Why was Layer2 Perp intercepted by Alt-L1?

Despite the expectation that Perpetual Decentralized Exchange (Perp DEX) growth would naturally favor Layer 2 solutions, the sector is being challenged by alternative Layer 1 (Alt-L1) blockchains like Hyperliquid and Aster. This analysis identifies key reasons for this shift and what Layer 2 Perp projects must do to compete.

Performance Limitations: General-purpose Layer 2s (e.g., Arbitrum, Optimism) face inherent constraints in transaction speed and finality due to their design, making it difficult to match the sub-second, centralized exchange-like experience offered by specialized Alt-L1s like Hyperliquid. The solution is for Layer 2 projects to abandon a one-size-fits-all approach and implement specialized optimizations, as seen with Lighter.
Outdated Trading Models: Many Layer 2 Perp DEXs still rely on Automated Market Maker (AMM) or hybrid models, which are plagued by issues like impermanent loss and MEV attacks. These models deter large institutional funds. To succeed, Layer 2 must fully adopt the Central Limit Order Book (CLOB) architecture, which provides a superior trading experience.
Uninspiring Incentives and Fragmented Liquidity: The old DeFi farming incentives on Layer 2 are no longer attractive. New Alt-L1 competitors engage users with diverse strategies like points systems, meme culture, and token buybacks. Furthermore, liquidity on Layer 2 is fragmented across various protocols, increasing user costs and failing to build direct protocol loyalty, unlike the more unified environments on Alt-L1s.

The article concludes that Layer 2 Perp DEXs possess the advantage of Ethereum's vast ecosystem and stablecoin liquidity but must address these fundamental issues to reclaim market share from Alt-L1 competitors.

A trend is clearly felt: a number of layer2 Perp projects such as Lighter and GRVT are desperately showing off their muscles, and seem to be catching up with Hyperliquiquid.

But this is obviously a bit embarrassing. The prosperity of Perp DEX should belong to layer2, so why was it intercepted by other Alt-L1s such as $ASTER?

1) The key issue is not complicated. Arbitrum, Optimism, and other four major layer 2 blockchains are all aiming to develop universal Rollups. However, this determines the limits of their TPS and block time. Transaction finality, state synchronization, and complex computational overhead all become drags. How can they possibly compete with products like Hyperliquid, which offer sub-second transaction speeds comparable to CEX experiences?

Therefore, blindly pursuing general-purpose design is a sin. Lighter is clever, abandoning the obsession with so-called universalization. Instead, it has implemented specialized trading optimizations in aspects such as ZK circuits and order book matching, which is why its trading volume has reached levels comparable to Hyperliquid. For other layer-2-based Perp DEXes to regain lost ground, abandoning general-purpose design is the first step.

2) Most layer-2 Perps are still clinging to the old AMM logic or experimenting with hybrid orderbook designs. GMX, the former Layer-2 Perp leader, has proven that the ceiling for AMMs is there. This is because issues such as impermanent loss, MEV attacks, and slippage directly impact the inflow of large institutional funds and high-frequency trading, which are virtually nonexistent in Hyperliquid's full-chain CLOB+HLP model.

So, if Layer2 Perp wants to make a complete comeback, it should just completely embrace the native CLOB architecture. Has the so-called incremental improvement been falsified by dYdX's recent escape?

3) The old DeFi mining incentives of Layer 2 have lost their appeal. New Perp players like Hyperliquid, in addition to the underlying transaction performance, are focusing on diverse gameplay, such as MEME cultural substitution, point airdrops, token buybacks, etc., which greatly improve the user experience and enhance the game experience.

Furthermore, Layer 2 liquidity is severely fragmented, with everyone using various incentives to scramble for it. This directly increases users’ cross-chain bridging costs and enriches a number of third-party cross-chain bridge projects, but does not directly boost user stickiness of the protocol itself.

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There are quite a few Perp DEXs in the Layer2 lineup. In addition to the projects mentioned above, there are also SynFutures, Orderly Network, Paradex and other projects that have been on the building road. GRVT recently received 19M in financing. It can be seen that Layer2 Perp has never given up on seizing the right to speak. Really, it’s okay to be defeated by Hyperliquid, but at least it should be able to compete with Aster, SunPerp and others, right?

Don’t forget that the huge amount of stablecoins and DeFi TVL accumulated in the Ethereum ecosystem are absolute advantages that other L1s do not have.