Layer 2’s on Ethereum are finally having their moment in the sun with over $6 billion locked in various L2 protocols and growing nicely every day. This is without most of them having native token incentives, they still have very immature infrastructure and they mostly don’t have easy onboarding vehicles. Though, over the next few months this is going to change drastically, and you can see an example below with Binance being the first major exchange to support both deposits and withdrawals to an Ethereum layer 2 network.

Arbitrum @arbitrum

.@binance users are now able to deposit and withdraw ETH to and from Arbitrum! 🪙 Read the guide below. 👇 arbitrum.notion.site/How-to-use-Bin…

January 15th 2022

729 Retweets3,789 Likes

I think that there are really 2 main things that will open the floodgates for layer 2’s - a native token with incentives and centralized exchange bridging. A token allows these layer 2’s to aggressively scale up their user-base while also giving them a share in the network while centralized exchange bridging allows for the seamless on/off-boarding that users are used to with layer 1 crypto-networks. Combine these 2 together and you have a recipe for explosive growth in not just TVL and liquidity, but also actual active users who will stick around once any liquidity incentives either taper off or expire completely.

Unfortunately, the cost to bridge from somewhere like Binance to Arbitrum is still quite high - around $10 when I checked a couple of days ago. Of course, this cost is high because of Ethereum layer 1 but there are ways that CEXs can subsidise these costs for their users. They could become a liquidity provider on one of the numerous bridging protocols (Hop, Connext, Synapse) and then generate revenues from this by directing withdrawals to these bridges. Bridging into layer 2’s could also be a “loss leader” for CEXs where they take the hit on the withdrawal fee but make it up on the trading fees (especially on fiat pairs) - I think this will start to be more of a trend once demand picks up from users to bridge to layer 2’s.

Of course, there are many other reasons users will be adopting layer 2 over the coming months: much cheaper and faster transactions, the networks will offer apps that just aren’t possible to build on layer 1, there will be layer 2 exclusive apps and more. Though I think it also depends on what apps are available and which ones are bringing in the most people. For example, NFT-related apps seem to be appealing to more people than anything else right now - at least newer people - and we’ve seen some great adoption of NFT-focused layer 2’s like Immutable X and Polygon’s NFT ecosystem has been growing nicely for quite a while now. I think DeFi will also be a very big player on layer 2’s because of the cheaper transactions which will allow users with a small amount of money to still get the benefits of things like high stablecoin yields.

Right now it seems like there aren’t very many new users coming into the crypto ecosystem and I think that’s mainly because the prices of the major cryptoassets (BTC, ETH and some others) have remained relatively flat for a while now. I think that as this changes with BTC and ETH going back to their all time highs (hopefully soon!), we’ll see an explosion of new users flooding in and this time layer 2’s will be ready to serve them.

Have a great day everyone,
Anthony Sassano

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All information presented above is for educational purposes only and should not be taken as investment advice.