Pantera: L2 is maturing, and the era of "dial-up internet" for blockchain has arrived

Original Title: Blockchain's "Dial-Up To Broadband" Moment

Original Authors: Franklin Bi, Jonathan Gieg, Nihal Maunder, Pantera Capital

Original Compilation: Deep Tide TechFlow

The "dial-up" era of blockchain has arrived.

The early internet was slow, cumbersome, and frequently malfunctioned. When broadband replaced dial-up connections, new activities and products emerged on the internet. The massive upgrade in bandwidth unleashed the full potential of the global information network. Today, a similar upgrade is happening on blockchain networks.

In the past two years, the Ethereum ecosystem has achieved approximately 10x scalability through L2 blockchains. L2 achieves higher speeds and lower costs by batch processing transactions and settling them on a separate blockchain, a scaling method known as "rollup chains."

The total transaction throughput of Ethereum's Layer 2 currently exceeds 140 TPS (transactions per second), compared to 14 TPS for Layer 1 (see chart).

Today, the leading L2 is Arbitrum. Since its launch in 2021, Arbitrum has led the L2 space across all key metrics, from transaction volume and developer activity to on-chain fee revenue. The design of the L2 protocol prioritizes compatibility with Ethereum. The experience for users and developers using Arbitrum is nearly identical to that on Ethereum, but cheaper and faster.

The result is a significant leap forward in Ethereum's scalability. In the past 30 days, the transaction volume processed by the Arbitrum network has been four times that of Ethereum. The 7-day transaction volume for L2 has increased by over 850%, from 18.6 million to 163 million. The "broadband moment" for blockchain networks has arrived.

Arbitrum, Launch Day

At the second Pantera Blockchain Summit in 2015, we invited a small group of industry friends to a lakeside cabin at Lake Tahoe. One of them was Princeton University professor Ed Felten. Dr. Felten is a distinguished computer scientist and technology policy advisor known for his pioneering work in cybersecurity and digital content protection. But it was his growing interest in Bitcoin that drew him to the West.

At that time, Ed was actively researching Bitcoin and often collaborated with other academics, including two postdoctoral researchers, Steven Goldfeder and Harry Kalodner. The three of them had been studying the security of Bitcoin wallets until they shifted their focus to the industry's most pressing question: how to scale blockchain for mass adoption. The key insight was an idea Ed had conceived a decade ago, which now defines a complete category of scaling solutions: "interactive fraud proofs."

In 2018, Steven, Harry, and Ed publicly shared a research paper titled: "Arbitrum: Scalable Private Smart Contracts." The proposal was concise and clear. However, implementing this important work would require greater effort, so we reunited with Ed, Steven, and Harry, who have since become co-founders of Offchain Labs.

When meeting with the founding team of Offchain Labs, we discovered that their strengths extended far beyond technical talent. They brought:

• A passion for building a better world with blockchain

• A steadfast commitment to open-source development and community

• A focus on creating the best developer experience for the flourishing of Web3 creativity

From that moment on, writing them the first check and ultimately leading their seed round at the end of 2018 became an easy decision, marking the beginning of the journey to scale Ethereum.

Arbitrum Ecosystem

Since its launch in 2021, Arbitrum has seemingly become the leading choice for Web3 projects and developers as an L2. Its early growth has largely stemmed from DeFi activity. Arbitrum ranks third in transaction volume among all blockchains, behind only Ethereum and Solana.

Today, the rapidly growing Arbitrum ecosystem includes:

• 500+ projects (more than any other L2)

• 1800+ monthly active developers (more than Solana)

• $16 billion in assets bridged from other chains (the highest among all L2s)

• $3 billion in DeFi deposits on Arbitrum (three times that of the closest L2)

Many established teams have expanded from Ethereum and other L2s to Arbitrum, achieving greater success than on any other chain. For example, the market-leading decentralized exchange Uniswap now processes the majority of its Layer 2 transaction volume on Arbitrum, despite initially being built on Optimism. The Uniswap instance on Arbitrum recently became the first instance on Layer 2 to reach $1 billion in daily transaction volume.

One of Arbitrum's most outstanding qualities is its native talent. From DeFi to gaming, Arbitrum-first teams have achieved impressive growth across multiple verticals. Here are some leading projects within the Arbitrum ecosystem:

Decentralized Finance:

• Robinhood: The investment platform announced integration of Arbitrum DEX for Robinhood Wallet users

• GMX: A decentralized perpetual exchange with a cumulative trading volume of $190 billion

• Camelot: A decentralized spot exchange with a cumulative trading volume of $12 billion and 900k users

• Radiant: A cross-chain lending protocol with a cumulative borrowing amount exceeding $120 million

Gaming:

• InfiniGods: A mobile-first Web3 game studio developing "King of Destiny," with over 25k global downloads

• Treasure: A decentralized game publishing platform; total market trading volume of $280 million; 150k players across 15+ games

• Hytopia: An open-world inspired by Minecraft; over 1.1 million players pre-registered

• XAI: Web3 gaming infrastructure; daily transaction volume of approximately 100k+, connecting over 600k wallets

Real-World Asset Tokenization:

• Kinto: A chain focused on financial services with KYC for users from 80+ countries

• Plume Network: A real-world asset tokenization protocol that has onboarded over 100 projects.

Art and Entertainment:

• AnimeChain: A decentralized IP ecosystem for anime; partnered with Azuki, one of the top three NFT projects

• ApeChain: A dedicated network established to support two of the top three NFT projects, Bored Apes and CryptoPunks

• RARI Chain: A creator-centric chain implementing NFT royalty enforcement

• Reddit: Previously selected Arbitrum for its community points program in the "Scaling Bake-off"

As Arbitrum continues to attract top teams and projects, we believe its ecosystem growth will further accelerate. The roadmap includes key developments to expand its developer base and attract new builders, including:

• Arbitrum Stylus: A custom programming environment for writing smart contracts in Rust, C, and C++, minimizing the need for Web3 developers to learn new languages (like Solidity)

• Arbitrum Bold: An improved, permissionless fraud-proof technology that can accelerate transaction processing

Arbitrum's journey from the cornerstone of DeFi to a thriving blockchain ecosystem reflects its technical strength and the rapid growth of its high-quality community.

Data Showcase

Active community engagement, top-tier developer experience, and technological breakthroughs have made Arbitrum a leading contender in the L2 space. The numbers support this.

Let's take a look at the fundamental metrics driving L2 adoption:

Total Value Locked ("TVL") measures the value of assets stored on the blockchain to support liquidity or lending activities. In L2 Rollup, 39% of the TVL is located in Arbitrum. Arbitrum holds $4 billion in its DeFi protocols, while the closest competitor, Blast, has locked $1.4 billion. This metric is significant as TVL serves as an indicator of trading activity, liquidity, and overall project health. A high TVL indicates strong user engagement and confidence in the platform.

Compared to other L2 scaling solutions, Arbitrum has consistently been the largest revenue generator. The fee-generating capacity of other chains can fluctuate, especially during anticipated token airdrops (like the current zkSync), while the organic activity of the Arbitrum community ensures predictable revenue regardless of external dynamics. Arbitrum achieves this by carving out niche markets like DeFi, where they have nurtured protocols like GMX and Uniswap, allowing them to cultivate a preferred chain for DEX exchanges and perpetual trading.

Looking ahead to its current dominance, we believe Arbitrum's ability to continue being Ethereum's preferred scaling solution stems from its focus on developer activity. As shown in the table above, Arbitrum has built the most attractive platform for developers looking to deploy decentralized applications. Users will ultimately gravitate towards the ecosystem where the best applications reside, and by doubling down on its developer community, we believe Arbitrum is ensuring its long-term sustainability.

We hosted a webinar with two experts in the field, whose projects are paving the way for blockchain's mass adoption.

Here are some key points from the discussion:

Steven Goldfeder, co-founder and CEO of Offchain Labs, stated: "The Arbitrum ecosystem places a strong emphasis on sustainability, which will be a differentiating factor in the long term compared to other projects. The system must run, must work, and must be self-sustaining. It cannot prioritize short-term growth through unsustainable mechanisms."

Eli Ben-Sasson, co-founder and CEO of StarkWare, remarked: "I prefer to call the technology we are building a 'network of integrity' rather than a 'blockchain,' as it truly emphasizes that it is a 'network,' much like the World Wide Web. But this technology also provides integrity, and integrity means doing the right thing even when no one is watching."