TL: DR

• The Merge is a significant milestone on Ethereum's roadmap, with only a minor impact on the chain's scalability.

• Ethereum's average gas price fell 61% from September 15 to September 17 but then resumed rising and is now nearly back to pre-merge levels.

• Layer-2 activity increased significantly before the Merge but decreased afterward, with the number of transactions and unique active wallets dropping by almost 40% and 30%, respectively.

• Optimism saw TVL rise 228% from $274.46 million on July 1 to $902.74 million on August 31. Following the excitement of July and August, TVL fell only 2% ($884.6M) in September, making it one of the best-performing protocols.

• Arbitrum's transaction volume increased by 54.7% month over month, while TVL increased by 2% ($979 million).

Introduction

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Since the Ethereum Merge in the middle of the last month, some critical questions have continued to preoccupy users and enthusiasts. The Merge is a crucial step in the roadmap of the network toward a more secure, efficient, and scalable ecosystem. Layer 2 solutions specifically came into existence to tackle the problem of scalability. It, therefore, begs the question if the Merge would have any adverse effects on these solutions. Notably, people wonder how Layer 2 ecosystems will fit into the scene after the Merge, given that Ethereum is building its infrastructure through the Merge. According to available data, Layer-2 activity was higher before the Merge; however, the number of transactions fell by 36%, and the number of unique active wallets fell by 27%. Generally, as a result of the Merge, the Ethereum environment was strengthened, paving the way for a more efficient layer 2.

What are Layer-2 solutions?

The primary goal of scalability is to increase transaction speed (quicker finality) and transaction throughput while maintaining security and decentralization.

Before sharding, Ethereum Mainnet (layer 1) could only process about 15 transactions per second. When there is a high demand for Ethereum, the network becomes congested, which raises transaction fees. That is where layer 2 comes into play to scale Ethereum today. Layer 2 solutions, built on the Ethereum MainNet (L1), collect transaction data and periodically send data bundles back to layer 1 for storage and verification. As a result, the layer 2 solution has significantly increased Ethereum throughput while maintaining the high-security level of L1.

State Channels, Sidechains, Plasma, and Rollups, are the most popular L2 solutions.

How exactly does Layer 2 work?

A layer 2 blockchain is simply an additional blockchain that extends Ethereum. It regularly communicates with Ethereum (by submitting transaction bundles) to ensure similar security and decentralization guarantees. None of this necessitates changes to the layer 1 protocol (Ethereum). As a result, layer 1 can handle security, data availability, and decentralization, while layer 2s can handle scaling. Layer 2s relieves layer 1 of the transactional burden and return finalized proofs to layer 1. When this transaction load is removed from layer 1, the base layer becomes less congested, and everything becomes more scalable.

How Layer 2 Solutions are Performing after the Merge

The impact of Ethereum Merge on Layer 2 solutions varies from one project to the other. Let's take a cursory look at some L2 solutions to assess the effects of the Merge.

1. Polygon

Polygon is a layer-2 solution on the Ethereum network. The network's native token, Matic, is used for utility services such as gas charge payments, governance tools, and staking incentives.

From June to August 2022, polygon transactions and unique active wallets follow the same trend as Ethereum, driven primarily by pre-merge excitement and a flood of news. There was a sharp decrease in September compared to the previous month. Transactions are down 33%, and unique active wallets are down 17%.

Following the same trend as the previous indicators, Polygon's has been steadily declining, with a 28% ($1.33B) decrease this month compared to the previous one.

2. Ronin

As an Ethereum sidechain, Ronin is explicitly designed for use in the Axie ecosystem. It is developed for near-instant transactions and low costs, allowing millions of microtransactions within video games. The transaction count and unique active wallets on Ronin are on the same downward trend as Polygon and Ethereum, which have decreased by 51% and 54% since August 2022, respectively.

Ronin's TVL follows the same pattern, falling 15% ($58.44M) from the previous month. It is worth noting that it decreased by 30% ($46.28M) from September 12 to September 15 before increasing its current value.

3. Optimism

Optimism Layer-2 is a novel technique in which optimistic roll-ups combine multiple crypto transactions into a single transaction and then send that transaction to another blockchain for processing.

It then issues transaction receipts back to Ethereum using the data compression concept, lowering the cost of doing Ethereum transactions.

Even though the number of transactions and unique active wallets fell by 37% compared to the previous month, Optimism has been on the rise since the beginning of 2022. However, it increased by 194% in transaction count and 275% in unique active wallets starting in January 2022. During this crypto winter, it has been one of the best-performing protocols. This rise was fueled by the belief that the Merge will benefit Optimism due to Ethereum's "Rollup-Centric Roadmap." The roadmap transforms its main chain into a settlement and data availability layer and delegates scalability to layer-2 roll-ups via "danksharding."

Following the hype of July and August, the TVL decreased by only 2% ($884.6M) in September, making it one of the best-performing protocols.

4. Arbitrum

Arbitrum, like Optimism, is another protocol that is doing well in this market downturn. When we look at the transaction count, we can see that it has been rising since the beginning of the year, increasing 54.7% from August to September.

Arbitrum's TVL does not follow the same trend as the transaction count, but a new and smaller ascending trend was formed in early August 2022. In September, the TVL increased by 2% ($979M) over the previous month.

5. Metis

The Metis TVL rose 42.7% in August from $39.59 million to $56.53 million. This rise corresponded to the pre-merge expectation. Following its increase in August, the TVL fell 9.7% ($51.01M) in September but was still up 29% from the beginning of August.

Sharding, scalability, and Layer 2 Solutions

Scalability is one of the goals of ongoing Ethereum upgrades, and it is expected to be achieved in the final phase in 2023 with the introduction of shard chains. Scalability refers to a network's ability to expand while maintaining transaction speed, efficiency, and output. Most networks struggle to achieve scalability and decentralization without sacrificing security. This may explain why Eth 2.0 is done in phases and why scalability through the shard chain is reserved for the final phase. Sharding is the process of breaking up blockchain transactions into more manageable sets of data, allowing more transactions to take place without causing congestion. By extending the network to 64 blockchains, shard chains increase transaction speed. To ensure network security, the Merge will make the unified blockchain randomly assign stakers to validate shard chains, making it difficult for conspiring to take over a shard. Ethereum has stated that it will enable layer 2 solutions to offer low transaction fees while leveraging the security of Ethereum. Hence, Ethereum still believes that layer2 solutions will still be in the game.

Conclusion

The Ethereum Merge has had a varying degree of impact on the Layer 2 solutions. Similarly, the pre-Merge anticipation and post-Merge effects have not been the same. The growth of the GameFi and NFTs, despite the general market downturn, will amount to more demand on the Ethereum network. The Layer 2 solutions are still very significant to high gas fees and clogging the network. While the network is continually optimized towards the next milestone of sharding and better scalability, the Layer 2 solutions must remain efficient for a seamless user experience.

Author: Gate.io Observer: M. Olatunji

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* This article represents only the views of the observers and does not constitute any investment suggestions.

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