In 2023, Ethereum witnessed a significant shift in activity as it moved towards Layer 2 solutions (L2s), marking a transformative year for the blockchain network as highlighted by IntoTheBlock. Ethereum, long plagued by scalability issues resulting in high transaction fees and network congestion, found a solution in L2s, which offered a remedy to these challenges.

By May 2022, the average transaction fee on Ethereum’s Layer 1 (L1) network had soared to $196, a stark contrast to the $2 average just two years earlier. This surge in fees had made using Ethereum prohibitively expensive, and it hindered transaction processing speed compared to rival networks like Solana.

The emergence of Layer 2 solutions addressed these problems by processing transactions separately and consolidating them before transmitting a compressed version to the Ethereum main network for settlement. Ethereum’s transition from proof-of-work (PoW) to proof-of-stake (PoS) consensus mechanism, known as the Merge, in September 2022 further fueled demand for the network.

The year 2023 started with a remarkable surge in demand for L2 scaling solutions, with monthly gas fees spent by these protocols for settling activity on the Ethereum base layer increasing by a staggering 138% between February and March. In February, these protocols spent 106.56 billion GWEI, which more than doubled to 253.91 billion GWEI by the end of March.

This surge in L2 activity in March was primarily driven by the anticipation of Arbitrum’s ARB token airdrop, which attracted new entrants to the ecosystem seeking to become eligible for the airdrop. On March 23, Arbitrum completed the airdrop, resulting in a record 2.73 million daily transactions on the L2, marking the year’s highest single-day transaction count.

Despite a decline in the prices of many cryptocurrencies in the first half of the year, gas fees in the L2 sector continued to rise, indicating not only increased user engagement but also consistent retention. Monthly gas fees for settling L2 activity on the Ethereum mainnet between March and September climbed to 527 billion GWEI, a 108% increase.

The launch of Base, Coinbase’s scaling solution on Ethereum, in August brought a new wave of users into the L2 ecosystem, surpassing the activity of existing protocols like Arbitrum and Optimism. The L2 network recorded an average of approximately 888,000 daily active addresses during this period.

Base’s decentralized social app friend.tech, launched in August, allowed users to buy and sell tokenized shares of crypto-personalities. The app’s popularity surged, with monthly active addresses exceeding 350,000 by September, accompanied by record-high transaction fees and revenue.

Towards the end of the year, Optimism experienced a 40% growth in daily transaction count, despite a 24% drop in the number of unique addresses completing transactions on the platform. Both Optimism and Arbitrum witnessed growth in Total Value Locked (TVL) in the DeFi sector in the last three months of 2023.

Optimism’s TVL appreciated by 36%, reaching $897 million, while Arbitrum’s TVL surged by 39% to $1.2 billion. As a result of increased user activity in December, network fees and revenue on both L2 protocols also saw growth.

With 2023 coming to a close amid a general market uptrend, there is considerable optimism surrounding Layer 2 solutions. The year ahead, 2024, holds the promise of building upon the successes and innovations of the past year, as Ethereum’s L2 ecosystem continues to evolve and mature.