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Welcome to the fourth edition of Onchain Lense, a newsletter focused on onchain analysis of key blockchain protocols and sectors.

Today, we are exploring the ecosystem of layer 2 scaling solutions on Ethereum and how they are helping the network process more transactions at reduced costs.

Layer 2 refers to a system built on top of a blockchain (commonly known as layer 1 network) that strives to extend the capabilities of the underlying base layer network. These solutions inherit the security of the layer 1 network, as the transaction data is verified on the base layer. They aim to increase the transaction throughput while reducing fees and not compromising decentralisation or security.

Common types of scaling solutions on Ethereum are Optimistic rollups and Zero-Knowledge rollups. Optimistic rollups' Ethereum Virtual Machine (EVM) compatibility makes it convenient for developers to migrate existing smart contracts from Ethereum to an Optimistic rollup-based system. zkEVMs, on the other hand, can provide the scalability benefits of both zero-knowledge proofs and EVM compatibility.

The total value locked on the Ethereum network is $61.9 billion, out of which $44.1 billion is locked in various layer 2 scaling solutions. Arbitrum One is leading the way with $17.9 billion in TVL, followed by Base at $7.5 billion and OP Mainnet at $6.9 billion. All three are Optimistic rollup-based solutions.

The transaction throughput is one of the most critical onchain metrics to consider when evaluating the impact of scaling solutions on Ethereum. It measures the number of transactions processed per second on the network. As per the data analytics platform, L2BEAT, the transaction throughput on Ethereum has increased tenfold since the introduction of layer 2 solutions.

Before September 2022, the network used to process approximately ten transactions per second (TPS), and now, with all layer 2 solutions, it consistently does more than 100 TPS. This is a result of offloading transaction processing and data storage to these secondary networks, reducing demand for network resources and lowering transaction fees. Base is leading with about 35 TPS and is followed by Arbitrum One at 23 TPS, both higher than the Ethereum Mainnet at 14 TPS.

Another important onchain metric to consider is transaction fees. It measures the cost of sending a transaction on the Ethereum network. The launch of rollups reduced the cost of sending a transaction, but a significant change came with the Ethereum network upgrade called Dencun (Protodanksharding) in March 2024. The average fee for transaction processing on the Mainnet is about $10, which was reduced to less than a dollar with the introduction of layer 2 solutions and the Dencun upgrade.

All leading scaling solutions process millions of monthly transactions at a fraction of the cost. Arbitrum One transaction cost is ~$0.09, Base is ~$0.04, and OP Mainnet is ~$0.19.

Overall, layer 2 solutions have significantly impacted scaling the Ethereum network. They provide three key benefits: reduced fees, quicker transaction processing, and access to familiar tools and languages, such as MetaMask and Solidity.  As the Ethereum ecosystem grows, layer 2 solutions will be increasingly important in ensuring the network’s long-term success.

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