The Transition From L1 to L2

Why more and more projects will decide to launch on second layer solutions and sidechains natively

Hey DEFI TIMES community,

Layer two solutions and sidechains are where the cool kids play!

We cannot deny that this trend is very likely to continue. Ethereum will scale in the medium term by outsourcing computation to Optimism, Abitrum, and co.

This is not a trend that will vanish as soon as sharding ships - it will have lasting effects that will shape the Ethereum ecosystem for a long time to come.

That's why we could see some strange things happening soon.

People will prefer to use L2 solutions and sidechains. They will get used so quickly to the UX that L2s and sidechains will become the "standard execution layer."

Who even uses Ethereum anymore?

That's not bad at all. The Ethereum community wants that to happen!

Ethereum is ready for a rollup-centric roadmap!

Another essential transition is that apps are leaving Ethereum to build on scaling solutions.

In addition, completely new projects could decide to never even launch on Ethereum in the first place - wth?!

We could see a new wave of protocols launching natively on L2 - don't believe me? Read on!

This article is about why more and more projects will decide to natively launch on second layer solutions and sidechains - without touching the Ethereum blockchain even once!

Let's dive into it!

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The Transition From L1 to L2

New DeFi protocols could decide to natively launch on L2s without ever launching on the Ethereum base chain in the first place!

In fact, Ethereum's vision has always been to only become the settlement layer. On the other hand, L2s and sidechains will become the user layer.

Why should protocols launch on Ethereum when the users are somewhere else?

Sure we will see projects launching on Ethereum and L2s for some time to come. But in the long run… I don't see many reasons why they would continue to do so.

Another big advantage for projects to only launch on L2s is that they can focus on the important stuff: to attract more users without having to worry about scaling issues.

We are witnessing a transition from projects dealing with high gas fees to completely focusing on the product and marketing.

What's the Future of Ethereum?

As we've discussed many times in this newsletter, Ethereum will mainly focus on becoming the "settlement layer." That means that Ethereum's primary use case will be to provide security and data storage.

Everything that happens on second-layer solutions needs to be stored somewhere. Ethereum is secure and trustless, but it is not cheap - computation is expensive.

Even after ETH 2.0 has shipped and sharding went live, we can expect some shards to be more expensive than others. In my opinion, it's naive to think that ETH 2.0 will solve every problem we face today. There will be costly shards that most people cannot afford to use on an everyday basis.

That's the main reason why I think that Ethereum will only become the settlement layer of the decentralized financial system.

Computation (all the critical apps) will sit on top of rollups and second-layer solutions. Only the end result will ultimately be stored on Ethereum.

People won't natively transact on Ethereum - they will do so on rollups and sidechains!

That's where the future is heading, and this particular future is not bad news for Ethereum. It's the future we want and have been building for years:

  1. Protocols will natively launch on second layer solutions

  2. Users will natively transact on second layer solutions

  3. Ethereum will only be responsible for securing these L2s

Exchanges Will Need to Adapt

I know this is a bit theoretical, and we are far from being there. But we see the first signs of this future to play out. People are excited about Polygon because it's fast and cheap. Few people care about their favorite apps on Ethereum anymore. The hottest new projects are all launching on Polygon and plan to do so on rollups as well.

But what are the next steps?

I think that the UX of L2s will need to improve significantly. One crucial factor is that exchanges need to enable withdrawals directly to L2s.

New users will never have to take the detour of withdrawing to Ethereum. Imagine how user-friendly it will be when we can withdraw our funds directly from Coinbase or Kraken to Polygon.

No hurdles, no high depositing fees... but direct withdrawals.

This is what we need. Everyday users don't even have to understand Ethereum; they will never need to interact with Ethereum in the first place. But they will use it indirectly (without even knowing) for data storage.

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DISCLAIMER: All information presented above is meant for informational purposes only and should not be treated as financial, legal, or tax advice. This article's content solely reflects the opinion of the writer, who is not a financial advisor.

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