Capturing the Layer-2 Narrative

Introduction

While Layer-2s have lost of their sheen in recent years as BTC dominated the market, there purpose is still worthwhile. Layer-2s are built on top of existing networks, like Bitcoin and Ethereum—benefiting from the underlying networks security while aiming to improve speed and usability. The aim is to solve the blockchain trilemma and build a scalable, secure, and decentralized network.

The Kaiko L2 Index (KSL2) tracks five Layer-2 assets across Bitcoin and Ethereum. Bitcoin’s sole Layer-2 representative, Stacks (STX), has the largest weighting in the index. The Ethereum Layer-2 assets included are Optimism (OP), Arbitrum (ARB), and Starknet (STRK), which was recently launched. Additionally, Polygon’s newly rebranded POL token is part of the index.

The Layer-2 ecosystem is a key growth area for crypto. As noted above these protocol’s are built on top of existing networks, with speed and scalability in mind. The aim is to solve the the blockchain trilemma.

This phrase was coined by Ethereum’s Vitalik Buterin and refers to the trade off between scalability, security and decentralization.

The Kaiko L2 Index streamlines the process for investors looking to benefit from breakthroughs in this sector of crypto. While returns have lagged leading digital assets in 2024 there are several tailwinds that should benefit the sector this year.

Improving regulatory outlook

The KSL2 Index has traded higher since the U.S. election, why? Clarity, markets love clarity—this has been evident crypto since the US election.

Where once there was chaos, now there is clarity thanks to regulatory overhaul that has occurred since November. The new leadership at the SEC has already begun its work on creating a framework for digital assets. This should prove pivotal to growth in Layer-2 assets, such as those included in our sector index. Read our full report now to find out more about the risk-return profile of the index and products it powers.