with one industry in mind – blockchain gaming. The demand for GameFi has increased over the years, and ImmutableX is the first L2 for NFTs. Like most other popular L2s, ImmutableX is built with zkRollups which has vastly improved the gaming experience for both developers and players.

ImmutableX is home to several highly-touted NFT marketplaces and GameFi platforms, including Gods Unchained, Illuvium and Guild of Guardians. The constant addition of new games has led to ImmutableX surging up the on-chain rankings, now sitting comfortably in the top ten for monthly transactions and TVL.

View live IMX price.

Metis

MetisDAO is an Ethereum L2 with the goal of solving what many have called impossible – the blockchain trilemma. The Metis team wants to create a solution for Ethereum that’s scalable, decentralised and secure. The protocol uses Optimistic Rollups to bundle transactions for faster procession on Ethereum, leading to lower gas fees and higher transaction throughput. The developers are also working on an evolution of these Rollups to further improve efficiency and on-chain privacy.

Metis has an excellent list of supported dApps, including heavy-hitters OKX, Stargate and Metamask. It has the third-most total value locked of any Layer 2 network, thanks to its popularity surging in 2023. It also sits around the top 20 for monthly transaction volume.

METIS is the native token of the MetisDAO L2 and can be used to participate in governance.

Why Do People Use Layer 2 Networks?

The main Ethereum 1.0 blockchain currently has a low transaction speed of around 7-15 transactions per second (TPS). Layer 2 solutions can theoretically handle much faster speeds of up to 9,000 tps by pushing most of the hard processing “off-chain” – either through the use of sidechains or Rollups. Additionally, using the main Ethereum L1 can be quite a costly experience, which may turn away many potential adopters.

There are an increasing amount of layer 2 projects and sidechains in circulation, each working to improve the user experience for swapping coins and tokens, minting NFTs, reducing transaction fees and increasing the speed of transactions. This also makes it much cheaper for developers to host and improve their applications on Ethereum.

How to buy Layer 2 network tokens 

Most of the layer 2 networks listed above have native tokens that you can purchase to get exposure to these projects. 

Some tokens like ARB, OP and IMX are ranked in the top 50 cryptocurrencies by market, which shows the relevance of layer 2 networks in the market today. You can buy several layer 2 tokens on Australian crypto exchange, Swyftx. 

Conclusion

Layer 2s are the next frontier of Ethereum-based decentralised finance. The success of these protocols will have a big say in the adoption of EVM dApps over the next decade. As these projects work together to bring the next evolution of DeFi to the sector, it will be enthralling to watch if Ethereum can truly revolutionise the world of finance as we know it.