TLDR📃

• Hey, wake up! It’s been a quiet week in the L2 ecosystem, but a competitive battle is brewing between zkSync and Polygon’s zkEVM.
• zkSync is growing quickly, due mainly to a couple of successful projects. It reminds us of Arbitrum in 2021.
• zkEVM went live on March 27, and a handful of troublesome issues have already emerged.

Disclaimer: Not financial or investment advice. Any capital-related decisions you make are your responsibility and yours only.

Layer 2 overview 🔭

Layer 2 total value locked (TVL) decreased slightly this week. It’s down 1.29% for a total of $9.25B. This could be the beginning of a decline, but we think it’s just recent growth cooling down a bit.

The week’s biggest TVL winners are Velocore and Convex Finance.

Velocore is a Solidly fork cloned from the Velodrome code base. It’s the fastest-growing project on zkSync this week, boosting TVL by 24% (from $14.59M up to $18.19M).

Convex Finance has seen TVL climb 19.48% from $49.12M to $58.69M. This is most likely due to last week’s Arbitrum airdrop. The increase in TVL happened at about the same time Convex Finance received $1.2M of ARB. 

Key developments🗝️

LayerZero Is now live on zkSync Era mainnet: LayerZero has launched on the zkSync Era mainnet, providing messaging capabilities that allow developers to build on zkSync and expand their apps to more than 30 chains.

Arbitrum partners with AltLayer in layer 3 push:  AltLayer plans to add support for Arbitrum Orbit on its launchpad platform by Q3. This is intended to allow anyone to create a customised Layer 3 on Arbitrum in just five minutes  –  even, AltLayer says if they lack coding experience.

Lens Protocol launches scaling solution: The Lens Protocol team has launched a beta version of Momoka, a scaling solution for their blockchain-based social media project. The new solution aims to handle an increased volume of transactions for users of Lens-based decentralised apps.

zkEVM is facing challenges 😣

Polygon's zkEVM went live on March 27, but it has stalled due to competition from zkSync Era. As of now, the network has attracted only $5 million in TVL.

Polygon’s Polygon Bridge is intended to boost zkEVM usage and level the playing field. It has significantly enhanced the user experience for bridging assets onto the network. But users can still expect withdrawals from the Ethernet mainnet to take 30 to 60 minutes.

Introducing Polygon Bridge to Polygon #zkEVM

👉🏽 Better Bridge 👉🏽 ‍Fast Finality 👉🏽 Asset Support 👉🏽 No Mapping Required

More: https://t.co/1P8dglhLcL pic.twitter.com/clypNXSYQq

— Polygon (@0xPolygon) April 26, 2023

Another challenge: Polygon’s initial sidechain isn’t a layer 2 solution. It’s more centralised and it’s capable of offering fees of less than $0.01. On the other hand, zkEVM has relatively high fees.

zkEVM is in a tough spot right now. The existing user base is unhappy with the network's high fees, which are the result of low usage. Fees will decrease as more apps and users join the network  –  but they won’t join as long as the fees are so high. It’s a Catch-22.

Competition from zkSync is another challenge. zkSync doesn’t have a token yet, so it is attracting attention from airdrop hunters  –  and adding to the rapid growth of its user base.

To make zkEVM a winner, Polygon needs to incentivise users to join or make the network more convenient than the original network.

zkSync: Deja vu all over again. 🤔💭🔄

zkSync has experienced great success since its launch, with more than $250M in TVL already. In fact, the network's rapid growth feels like a replay of Arbitrum in 2021.

Arbitrum was a huge success in September 2021, remember? But it turned out there was a problem. Most of the projects on layer 2 were meme coins like ArbiNyan, which attracted lots of attention and money but were unsustainable. And then there were rug pulls, sneaky scams that tricked investors into parting with their cash

History may be repeating itself as zkSync finds itself in a similar situation. The highly anticipated decentralised exchange Merlin turned out to be a scam, stealing $1.8M from investors. SyncDex also defrauded investors, causing them to lose $383K. 

Auditor Certik says it is exploring a community compensation plan to cover the ~$2M of user funds lost in the Merlin DEX rug pull. Investigations indicate that the rogue developers are based in Europe and will work with law enforcement to track them down. But Certik still denies…

— Wu Blockchain (@WuBlockchain) April 27, 2023

Though some of the projects on zkSync are useful, there appears to be a lack of genuine innovation. The network has launched few native projects that are launching exclusively on the network and have not yet launched elsewhere.

This doesn’t mean you should refrain from using zkSync  –  especially given rumours of an airdrop for early users. But it appears that zkSync may require a year of development to fully mature  –  just as Arbitrum did in 2021.

Other news📰

• Optimism reveals decentralization plans: In February, engineers and core developers from the Optimism Collective's OP Labs gathered for the Keys in Mordor summit. Their goal was to chart a path for Optimism to decentralize essential components of the network's architecture.
• zkSync DEX Merlin exploited for over $1.8M: Rogue developers made off with millions in investor funds from DeFi project Merlin by exploiting a back door in the protocol’s code, sparking a debate about the role code audits play in DeFi security.
• Decentralized exchange Vertex launches on Arbitrum: Vertex offers high-speed spot and derivatives trading. The protocol has allocated 9.0% of the supply of its upcoming VRTX token to trading rewards, which will be granted to those who trade in the first six months.
• The governance proposal for activating Aave V3 on Metis is now live: A proposal for the activation of the Aave V3 Metis pool has finally been made live on Aave Governance. If the proposal is approved, Aave will be launched on the Metis L2 solution while receiving METIS incentives during the launch.

Cryptonary’s take🧠

It’s been a quiet week for L2s, with not much cash moving into the ecosystem due to a cooled-down market. 

zkSync’s growth is impressive, but it is important to remember that this network is still quite new. There are many scams on zkSync at present, and it seems real innovation has not yet arrived. 

So while you should certainly give the network a try, be aware that the network is in its infancy. Many of today’s successful projects on zkSync may not be remembered a year from now.

zkSync's hopeful competitor, Polygon zkEVM, is facing numerous challenges, and it has not yet been able to come close to zkSync's TVL. The Polygon team must address these challenges to make the network suitable for significant growth.