DeFi on Ethereum L2 Networks Sees Significant Growth

DeFi on Ethereum

Total value locked (TVL) in decentralized finance (DeFi) platforms built on Layer-2 networks for Ethereum (ETH) rose by a massive 964% in the first quarter compared to the same quarter last year; even as average transaction fees on Ethereum’s base layer fell by 80%.

The data about the surprising growth in TVL on Layer-2 platforms was shared in a quarterly State of Ethereum report from the crypto educational resource Bankless; stating that the amount increased by 964% from USD 686.9m as of the end of Q1 2021 to USD 7.3bn at the end of Q1 2022.

The figure includes the total value locked across all Ethereum Layer-2 scaling solutions; including optimistic rollups, zero-knowledge rollups, and validiums, the report said. It added that in all, more than USD 23bn in digital assets; including USD 4.2bn worth of ETH, have been bridged from Ethereum to Layer-2 networks and other Layer-1 blockchains.

Growth in TVL on Ethereum L2 networks:

DeFi on Ethereum L2 Networks Sees Significant Growth, Even as Ethereum Fee Level Falls

The large growth seen in the use of Layer-2 networks is perhaps surprising given the fall that has been seen in transaction fees on Ethereum over the same period. Ethereum for a long time completely dominated the space of blockchains for DeFi protocols; but has recently seen more usage shift to Layer-2 chains like Polygon (MATIC) and Arbitrum.

A Layer-2 network is a separate blockchain built on top of a blockchain (Layer-1); typically used by users who require faster and cheaper transactions. In addition to Ethereum-based networks; other networks such as Solana (SOL), Avalanche (AVAX); and BNB Chain (BNB) are also increasingly favored by DeFi users.

The fees, which have long been high and served as the primary reason why users migrated to Layer-2 networks and other blockchains; are now down at an average of USD 2.98, the report said.

That compares to an average transaction fee of USD 14.93 as of the end of Q1 last year – a reduction of 80% over the course of a year.

Despite the drop in the average transaction fee paid, the total amount paid by users for transacting on the network – known as the network revenue – continued to rise year-over-year.

According to the report, network revenue increased 46% from the first quarter of last year; from USD 1.6bn to USD 2.4bn. Out of this, USD 2.48bn – or 87% – was removed from the circulating supply of ETH through the burning mechanism that was introduced with EIP-1559, the report said.

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