Cryptocurrency is growing at an exponential rate. Every day, it seems like something new is coming out. It sometimes seems almost impossible to keep up.
One of the newest topics people on the cryptocurrency platforms have been talking about is L2 tokens. Even if you’ve been keeping up with the world of decentralization, you might find yourself confused.
Thankfully, we are here to help. In this article, we are going to tell you about L2 tokens, including what they are, how they work, and what is expected of them in the future.
So keep reading to learn all of that and more.
What Is Layer 2?
Layer 2 is, as it sounds, a layer built on top of the original layer (Layer 1). Layer one is the original blockchain. In this case, it is Ethereum.
Ethereum is a very popular crypto blockchain. However, it has a large problem with its ability to handle transactions. At best, it can handle 14 transactions per second. With millions of people going on per day, this just isn’t enough.
Solutions were then found to help the platform handle its transactions. At some point, Ethereum 2.0 is supposed to come out. But until then, the transaction problem needs to be handled. The first trial was sidechains.
Sidechains were made as a separate blockchain that runs alongside the original. Most, if not all, platforms use sidechains, and they are a permanent way to fix the scaling problems that they all face. However, these sidechains operate differently than the original blockchain and have their own security.
This security is often much weaker than the original and makes it much more at risk of hacking. It also only provides a minimal boost for transactions.
Layer 2 is a newer solution, and it allows for a much faster transactional time while also keeping the safety that comes with the main blockchain. There are a few different types of layer two solutions, but the most popular and fastest are the Rollups.
There are 4 main Rollups that are being used right now. They are:
- ZkSync
- Arbitrum
- Optimistic
- StarkNet
Some of these can process up to 2000 transactions per second, which is a definite improvement from 14 per second.
With Ethereum 2.0 coming out at some point, it isn’t quite clear how Rollups will be affected. However, many experts believe they are here to stay, even when the new Ethereum upgrade comes around.
What Are L2 Tokens?
L2 stands for Layer 2. Layer 2 tokens are tokens made and used by the Rollup platforms listed above. Essentially, they would be like major blockchains or sidechains, where each has its own token.
Tokens allow for any holder of them to have governance over the platform these tokens control. They get to help run the system and make it more decentralized.
What Are The Benefits Of L2 Tokens?
Tokens allow the holders to have control of some of the governance of a platform. Without tokens, there can’t be decentralization.
Currently, these Layer 2 Rollups have centralized sequences and provers. These are the programs that determine how the data is sent back to the blockchain.
Recently, Arbitrum’s sequencer had a problem, and the whole platform had to shut down temporarily.
Having tokens allows for users to take control and have the power of governance. Since people will have the ability to govern, this means there will be no centralized sequencer that can shut down or that controls the whole system.
This is why tokens are important, and why many people believe they are necessary for the future of Rollups to continue.
When Are L2 Tokens Coming? Airdrops?
Rollup tokens are expected to arrive in late 2022 and sometime in 2023.
Below are the Big Four L2 token that have been recently announced or are expected to be announced soon. All of these prominent L2s are tokenless!
- Arbitrum: “Arbitrum,” is an optimistic rollup created by Offchain Labs. This L2 is EVM compatible, meaning it’s easy for DeFi and NFT projects to port over their code to the scaling solution.
- Optimism: A Layer 2 scaling solution that batches transactions on another blockchain, then feeds them back to Ethereum as a single transaction.
- StarkNet: A permissionless decentralized ZK-Rollup. Starknet operates as an L2 network over Ethereum, enabling any dApp to achieve unlimited scale for its computation and without compromising Ethereum’s composability and security.
- zkSync (confirmed): A rollup developed by Matter Labs. This L2 uses zero-knowledge cryptographic proofs to efficiently batch many transactions at once to the Ethereum mainnet. Incredibly, this model means zkSync becomes more inexpensive as more people and projects use the network.
It is anticipated people that are transacting and using these apps and bridges will receive airdrops. To take advantage of L2 token season get involved with the Big Four rollups as a user by doing the following:
- Transact on theseL2s
- Use L2 apps
- Using L2 bridges
- Build new L2 apps
What Barriers Are Holding Up L2 Tokens?
Currently, there are a few barriers that are holding L2 tokens up. These are pretty big problems, and it is why they are expected to take until at least the end of the year, if not longer.
The first main problem is the fact that transferring Fiat money to cryptocurrency is a pretty slow process. To implement L2 tokens, you need to be able to transfer from Fiat money to crypto faster and in a more streamlined process.
Also, transferring from one currency to another is a slow and costly process, so it is difficult to convince people to make transfers. A lot of the L2 tokens that are out right now cost almost the same amount as the gas they have to give up to get them. So if you are buying 2 dollars of an L2 token, the gas fees are usually around $1.80. This makes it not only costly to purchase tokens from L2 platforms, but also meaningless except for the fact that you get to have some governance on the platform.
This leads to another major issue. Governance can’t happen unless people start purchasing tokens. So when the cost isn’t worth it, there is a fear that the system won’t gain enough users and interest to become decentralized.
If a Rollup platform steps away from centralized sequences but has no one to support the decentralization process, the Rollup may face collapse.
Which Rollups Will Be Implementing L2 Tokens?
Layer 2s are primed and ready to launch their native tokens. They’ve found a product-market fit with a bustling application layer. They all have investors with a cap table who will want liquidity. The Ethereum Merge will drive a wave of new demand for ETH. The launch of L2 native tokens will fuel a flurry of activity as users and investors look to scoop up ownership in these ecosystems, generating more transaction revenue for Ethereum.
Currently, the only major Rollup that has publicly announced that it will be creating and using L2 tokens is ZkSync. StarkNet and Arbitrum have not announced anything about their plans on L2 tokens and are likely waiting to see how public options and ZkSync’s tokens do first before proceeding.
On the other hand, Optimistic has publicly denounced using L2 tokens. However, many experts seem to think that at the end of it, Optimistic may have no choice but to join in.
According to one expert, John Wang, ZkSync, then StarkNet, then Arbitrum, and finally Optimism is the likely order for who is going to be releasing their L2 tokens first. It makes a lot of sense why this may be, especially with ZkSync already announcing that they are making tokens, and Optimism outright denying it.
Why Should I Jump To Use L2 Tokens Now?
By purchasing L2 tokens while they are still relatively cheap, you gain the ability to have a lot of maximum governance of some good Rollups. While there aren’t any tokens out now, learning more about L2 tokens as well as how the system works can allow you to move in when they are first released and get a lot of control.
Even if they don’t turn out to be profitable, they are still beneficial to have, and are well worth the investment. Having control of a platform that is essentially in control of one of the main cryptocurrency platforms out there is no small matter, and is well worth an investment, no matter how much or little you can put into it.
The best way to get ready is to start using these L2 solutions and Rollups. Learn more about the four major Rollups. This includes using their apps, making new apps, using their bridges, and making transactions using their systems.
If you aren’t savvy on app development, even the other three steps can make a big difference in whether or not you are prepared when those tokens come out.
What Are The Downsides Of L2 Tokens?
There is a lot of debate on the downsides of L2 tokens. One of the biggest worries is whether or not these Rollup tokens are parasitic to Ethereum and Ethereum’s token, ETH.
Already, L1 tokens do not bring in a lot of value. The money that comes in from transaction fees goes mostly to gas and management costs. To take more money away from the platform that Rollups depends on does seem very parasitic.
One of the big worries with this is that it takes away revenue from those that mine ETH. This can cause the money that goes towards securing the platform to decrease, which makes it easier for someone to perform an attack on the main blockchain.
However, some people argue that there are plenty of other ways that Ethereum gains money and that the L2s taking the amount they are isn’t going to make much of a difference.
For example, while there are all of these new tokens being created on the L2 side, the L1 side still needs a lot of ETH. Moving things over from Layer 1 to Layer 2 requires gas fees and transaction fees. Furthermore, there are NFTs and pools. All of these will require ETH to run, and that doesn’t look to be going away anytime soon.
Will L2 Token Help Or Harm Ethereum?
Honestly, while we are waiting on Ethereum 2.0, everything is a little in the air. Experts can make assumptions and educated guesses, but there is no telling how everything will be affected by this new aspect of the Ethereum platform. Everything is still really new and there is not much of a past history to look at and gain an idea from.
However, many experts do think that Rollups are here to stay, even when the new Ethereum comes out. This makes the need for L2 tokens all the more necessary if we want to move more towards decentralization for Rollups.
Overall, it seems that L2 tokens will be more help than harm when it comes to Ethereum’s platform. Though some of their income might be taken away, it shouldn’t be enough to harm their overall growth.
There may be some worrisome areas, but nothing serious is expected. It doesn’t help that this is the only way that Layer 2 solutions can keep growing.
We’ve talked about how Layer 2 solutions are necessary to keep Ethereum up and running. To sacrifice a bit of income or profit to keep the Rollups that make a huge difference in their transaction speed seems well worth it. Otherwise, Ethereum would be back to looking at only 14 transactions per second and easily fall to one of the slowest major platforms available.
Final Thoughts
L2 tokens are still a thing of the future. They have a lot of work until they are ready and able to be used on their platforms, but they are growing quickly enough that it is a prime time to start doing more research about L2 solutions and tokens to get a better idea of what to expect so you are ready when they do roll out.
There is a lot of uncertainty about how the future of Rollups and all L2 solutions will turn out. There is no guarantee that L2 tokens will be as beneficial as many experts say they will.
But with high risk comes a high reward. By purchasing tokens while they are cheap, you can buy a lot more and have a major stake in the system. Who knows, L2 tokens might even be worth a lot of money later, making the initial cost doubly worth it.
However, people say that Rollups may just be the future of Ethereum, so having the ability and power to govern them a little can be a very powerful tool to have on your side.
John S. Logan has been working with cryptocurrency for nearly as long as it has been available on the market. With a professional background in the finance industry, he believes that blockchain technology, cryptocurrency, and decentralized finance play an important role in the future of the world.
