The moat and value of Ethereum Layer 2 scaling

Ethereum's mainnet focuses on security and decentralization, so it has delegated the task of performance scaling to layer 2 solutions.

After this development approach was established, Ethereum's layer 2 solutions began to flourish. In the early days, there was a certain technical barrier to the development of layer 2 solutions, but later both OP Rollup and ZK Rollup teams released mature development kits, which made the development threshold for layer 2 solutions increasingly lower.

According to the latest data from l2beat.com, there are now dozens of layer 2 solutions in the Ethereum ecosystem. Moreover, new layer 2 solutions continue to emerge one after another.

How is the ecological progress on these layer 2 solutions?

For a long time in the early days, Arbitrum's TVL consistently ranked first in the layer 2 ecosystem. Last year, with the rise of the AI agent track, Base's TVL began to catch up and surpass Arbitrum. Now, with the significant drop in AI agent token prices, Arbitrum's TVL has once again returned to the top position.

The constant changes in TVL rankings indicate that, for now, no project in this track has been able to gain a significant advantage. Everyone is continuously competing to attract limited ecological projects.

With the technical barriers of layer 2 solutions becoming lower and the TVL rankings subject to change at any time, one cannot help but wonder whether there are any moats between layer 2 solutions. Is there any service or value that one layer 2 solution can provide that others cannot?

In the beginning, I was quite optimistic about ZK-based layer 2 solutions because, theoretically, they could offer better security. However, the developments over the years suggest that this characteristic does not seem to have clearly distinguished ZK systems from OP systems.

I wonder if this is because, whether ZK or OP, Ethereum ultimately provides security guarantees, so the advantage of ZK in terms of security is not that pressing? Additionally, many projects in the crypto ecosystem that currently have high security requirements have originally operated on the mainnet, and even if some are on layer 2, their importance is not that obvious?

Moreover, many early layer 2 solutions were competing on who had lower fees and faster transaction speeds.

But can this really be considered a barrier?

Since security can be guaranteed by Ethereum, to reduce costs and increase speed, in the most extreme cases, layer 2 solutions could even operate in a completely centralized manner to minimize costs and maximize speed.

Even without such extreme measures, with continuous technological advancements, it seems difficult to form a barrier. For example, recently Base claimed it could improve transaction efficiency to under 200 ms. Another example is the recently popular MegaETH, which claimed it could increase transaction speeds to the million-level.

If these factors make it difficult to create differentiation among layer 2 solutions, what can?

I think Tencent's approach to establishing ecological interconnections might be a path, and Base's efforts over the past two years seem to be focused on building connections between ecological projects.

A noteworthy phenomenon is that in recent years, some well-known projects or trendy tokens on Base were initiated in certain ecological projects (like Farcaster) and then spread to other projects within the ecosystem. This has been the case from earlier meme coins to later three-layer expansions and most recently Clanker.

If this ecological interconnection can be established, perhaps Base can create its own differentiation in the competition among layer 2 solutions.

However, Base's biggest problem is that it lacks a token, making it impossible to empower the value of the ecosystem into a token, and even more difficult to pass on these benefits to others. This is akin to a company that is great but not publicly listed, leaving outsiders only able to watch.

But if this ecological interconnection cannot be established, how will differentiation in layer 2 solutions be manifested? If such differentiation cannot be realized, could layer 2 solutions themselves represent a business model that is very poor, making them not worth investing in?

As Duan Yongping wrote in his book: Certain industries (like the aviation industry) find it difficult to have good business models and establish differentiated competition, and those industries are simply not worth investing in. He would hardly even look at those industries.