Over the past few years, it's become clear that Ethereum(ETH -0.63%) has experienced significant growth. But as a result of becoming one of the most popular blockchains in the world, its network has become plagued by slow transaction speeds and costly fees. This extreme congestion has created demand for effective Layer 2 scaling solutions.
Layer 2 scaling solutions are built on top of the Ethereum blockchain to enable faster and cheaper transactions while maintaining the blockchain's decentralization and security features.
There are currently a handful of Layer 2 scaling solutions that aim to solve Ethereum's issues. But the three front-runners today -- and also those with the most long-term potential -- are Arbitrum (CRYPTO:ARB), Optimism (OP), and Polygon (MATIC -0.38%).
Each of these solutions operates a little differently, and as such have their own pros and cons. Let's see what sets these competitors apart and might be deserving of your hard-earned money.
To start, it should be clarified that all these Layer 2 solutions try to accomplish the same thing: Make Ethereum faster and cheaper. For the most part, they all use similar processes but differ slightly in how they actually scale up Ethereum.
These differences can be highly technical and are likely better saved for a conversation another day, but the key factor to understand is that all of these solutions present trade-offs depending on what they prioritize.
For example, Arbitrum and Optimism both use rollups, which combine groups of transactions into a single transaction. But Arbitrum does it in a way that is slightly slower, yet dramatically cheaper than Optimism. When looking at Polygon, its method of using a sidechain to process transactions makes it less decentralized than Optimism or Arbitrum.
However, Arbitrum and Polygon have robust compatibility with Ethereum, making them great options for developers wanting to create decentralized apps.
Each solution comes with its own benefits and drawbacks, but to truly understand which ones are in the most demand, we can look at some statistics.
To quantify each solution, it can be helpful to compare simple metrics such as speed and transaction costs since these are essentially the two reasons there is demand for a Layer 2 solution.
Polygon is able to process as many as 65,000 transactions per second, while maintaining low fees that typically range between $0.1 to $0.5 depending on the transaction size. Arbitrum allows for 40,000 transactions per second, with fees ranging from $0.5 to $0.7. Optimism has the capacity to process up to 2,000 transactions per second, and fees are slightly higher compared to Arbitrum and Polygon, ranging from $0.6 to $0.9.
Other statistics -- such as the number of wallets, number of transactions, and total value locked -- can also help paint a clearer picture of the layer 2 landscape.
When it comes to the number of wallets and the number of transactions, the race really isn't even close. Polygon simply dominates. While Optimism lags behind Arbitrum and Polygon significantly, Arbitrum is gaining some ground on Polygon thanks to its newly released token that came out this March.
The other metric to consider is total value locked (TVL). You could think of this as a way to measure the value each solution supports in decentralized applications. The greater the TVL, the more valuable the solution. Surprisingly, Arbitrum has the highest TVL among these three, coming in at around $2.2 billion. Polygon follows at $1.1 billion, and Optimism is third at $920 million.
Considering this combination of statistics, it's clear that Polygon and Arbitrum are providing developers and users with a valuable solution. Both have proven usage, which is reflected in multiple sets of statistics.
An investment in both could be plausible, but if there is one Layer 2 solution deserving of your money, it is likely Polygon. It has a friendly developer environment, verifiable usage, and the best part: a plethora of partnerships with some of the world's most recognizable brands.
In the past year or so, companies including JPMorgan Chase, Starbucks, Disney, Nike, and Meta Platforms have all used Polygon in different ways to facilitate new blockchain-based business models.
With its price still down 62% from its all-time high, Polygon looks to have significant long-term potential, exactly the kind investors should be looking for.
If there is one downside to Polygon, it would be its higher levels of centralization. If decentralization is a priority, then Arbitrum seems to be the best choice. But with its new token just a few weeks old, I would personally like to see Arbitrum build more of a track record.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. RJ Fulton has positions in Ethereum and Polygon. The Motley Fool has positions in and recommends Ethereum, JPMorgan Chase, Meta Platforms, Nike, Polygon, Starbucks, and Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney, long January 2025 $47.50 calls on Nike, short April 2023 $100 calls on Starbucks, and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.
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Ethereum's Scaling Race: Which Layer 2 Crypto Is the Best Buy ... - The Motley Fool
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