How Do Layer 2 Solutions Affect the Cryptocurrency Fee Market?
Layer 2 solutions, such as rollups and sidechains, process transactions off the main Layer 1 blockchain (like Ethereum) and then batch the results back to L1. This drastically increases transaction throughput and reduces the demand for L1 block space.
By absorbing a significant portion of the transaction volume, L2s lower the overall network congestion and consequently drive down the average transaction fees on the Layer 1 fee market.
Glossar
Network Congestion
Latency ⎊ Network congestion within cryptocurrency, options trading, and financial derivatives manifests as increased latency, directly impacting execution speeds and potentially leading to adverse selection against slower participants.
Optimistic Rollups
Scalability ⎊ Optimistic Rollups represent a Layer 2 scaling solution for Ethereum, designed to enhance transaction throughput and reduce associated gas fees without compromising decentralization.
Transaction Fees
Fee ⎊ Transaction fees, inherent in cryptocurrency, options, and derivatives markets, represent the cost of executing trades and utilizing network infrastructure.
Layer 2 Solutions
Architecture ⎊ Layer 2 solutions, within the context of cryptocurrency derivatives and financial engineering, represent a paradigm shift in scalability and transaction throughput.
Transaction Throughput
Meaning ⎊ Transaction throughput quantifies the maximum number of transactions a blockchain network can process and validate within a given unit of time, typically measured in transactions per second (TPS).