In the past few years, Ethereum has made significant progress on its roadmap, completing the transition from Proof of Work (PoW) to Proof of Stake (PoS), known as “The Merge”. Recently, the “Dencun” upgrade was carried out, including proto-danksharding, making Layer 2 transactions cheaper.
Before Dencun, the transaction fees on Layer 2 were around $0.50, but now most Layer 2 chain transactions cost only a few cents. This change greatly promotes the expansion of new applications on Ethereum.
Since the Dencun upgrade, the daily transaction volume of Arbitrum and Base has exceeded that of the Ethereum mainnet, and this trend remains unchanged. Although there is still much work to be done for Ethereum’s scalability, this is an important step in the right direction, with infrastructure significantly improved since the previous cycle. In recent months, activity and transaction volume on Arbitrum and Base chains have increased, possibly just the tip of the iceberg for the upcoming cycle.
Layer 3 Expansion
The initial versions of Ethereum rollups were Optimism and Arbitrum, both optimistic rollups. Currently, there are more and more Layer 2 optimistic and zero-knowledge rollups, most of which are classified as general purpose. The choice of running or building applications on a particular rollup depends on the required feature set and security requirements. For example, applications like Uniswap can run on a general-purpose Layer 2 (such as Arbitrum One). However, if you are a crypto game or NFT project, or another application that requires higher throughput or extremely low transaction fees (such as $0.0001), you may need a different solution. This is where Layer 3 comes in.
Examples of Layer 3 frameworks include Arbitrum Orbit and zkSync Hyperchains. Although Layer 3 is still in its early stages, it can be expected to undergo some changes and improvements in the future. The overall idea of Layer 3 is to further expand Ethereum by creating highly customizable, cheap, fast, and interoperable chains with varying degrees of security and decentralization.
Degen Chain (DEGEN)
Degen Chain is an emerging innovative blockchain launched in January 2024, quickly gaining attention with a fully diluted valuation (FDV) exceeding $20 billion within three months of its launch.
Degen Chain was initially launched on Farcaster’s Degen channel, a new social app that allows users to “tip” quality content. Degen is built on Arbitrum Orbit, settles to Base, and uses AnyTrust for data availability (DA). The initial hype around the chain led to a surge in total value locked (TVL), but then stabilized, with the price of DEGEN adjusting accordingly.
Sanko (DMT)
Another interesting Layer 3 application is Sanko, another chain built on Arbitrum Orbit, settling to Arbitrum L2, and using AnyTrust for data availability. Sanko focuses mainly on NFTs and gaming, leveraging Layer 3 for low costs and high throughput. The native token of Sanko, DMT, performed well in 2024.
Dream Machine is an interesting application of Sanko L3, which combines social and gaming on a single platform.
Sanko.TV combines gaming and streaming entertainment, allowing users to purchase passes for their favorite streamers and access private chat rooms, similar to Friend.tech.
Sanko showcases the customizability of Layer 3 chains, demonstrating its potential. The rise in DMT price indicates continued interest in the content built by Sanko, and the innovative nature of combining gaming and social aspects is a compelling value proposition. With social apps gaining momentum, Sanko is undoubtedly a project worth watching.
The Future of Layer 3
Layer 2 mainnets have been live for several years and have made significant progress in scaling Ethereum. While the scalability roadmap continues to advance, highly customizable Layer 3 seems to be the logical next step. Many projects are already experimenting on Layer 3 and making varying degrees of progress.
However, an interesting use case and a brief hype period do not necessarily mean a good investment. In the two examples discussed (DEGEN and DMT), the native tokens experienced significant fluctuations, and these chains are far from being proven. Nevertheless, with Layer 2 already expanded and transaction fees only requiring a few cents, opportunities and use cases have significantly increased. It is important to track trends in application types brought about by increased throughput and customizability, as Layer 3 will undoubtedly bring some interesting investment opportunities.