Key Takeaways

• L2 on TON isn’t about scalability, but ecosystem expansion—it can bridge TON with Ethereum’s DeFi ecosystem, bringing more liquidity and users.
• An EVM-based L2 will allow seamless integration of Ethereum’s DeFi protocols, making it easier for developers and liquidity providers to join the TON ecosystem.
• Projects like TAC and DuckChain are already building TON-compatible L2 solutions, aiming to make EVM usage as seamless as possible for TON users.

Tonstakers is grateful to the TAC team for sharing their expertise and helping us to prepare the article.

This year, several teams announced that they are working on Layer 2 solutions for TON. Typically, L2 solutions are developed to address network scalability issues and reduce transaction costs. However, TON already achieves scalability through sharding. So why does TON need L2?

In this article, we’ll explore L2 from a different perspective and uncover what Layer 2 solutions can actually bring to TON. Beyond low fees, they offer new DeFi opportunities, additional liquidity, and more users.

What is L2?

In 2017, Ethereum founder Vitalik Buterin described the so-called blockchain trilemma. It states that a blockchain network cannot simultaneously achieve high decentralization, security, and scalability — one of these qualities must be sacrificed. Blockchain developers have partially addressed this trilemma with L2 solutions.

L2 (Layer 2 or second-layer solutions) is a blockchain network that operates on top of another blockchain (Layer 1 or L1). The main difference between L2 and L1 blockchains is that L1 ensures its security through a consensus algorithm, staking, and independent validators, while L2 relies on L1’s security instead.

“L2 (rollups) achieves this by regularly sending detailed state updates to the L1. These updates are not stored on the blockchain and require a simplified validation from the L1 validators to make it possible for the L2 to continue to operate and process asset withdrawals to the L1.”

— TAC developer

As a result, L2 doesn’t need to expend resources to ensure its own security and decentralization, allowing it to fully focus on performance. This enables L2 networks to produce several blocks per second and offer transaction fees of less than $0.01.

Why Use L2?

The primary goal of L2 is to scale L1 for more efficient DeFi usage. For example, on Ethereum (L1), a transaction swapping ETH for USDT costs over $5 and takes 15 seconds to complete. On Arbitrum (L2), the same transaction costs $0.1 and takes only 0.25 seconds. Consequently, Arbitrum is far better suited for active trading on decentralized exchanges and other DeFi protocols.

L2 solutions have bridges that enable them to write their transactions on L1 and are also used to transfer assets back and forth between L1 and L2. For instance, Ethereum users can move their ETH and other tokens to L2, interact with DeFi protocols, and then withdraw everything back to L1.

L2 scalability not only reduces costs for existing DeFi protocols but also enables the creation of new products. These include decentralized leveraged futures, Web3 games with heavy NFT usage, or decentralized social networks with on-chain communication, which couldn’t operate efficiently on L1 due to slow transaction speeds or high fees.

As a result, L2 has firmly established itself in DeFi. Although the TVL (Total Value Locked) of all Ethereum L2 networks is smaller than Ethereum’s ($10 billion vs. $70 billion), the trading volumes on DEXs are comparable — $2 billion per day on both. Moreover, the number of active wallets is twice as large — 1 million on L2s versus 400,000 on Ethereum.

Why Does TON Need L2?

Ethereum’s L2 solutions primarily address scalability issues and can be considered faster copies of Ethereum.

In TON and other modern PoS networks, scalability is less of a concern: transaction costs on TON are roughly equivalent to Ethereum’s L2s, and scalability is achieved through sharding. So why might TON need L2? The reason is that L2 doesn’t have to use the same architecture as the L1 it operates on.

This means that a potential L2 on TON could use the Ethereum Virtual Machine (EVM) instead of TON’s virtual machine, allowing popular DeFi protocols from Ethereum, Arbitrum, Base, and other EVM networks to be deployed with minimal code modification.

Additionally, an EVM-based L2 on TON would simplify the development of new products: the Ethereum ecosystem and developer tools have been evolving for nearly a decade, and there are far more experienced Solidity developers compared to FunC developers on TON.

How L2 on TON Can Address Liquidity Issues

Liquidity is one of the most critical challenges in DeFi. The primary source of liquidity for L2 solutions is their L1, as users move assets to L2 via bridges.

Meanwhile, decentralized bridge technologies continue to evolve, offering increasingly convenient, cost-effective, and abstract bridging solutions. While older bridges are hardcoded to transfer only certain assets between two networks, newer bridges can transfer anything to any connected network.

For instance, the LayerZero project introduced the Omnichain Fungible Tokens solution to create native cross-chain tokens that can be bridged between any LayerZero-connected networks, including L2s. Stargate, the most popular LayerZero-based bridge, handles $1.5 billion in token transfers between EVM networks monthly.

Using EVM in TON L2 would allow for the integration of such advanced bridges and simplify bridging. Potential liquidity sources wouldn’t be limited to TON but would include all EVM networks available via bridges. Stargate alone supports over 20 networks with a combined TVL exceeding $100 billion.

Who Will Use L2 on TON?

The most popular DeFi products on Ethereum are liquid staking, restaking, and lending protocols. Despite its popularity, DEX Uniswap ranks only 7th in terms of TVL.

On Ethereum’s L2 solutions, the situation is different. The most popular products there are decentralized futures platforms like GMX, Synthetix, and Camelot, which cannot operate effectively on a slow and expensive L1 like Ethereum.

An EVM-based L2 on TON could deploy all the same applications as other EVM and EVM-L2 networks. Additionally, TON L2 could offer users unique features unavailable elsewhere, such as Toncoin, NOT, and other tokens with pricing independent of ETH. In other words, L2 on TON would open up more opportunities for participants across the entire DeFi ecosystem.

When to Expect L2 on TON?

While it is possible to build EVM-L2 on TON, there will be an issue with wallet compatibility, forcing users to use separate wallets for each network. Devs address this with a network extension approach, which will be explained just below.

In 2024, two EVM-based solutions for TON were announced:

• TON Applications Chain (TAC): TON network extension developed using the Cosmos SDK with support from TOP. The project is currently in beta testing.
• DuckChain: TON-friendly EVM L2 that relies on Ethereum as an L1, Developed by Tonscale Labs using Arbitrum technology.

The TAC architecture is worth a closer look, as the team has already proposed a solution for incompatibility between TON and EVM wallets.

1. Developers add an application to the EVM network, and it automatically gets proxy contracts on both EVM and TON.
2. Users connect to the application using their familiar TON wallets, rather than EVM wallets like MetaMask.
3. When interacting with the app, such as swapping TON for USDT, the proxy contract locks the user’s TON in a bridge contract on TON Network and sends a cross-chain message to the EVM network, where it creates a corresponding amount of wrapped TON.
4. The EVM app receives the wrapped TON and sends the proxy contract wrapped USDT.
5. The proxy contract sends a message to a bridge, which unlocks and sends the required USDT to the user on TON.

All these steps happen automatically and there is no impact on the UX of existing TON users.

“This solution eliminates the need for bridging assets and or separate EVM wallets for TON users, making EVM usage as seamless as possible and allowing battle-tested and low-risk Solidity code to be used with TVM Wallets and TON assets with EVM-bytecode compatibility and minor switching costs.”

— TAC developer

Conclusion

In Ethereum, L2 solutions solve the challenges of slow transactions and high fees, while in TON, they can help address EVM ecosystem compatibility.

Attracting liquidity to L2 remains a significant challenge. This can be partially addressed by integrating popular EVM-compatible bridges, which are difficult to adapt to TON’s virtual machine. In this case, liquidity could be attracted through assets with dynamics distinct from EVM ecosystem tokens.

“Liquidity follows yield, but it’s mainly influenced by risks and smart contract risk is the biggest of them to be managed. Enabling bytecode-level compatibility will unlock the deployment of battle-tested DeFi dApps that are already time-proof. With solutions like TAC, TON can open an opportunity for Liquidity Providers to tap into the TON ecosystem and user base dealing with risks that have been well known for years.”

— TAC

Overall, an EVM-L2 on TON is less about accelerating and reducing transaction costs and more about creating a unified hub between TON and Ethereum’s DeFi ecosystems.