Ethereum Ladder Race: Which Layer 2 Crypto Is The Best Buy Right Now?

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Over the past few years, it has become clear that Ethereum (ETH -0.75%) has seen significant growth. But in becoming one of the most popular blockchains in the world, its network has become plagued with slow transaction speeds and expensive fees. This extreme congestion has created a demand for efficient Layer 2 scaling solutions.

Layer 2 scaling solutions are built on top of the Ethereum blockchain to enable faster and cheaper transactions while maintaining the decentralization and security features of the blockchain.

There are currently a handful of Layer 2 scaling solutions that aim to fix Ethereum’s problems. But the three favorites today – and also those with the greatest long-term potential – are Arbitrum (CRYPTO:ARB), Optimism (OP) and Polygon (MATIC -0.71%).

Each of these solutions works a little differently and therefore has its own advantages and disadvantages. Let’s see what sets these competitors apart and might be worth your hard-earned cash.

Layer 2 distribution

To start, it should be clarified that all of these layer 2 solutions are trying to accomplish the same thing: to make Ethereum faster and cheaper. For the most part, they all use similar processes but differ slightly in how they actually scale Ethereum.

These differences can be very technical and are probably best saved for a conversation another day, but the key factor to understand is that all of these solutions have tradeoffs depending on what they prioritize.

For example, Arbitrum and Optimism both use rollups, which combine groups of deals into a single deal. But Arbitrum does this in a slightly slower, but significantly cheaper way than Optimism. As for Polygon, its method of using a sidechain to process transactions makes it less decentralized than Optimism or Arbitrum.

However, Arbitrum and Polygon have robust compatibility with Ethereum, making them excellent options for developers looking to build decentralized applications.

Each solution has its own pros and cons, but to really understand which ones are most in demand, we can look at some statistics.

By the numbers

To quantify each solution, it can be helpful to compare simple metrics such as speed and transaction costs, as these are essentially the two reasons why there is demand for a Layer 2 solution.

Polygon is capable of processing up to 65,000 transactions per second while maintaining low fees that typically range between $0.1 and $0.5 depending on transaction size. Arbitrum allows 40,000 transactions per second, with fees ranging from $0.5 to $0.7. Optimism has the capacity to process up to 2,000 transactions per second, and the fees are slightly higher compared to Arbitrum and Polygon, ranging from $0.6 to $0.9.

Other stats — such as number of wallets, number of transactions, and total value locked — can also help paint a clearer picture of the Layer 2 landscape.

When it comes to the number of wallets and the number of transactions, the race is really not tight. The polygon simply dominates. While optimism lags considerably behind Arbitrum and Polygon, Arbitrum is gaining ground on Polygon with its new token released in March.

The other metric to consider is Total Locked Value (TVL). You could think of this as a way to measure the value that each solution supports in decentralized applications. The larger the TVL, the more valuable the solution. Surprisingly, Arbitrum has the highest TVL among these three, reaching around $2.2 billion. Polygon follows with $1.1 billion and Optimism is third with $920 million.

Precursor

Given this combination of stats, it’s clear that Polygon and Arbitrum offer developers and users a valuable solution. Both have proven usage, which is reflected in multiple sets of stats.

Investing in both might be plausible, but if there’s a Layer 2 solution worth your money, it’s probably Polygon. It has a user-friendly development environment, verifiable usage, and best of all: a plethora of partnerships with some of the world’s most recognizable brands.

Over the last year or so, companies such as JPMorgan Chase, Starbucks, Disney, Nike, and Meta Platforms have all used Polygon in different ways to facilitate new blockchain-based business models.

With its price still down 62% from its all-time high, Polygon appears to have significant long-term potential, just the type investors should be looking for.

If there’s a downside to Polygon, it would be its higher levels of centralization. If decentralization is a priority, then Arbitrum seems like the best choice. But with its new token just a few weeks old, I would personally like to see Arbitrum build more track records.

Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. RJ Fulton has positions in Ethereum and Polygon. The Motley Fool holds and recommends Ethereum, JPMorgan Chase, Meta Platforms, Nike, Polygon, Starbucks, and Walt Disney. The Motley Fool recommends the following options: January 2024 Long Calls at $145 on Walt Disney, January 2025 Long Calls at $47.50 on Nike, $100 April 2023 Short Calls on Starbucks, and January 2024 Short Calls on $155 on Walt Disney. The Motley Fool has a disclosure policy.

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