Ethereum Layer-two Tokens Tank as TVL Drops to 7 Month Low

Key Insights:

• Layer-two total value locked has dumped 40% in less than two months.
• L2 network tokens have also suffered significant selloffs as the bear market deepens.
• The Ethereum Merge will not reduce gas fees, so there will still be demand for L2 networks when markets recover.

Native tokens for many layer-two projects have tanked to long-term lows as the bears eat away at cryptocurrency market capitalization.

Additionally, total value locked (TVL) across layer-two platforms has dropped to a seven-month low as capital and collateral exit the space.

Crypto Venture Advisor at Presight Capital, Patrick Hansen, pointed out that L2 TVL was at its lowest level this year.

Since the beginning of 2022, TVL across L2 networks has dropped 22.5%. However, since its all-time high of $7.4 billion in early April, the figure has fallen 40%, according to L2beat.

Ethereum L2s currently have a hard time living up to the high expectations – remember the L222 meme?

The reality is L2 TVL is at its lowest this year, in spite of massive liquidity incentives & token farming efforts. pic.twitter.com/YQkxIfL5Ko

— Patrick Hansen (@paddi_hansen) May 29, 2022

L2 Tokens Tanking

Layer-two networks are used to scale Ethereum for faster and cheaper transactions. They employ a range of technologies such as ‘rollups’ to process some data off the primary blockchain enabling transactions to move quickly and for a lower cost in gas.

L2s surged in popularity this year as Ethereum (ETH) demand skyrocketed with new nonfungible token (NFT) mints and other network activities. Users flocked to L2 platforms such as Arbitrum and Optimism to carry out Ethereum-based transfers on layer-two.

However, the crypto exodus that has accelerated through May has resulted in $1.4 billion withdrawn from L2s since the beginning of the month.

Many of the more extensive L2 networks have their own native tokens, and these too have suffered heavy losses. Decentralized derivatives exchange dYdX, which is the second most popular L2 platform according to L2beat, has seen its token value plummet by 55% over the past month. As a result, the DYDX token is currently trading a painful 93% down from its September all-time high

Loopring is another popular L2 exchange that has seen its LRC token plunge by 35% over the past month despite some prominent partnership announcements such as GameStop [GME]. LRC prices are currently down more than 86% from their November all-time high.

Polygon is another popular L2 network, but it has also seen TVL and token prices tank. The platform’s MATIC token has lost 45% over the past 30 days, and it is down 79% from its December all-time high.

The Merge Effect

Some rumors circulating on crypto social media suggest that the upcoming Ethereum Merge could have a negative impact on layer-two networks. The Merge, which has now been slated for August, will usher in proof-of-stake consensus and end proof-of-work Ethereum mining.

It will not significantly reduce transaction fees as that will only happen with scaling upgrades further down the line. Therefore, there will still be a strong demand for L2 networks when Ethereum demand increases again.

With that in mind, there could be a few bargains from the basket of lower-priced layer-two network tokens during this bear market.