[Daily] Do you feel Optimism?

Good morning! Welcome to The Daily Moon. It’s a brand new week. There is an effort to build a time machine, no, really, and a DAO has been created to fund this effort. How much cash is needed? Indefinite. We’re off to a great start.

Moving on, today we talk about how Arbitrum and Optimism topped the charts, and what happened to the hackers?

The markets were cautious. Bitcoin was headed towards $23,000 but Ethereum slipped to $1,630 levels. Nasdaq rallied on the back of a subscription boost at Netflix. Back home, Sensex and Nifty ended lower after weak US economic data.

How Two L2s Beat ETH

Two newcomers beat Ethereum in its own game. Layer-2 (L2) solutions Arbitrum and Optimism overtook Ethereum in transaction volume. These L2s had a ~6% higher transaction volume than ETH. But this didn't happen overnight.

Since their mainnet launch in 2021, Arbitrum and Optimism were a favourite among developers. Decentralised apps on these L2 drove the growth. A “flippening” has already happened where L2s collectively process ~2.5X more transactions than Ethereum on an average.

The L2s have taken the spotlight from the L1. It’s a signal that developers are eager to experiment. In the world of dApps, the fastest network wins.

So, what exactly is L2?Before we get to the specifics, let us first understand what L1 and L2 are. L1 is layer 1 or the base blockchain. It is the underlying primary network. Some of the L1s include Bitcoin and Ethereum.

L2 is a blockchain that is built over an L1. Ethereum is a “rollup centric” blockchain wherein ETH is the main layer or L1 and the top layers are L2s.

You may wonder what’s the need for L2? Well, it’s for speed and scale. ETH supports ~14.26 transactions per second. If there are too many dApps on it, the network will crash. That’s where L2s come into the picture. L2s such as Arbitrum and Optimism offer:

• Lower fees: L2 are “rollups” meaning they bundle multiple transactions into a single transaction. This rolled-up transaction gets settled on L1 or the main layer.

• Scalability: Because of the rollup feature, more transactions can be processed per second. So, developers can focus on improving user experience.

Arbitrum and Optimism are the top two L2s by adoption. Arbitrum One is the name of the rollup by Arbitrum.

How did they do it?A mix of user-friendly features and affordable fees helped Arbitrum and Optimism to take the lead. As of January 20, Arbitrum had the highest TVL followed by Optimism. TVL is the total value locked or funds deposited in a DeFi protocol.

Source: L2Beat

Arbitrum and Optimism have an ~82% market share in the L2 ecosystem. Affordability is a big factor that’s brought dApps to these L2s. Users can save up to 100X in gas fees on L2 rollups.

For instance, the average transaction fee on ETH is ~$0.60. On the other hand, Arbitrum charges $0.11 and Optimism has a $0.12 fee for basic transactions. For smart contracts, the basic fee can rise up to $0.35. More the contracts, the higher the fee. And that’s really how these L2s made money.

ETH’s network revenue dropped ~94% to $267.8 million in the fourth quarter of 2022. Despite this slump, Arbitrum and Optimism together made $7.9 million in profits during the year.

What’s next?The L2s are onto the next phase of growth. Optimism, for instance, will initiate its Bedrock upgrade in the next few weeks. Bedrock will help reduce transaction costs and increase the network speed.

For Arbitrum, there’s buzz around resumption of its Odyssey event and a possible governance token release. Odyssey was a user engagement initiative where participants were airdropped NFTs for completing certain tasks on dApps.

Now that the community is hooked, these L2s ain’t giving up.

2022: It Was Safer

All we heard last year were massive hacks and the demands for ransom. But analysis indicates that the number of ransomware activities was down by a shade over 40% in 2022.

That doesn’t feel rightIt did feel like there were a larger number of hacks but that’s not true. Even the ransom paid to hackers to recover stolen data dropped. According to the report, victims paid $765.6 million in 2021 but in 2022 the number was down to $456 million.

What changed?Regulation. Governments have insisted that crypto companies employ stricter cybersecurity measures. However, the attacks aren’t down, just the ability to defend them has improved.

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Who are we? This newsletter’s ambition is to educate (and to entertain). The world of money is changing everyday and we want to help you decode what’s happening in the world of crypto, public markets in the US and India.