Rising Ethereum Layer 2 Usage Raises Fragmentation Concerns

Ethereum Layer 2 (L2) metrics have surged throughout 2024, with transactions per second (TPS) and total value locked (TVL) increasing steadily over the last 6 months. However, new Layer 2s are being announced regularly, and some analysts are worried about liquidity fragmentation issues.

The spike in Layer 2 usage converged with catalysts such as EIP- 4844 and the launch of Blast. Following its launch on February 29, Blast is now the 6th largest chain by TVL. Meanwhile, the implementation of EIP-4844 led to a large increase in transactions per block on other L2s.

Liquidity Fragmentation

DeFi Maestro, a strategist at Mantle, took to social media and posted, “Everyone is launching their own chain. Monitoring developments in the DeFi space pretty closely as the problem of liquidity fragmentation and user attention becomes more severe.”

Liquidity fragmentation is a concept in DeFi in which active liquidity is thinly spread across a variety of chains and protocols. Due to a low concentration of volume, this can lead to market and protocol inefficiencies.

This comes on the back of Aave unveiling its vision for Aave Network, a native Layer 2 solution for Aave Protocol and its GHO stablecoin.

Layer 2s Effect on Ethereum

Despite the increased usage of Layer 2 solutions, ETH has been inflationary over the last 30 days. Ether’s supply is currently increasing at a rate of 0.51% per year, which would lead to a 612,000 ETH surplus on an annualized basis.

In their current form, Ethereum L2s collect transactional value due to their high usage while inheriting the security of ETH mainnet. However, the amount of total ETH burned remains significantly lower than if similar activity were to take place on mainnet.