As TVL Drops to a 7-Month Low, Ethereum Layer two Tokens Tank

As the bears nibble away at the bitcoin market capitalization, native tokens for several layer-two applications have plummeted to long-term lows.

As money and collateral leave the industry, total value locked (TVL) across layer-two platforms has plunged to a seven-month low.

Patrick Hansen, a crypto venture advisor at Presight Capital, pointed out that L2 TVL was at its lowest point this year.

TVL has decreased by 22.5 percent over L2 networks since the beginning of 2022. According to L2beat, the amount has dropped 40% from its all-time high of $7.4 billion in early April.

L2 Tokens Tanking To expand Ethereum for quicker and cheaper transactions, layer-two networks are utilized. They use a variety of technologies, including as 'rollups,' to process data outside of the main blockchain, allowing transactions to move more rapidly and at a reduced gas cost.

This year, L2s grew in popularity as Ethereum (ETH) demand soared due to new nonfungible token (NFT) mints and other network activity. Users went to layer-two services like Arbitrum and Optimism to make Ethereum-based transactions.

However, since the beginning of May, $1.4 billion has been removed from L2s due to the crypto exodus that has increased.

Many of the larger L2 networks have their own native tokens, which have also experienced significant losses. The token value of dYdX, a decentralized derivatives exchange that is the second most popular L2 platform according to L2beat, has dropped by 55 percent in the last month. As a consequence, the DYDX token is presently trading at a severe 93 percent discount to its all-time high set in September.

Despite notable partnership announcements such as GameStop [GME], Loopring's LRC token has dropped by 35% in the last month. LRC prices have dropped by more than 86 percent from their all-time high in November.

Polygon is another popular L2 network, although its TVL and token values have also plummeted. The MATIC token on the platform has dropped 45 percent in the last 30 days and is down 79 percent from its all-time high in December.

The Effect of Merging

According to several reports circulating on cryptocurrency social media, the impending Ethereum Merge may have a severe influence on layer-two networks. The Merge, which has been pushed back to August, will bring in proof-of-stake consensus and put a stop to Ethereum mining based on proof-of-work.

It will not considerably lower transaction prices since it will only happen with future scaling enhancements. As a result, when Ethereum demand picks up again, L2 networks will continue to be in high demand.

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