Examining Layer 2 Activity using Onchain Data

As we look ahead to how we can bring in the next billion users into crypto, one clear trend that we see ahead is a shift in on-chain activity flowing from Ethereum mainnet to layer 2 networks in the first half of this year. This was part of the motivation for Base, Coinbase’s L2 network, which aims to provide a secure, low cost, and developer friendly solution built on the OP stack. We will examine Base more closely post-mainnet.

To examine this shift in activity, for this blog post we decided to examine on-chain data from Ethereum mainnet, two major layer 2s (Abritrum and Optimism), and the two most used EVM layer 1 blockchains other than Ethereum (Polygon and BNB Chain). 

Active Addresses

We first examined the 10-day moving average of active addresses (which can serve as a very rough proxy for active users) for each network. Any address performing an interaction on chain has been considered an active address. Examples of interactions include sending tokens, calling a contract, or sending ETH. Although not a precise metric, this number can serve as a proxy of sorts for active users. We noticed that Arbitrum’s daily number surpassed its L2 rival, Optimism’s, increasing five-fold from the start of the year to ~250k daily active addresses today.

Active Addresses (10d MA)

Source: Coinbase Chainstorage

The enthusiasm generated around Arbitrum’s token launch (which was distributed to users via an airdrop in March 2023) and a burgeoning DeFi ecosystem seems to have contributed to user activity increase at the beginning of 2023. The ARB token launch on March 23, 2023, corresponds to the first bump in active addresses in the chart above. Users then steadily increased over the month of  April. In May, Arbitrum matched Ethereum and Polygon in the number of active addresses - an impressive feat for a relatively new ecosystem.

Now that Arbitrum has distributed its ARB airdrop to individual protocol DAOs within the ecosystem, we have the potential to see an influx of new users - as ARB gets utilized as incentives by the protocols to potentially draw in users.

Despite Arbitrum’s growth, Binance’s BNB Chain (previously Binance Smart Chain) remains the network with the most active addresses across all the chains that were examined. This is likely due to a mix of factors, such as continued low transaction fees (on par with the cheapest L2s) and their extremely active decentralized exchange, Pancakeswap (which is consistently second to Uniswap in volume across all decentralized exchanges).

When looking at how many new addresses become active on these networks daily, we see a similar trend play out. BNB Chain dominated new address growth, followed by Ethereum and Polygon which both stayed relatively flat since November last year. We saw substantial growth in Arbitrum and Optimism’s number of new addresses since March this year. By the end of June 2023, Arbitrum had ~35,000 new addresses created per day and Optimism had ~23,000 - a significant increase compared to where they were eight months ago (both had fewer than 10,000 daily new addresses created per day back then).

New Active Addresses (10d MA)

Source: Coinbase Chainstorage

Number of Transactions

Looking into the daily transaction (ETH transfers, ERC-20 transfers, and contract calls) numbers for the last six months, most of the networks examined either declined or remained flat. Arbitrum and BNB chain are the main two that demonstrated noticeable growth over time. Arbitrum even surpassed Ethereum mainnet in daily transactions after its ARB airdrop, increasing its number of daily transactions by 87% in the observed 6 month period.

Daily Onchain Transactions

Source: Coinbase Chainstorage

The diagram below illustrates this significant growth in terms of percentage more clearly. This shows the number of transactions in the last 6-month period (June 2023 - Dec 2022 ) compared to the previous 6-month period (Dec 2022 - June 2022).

Last 6 months Onchain Transaction Growth

Source: Coinbase Chainstorage

We also see a strong increase in ERC-20 transfers in Arbitrum. It surpassed Ethereum and Polygon (briefly) in the last 6-month period.

Daily Onchain ERC20 Transfers

Source: Coinbase Chainstorage

Transaction Costs and Chain Utilization

One of the early tell-tale signs we saw of increased on-chain usage (even on mainnet Ethereum) was the gradual increase in transaction costs. This can be seen in the image below. 

Daily Median Transaction Cost (since Jan 2023)

Source: Dune Analytics

Two particular events seem to have triggered the spikes in transaction costs seen in the chart above - one by the temporary depeg of USDC during the weekend of March 10th and one by the rapid explosion in trading activity of memecoins on DEXs on Ethereum mainnet.

Overall, the chart above shows that more users are utilizing the chain as there is more demand for transactions to be included in blocks; therefore, users are willing to pay for it. The London Upgrade for Ethereum introduced variable-sized blocks in August 2021 - each block has a target size of 15 million gas, and the size of blocks will increase or decrease per the network demand up until the block limit of 30 million gas. The most visceral proof of the upgrade  working as intended is the increased demand for blockspace on-chain we have seen over the last few months. 

As shown in the chart below, the average size of an Ethereum block in bytes has been at an all-time high - indicating more computational activity being accommodated by the “world computer” that is Ethereum.

Ethereum Average Block Size

Source: Etherscan.io

In the world of L2s, gas costs are typically split into two parts: the L2 fee for the sequencers to execute transactions and the L1 fee for ultimately settling the transaction and getting the security guarantee provided by Ethereum Mainnet. In the table below, we’ve split up the costs it takes to do various actions on the different chains (7-day median values). We can see that   mainnet Ethereum is the most expensive, and Polygon is the cheapest across the board, followed by BNB Chain. 

From the activity standpoint, the fact that Polygon is the cheapest for transactions but not the highest in transaction and address counts indicates that it’s not all about the lowest cost but also the types of activity and applications available on each chain.

7-day Median Transaction Cost $ (2023-06-20 to 2023-06-27)

Source: Dune Analytics

The chart below shows the percentage of Ethereum Mainnet gas used by Arbitrum and Optimism. The rollups were relatively evenly split (Arbitrum ~0.8% and Optimism ~0.35%) throughout the end of 2022. As we get into 2023, there has been a notable increase in Arbitrum L1 gas usage where Arbitrum uses around 2% ~ 4% L1 gas and Optimism uses around 0.2% ~ 1% L1 gas, matching up with their own network activity level around the time.

Percentage of Ethereum Mainnet Gas Used by L2s

Source: Coinbase Chainstorage

Rollup DEX Activity

Using Dune Analytics data, we also took a look at how the decentralized exchange landscape has evolved among the two main L2 rollup networks. As seen in the chart below, Ethereum has the lion's share of overall DEX volume across chains despite BNB Chain having a larger number of active users and onchain transactions. BNB Chain and Arbitrum more or less share the second place, with each taking up approximately 15% of the overall DEX volume across the chains we examined. 

Daily DEX Trading Volume in %

Source: Dune Analytics For DEX activities on Arbitrum and Optimism, we noticed that the DEX trading volume on Arbitrum starts to increase  from the beginning of January and culminates with the ARB airdrop by the end of March. Since the introduction of ARB, DEX pools that include it (ARB-USDC and ARB-USDT) show significant trading volume on chain, even occasionally rivalling USDC-WETH (which historically has been the most traded pair across DEXs) in volume on certain days.

Top Arbitrum DEX Paris by Trading Volume in %

Source: Dune Analytics

In terms of transaction volume by DEX, data shows that Uniswap garners the lion's share of volume since the beginning of 2022. However, this does not include transaction data related to trading on Trader Joe, an alternative DEX which has seen significant activity increase since launching on Arbitrum. 

Top Arbitrum DEX projects by Transaction Volume %

Source: Dune Analytics

On the Optimism network, OP (OP-WETH, OP-USDC) is still one of the most traded tokens after its inception a year ago, only surpassed by USDC-WETH which has been the dominant DEX pair across several other chains.

Top Optimism DEX Trading Pairs by Transaction Volume %

Source: Dune Analytics

What stands out from Optimism’s DEX landscape is how other DEXs also show relatively strong market share in terms of USD volume against the dominance of Uniswap.

Top Optimism DEX projects by Transaction Volume %

Source: Dune Analytics

The blockchain landscape is dynamic, and we’ve seen that with the data shown above. In terms of Layer 2s, we have seen Arbitrum riding a surge of growth following an airdrop while mainnet Ethereum also witnessed an uptick in usage due to heightened activity both on the main chain (memecoin mania) but also on layer 2s as a whole (contributing part of their fees to mainnet ethereum for security and decentralization). Both of these signal the growing usage of Ethereum in general - both as a primary and secondary settlement layer. 

Meanwhile, BNB Chain records high network usage but lags behind Ethereum in terms of DEX activities, indicating room for more balanced utilization. Polygon provides a counterpoint to this volatility, maintaining steady network usage over the past year, showcasing some form of stable state reached within its ecosystem. Intriguingly, we saw that Layer 2 tokens, ARB and OP, have on certain days rivalled USDC-WETH in terms of trading volume within their respective networks, highlighting their growing utility. 

As more updates get rolled out for these networks, like Bedrock on Optimism and new applications on Arbitrum, the user experience should only get easier, with the cost to interact getting cheaper in tandem. These developments, combined with the upcoming launch of new scalable layer 2s like Base bodes well for the increased usage capacity crypto as a whole will get from these ecosystems.