- According to a Gemini expert, the proliferation of Layer 2 solutions on Ethereum is causing a greater dispersion of liquidity around the network.
According to multiple observers, the spread of Layer 2 solutions on Ethereum ETH +1.13% is fracturing liquidity throughout the network.
The Ethereum network’s array of Layer 2 solutions, which includes Arbitrum, Polygon, and Optimism, is a component of a wider array of approaches meant to tackle scaling problems.
According to Patrick Liou, Gemini Principal of Institutional Sales, “there is a growing argument that the proliferation of Layer 2 blockchains created in response to Ethereum network scalability problems is resulting in a dispersion of liquidity throughout the blockchain, impairing the functionality and uptake of a blockchain or its applications.”
A new Ethereum Layer 2 appears every 19 days, according to a recent Gemini institutional insights study, which heightens worries that liquidity—the availability of assets for trading—is fragmenting.
Although Liou noted that transferring liquidity between blockchains is not always simple, she also emphasized that improvements in bridge applications are making this process more smooth, which may permit liquidity to move more freely.
Design of Layer 2 modules impacting liquidity
The similar issue was raised in a March CoinShares research blog post, which claimed that Ethereum Layer 2 roll-ups have inadvertently fragmented liquidity and composability, therefore negatively impacting the entire application, developer, and user experience.
Every Ethereum Layer 2 has its own asynchronous asset ledgers and smart contracts, and each one centrally processes and organizes transactions in blocks, according to the CoinShares study paper. The research also stated that this modular design causes a fragmented global state, which has a detrimental impact on liquidity.
Layer 2 solutions, with their asynchronous sequencing and zero-sum proprietary technology stacks, aggravate fragmentation and present serious obstacles to liquidity, interoperability, and social coordination, according to CoinShares analyst Max Shannon’s analysis.
The Ethereum market will not be significantly impacted in the long run.
Liou did point out that similar worries about liquidity fragmentation have previously existed, though they had no bearing on the Ethereum market’s long-term growth.
For instance, he argued that the Ethereum network’s congestion in 2020–21 resulted in exorbitant gas fees, which in the end pushed the development of Layer 2s but had no effect on the market’s long-term expansion.
Liou continued, “There is a massive surplus of blockspace due to the existence of so many Layer 2s, many of which offer new and interesting use cases and benefits.”
In the end, this is providing developers with the chance to produce cutting-edge consumer applications, which will stimulate market growth in the future.
Disclaimer : This article was created for informational purposes only and should not be taken as investment advice. An asset’s past performance does not predict its future returns. Before making an investment, please conduct your own research, as digital assets like cryptocurrencies are highly risky and volatile financial instruments.
