In recent months, a significant number of alternative Layer 1 (alt-L1) blockchains have transitioned to Layer 2 (L2) solutions on Ethereum, even as some existing L2 projects revert back to the Ethereum mainnet. Ethereum’s Layer 1 is reaffirming its position as the leading platform for high-value decentralized finance (DeFi), boasting a total value locked (TVL) that is seven times greater than that of its closest competitor. Meanwhile, the L2 framework presents substantial cost savings and network advantages for alt-L1s looking to integrate into the Ethereum ecosystem.
### Celo’s Shift to Layer 2
Earlier this year, amidst a wave of skepticism regarding the L2 approach, Celo, a mobile payments platform, discreetly transitioned its validator network to operate as an L2. This strategic shift is projected to save the platform nearly $7 million annually in operational expenses.
### Ethereum’s Scaling Progress
In August, Ronin, a blockchain dedicated to gaming, announced its plan to return to Ethereum as an L2 by 2026, after having to leave the mainnet due to congestion issues that affected its popular game, Axie Infinity. Jeffrey “Jiho” Zirlin, co-founder of Sky Mavis, noted that Ethereum has made significant progress in its scaling efforts, demonstrating its potential to support high-demand applications.
The same month saw Synthetix, an original DeFi protocol that transitioned to the Optimism network in 2021, announce its decision to close its L2 operations and return to the Ethereum mainnet. The project aims to leverage the substantial liquidity that remains on the mainnet and is launching a new decentralized exchange (DEX) with exciting trading competitions featuring well-known influencers.
### Aave’s Strategic Adjustments
Following this trend, Aave revealed plans to reduce the number of its underperforming instances across multiple chains, including Avalanche and BNB Chain. Despite its extensive expansion over the past five years, a staggering 86% of Aave’s revenue continues to originate from Ethereum’s Layer 1.
In recent developments, Consensys founder Joe Lubin confirmed that the global banking consortium Swift is developing a crypto payment system on the Linea L2, while the Polkadot-based project Phala voted to transition to L2, citing a stronger environment for developer engagement, liquidity, and resources.
### Optimism Surrounding Ethereum’s Roadmap
This movement back to Ethereum underscores a growing confidence in the effectiveness of the scaling roadmap, particularly with credible plans to enhance the L1’s capacity through increased gas limits and zero-knowledge (ZK) technology. DeFi projects are now more inclined to invest in L1 development without the fear of network congestion hampering performance. Lead engineer Ben Celermajer from Synthetix expressed optimism about the commitment from both the Ethereum Foundation and developers to successfully scale the L1.
For projects with varying requirements, the L2 framework offers cost-efficient security and improved throughput, with an anticipated data capacity increase of up to eight times by 2026. However, not all projects are migrating towards L1; for instance, the fantasy sports NFT platform Sorare experienced a surge in volume after moving to Solana, while Circle and Stripe introduced competing L1s, Arc and Tempo, respectively.
### Future Expectations for Ethereum
Zirlin predicts that these new EVM-compatible stablecoin L1s will eventually transition to L2s, similar to Ronin’s journey. He believes that while they may initially seek flexibility on L1s, they will ultimately return to Ethereum’s ecosystem.
Ethereum’s ambitious goal of achieving 10,000 transactions per second (TPS) received a boost this week with the successful demonstration of 99.6% real-time ZK proving.
### Synthetix’s Successful Comeback
After spending time on the sidelines, Synthetix has begun to reap the benefits of rejoining the Ethereum mainnet, highlighted by a surge in performance earlier this week. The new Central Limit Order Book (CLOB) for its perpetual DEX aims to draw attention through a trading competition set to launch at the end of next month. The project has undergone significant transformations, initially focusing on stablecoins, then pivoting towards synthetic assets during the yield farming craze, and now reinventing itself as a DEX.
Despite its recent upswing, Synthetix remains approximately 90% below its all-time high. The previous year’s unwinding of its staking system affected its stablecoin, SUSD, but with the introduction of Synthetix v4, a fresh team has been assembled to revitalize the platform.
### Challenges Faced by Synthetix
The decision to move to Optimism in 2021 was driven by exorbitant gas fees on the mainnet, which exceeded $100 for simple transactions. Synthetix also explored options on Arbitrum and Base, and contemplated launching on other platforms. However, by mid-2022, it became evident that the project was struggling. Celermajer noted that liquidity on L2s tends to be transient, moving towards the most attractive incentives, and that larger investors remained hesitant to fully commit to L2s due to security concerns related to fund locking in bridges.
Despite Ethereum L1 representing 60% of the total TVL in crypto, the leading L2, Base, accounts for a mere 3.5%. Acknowledging the risks, Warwick explained that he never transferred more than a small portion of his holdings to Optimism, prioritizing security over potential gains.
### Improvements in Ethereum’s Layer 1
Many projects with lower transaction values have indeed migrated to L2s, alleviating congestion on L1. Celermajer noted that this L2-centric approach has enhanced L1’s overall performance. He highlighted improvements such as proof-of-stake and larger block sizes that have contributed to a more efficient network.
Average gas fees on the Ethereum mainnet have plummeted by 99% from previous highs. The upcoming Fusaka upgrade is expected to increase the L1 gas limit to 60 million gas units per block, with plans to expand this further in the future.
### Synthetix’s Future Plans on Mainnet
Although the projected throughput will not suffice for high-frequency centralized exchange (CEX) trading, Synthetix plans to implement an off-chain matching engine capable of handling 100,000 TPS. This approach positions the platform closer to a centralized model, which has been a point of contention among decentralization advocates.
Celermajer argues that true high-frequency trading cannot be effectively executed on a decentralized network due to inherent latency issues. However, he believes that the current market sentiment is more accepting of such trade-offs.
### Transitioning to an Optimistic Order Book
Warwick envisions a shift to an “Optimistic order book” model, which would essentially allow the application to function like its own rollup. This could involve processing transactions off-chain and then posting the results to the Ethereum network.
The possibility of using Trusted Execution Environments (TEEs) or ZK-proofs to verify off-chain transactions is still speculative but indicates a potential future where applications on the mainnet can scale independently.
### Aave’s Cautious Approach
Conversely, the lending and borrowing protocol Aave is adopting a more cautious strategy, scaling back its operations on various blockchains while maintaining a strong presence on Ethereum. Aave founder Marc Zeller recently articulated the need for a revised expansion strategy due to many unprofitable instances from its aggressive growth phase across multiple chains.
Despite some closures, Aave has integrated with various L2s, including OKX’s X Layer and Crypto.com’s Cronos Chain, recently launching on Plasma, where it quickly amassed a TVL of $6 billion.
### Ronin’s Return to Ethereum
Ronin, which migrated from Ethereum due to mainnet congestion in 2021, is now planning its return as an L2. This transition comes after the platform successfully scaled its game, Axie Infinity, to reach 2.8 million daily users during peak periods in 2022. Zirlin noted that Axie Infinity was a pioneer in achieving exponential growth through its migration to a scaling solution.
Ronin now supports 100 games and has a robust user base, with 350,000 daily active addresses. As the project prepares to relaunch on Ethereum as an Optimistic rollup in early 2026, the anticipated Fusaka upgrade will significantly enhance Ethereum’s capacity.
### Cost Savings of Layer 2 Transformation
The cost advantages of transitioning from L1 to L2 are substantial. According to Matthias Seidl, co-founder of GrowThePie, Celo experienced a dramatic 99.8% reduction in security costs by moving to L2, slashing its annual expenses from nearly $7 million to just a few thousand dollars.
Zirlin elaborated that managing an alt-L1 is complex and expensive, with significant funds previously allocated to staking rewards now redirected toward incentivizing developers and high-value users.
### Additional Advantages of Becoming an Ethereum Layer 2
Transitioning to L2 not only provides financial relief but also allows projects like Ronin to stay current with Ethereum’s latest enhancements and security features. Zirlin emphasized the collaborative opportunities arising from rejoining the Ethereum ecosystem, suggesting that their return has fostered new connections and partnerships within the community.
