• As interest in crypto continues across Australia and globally, scalability solutions for crypto protocols have become critical to enabling wider adoption
• 31% of Australians now own cryptocurrency according to a recent study, highlighting the need for robust infrastructure
• In response to ongoing challenges, Kraken’s Ink provides a high-speed, low-cost Ethereum layer 2 solution, reducing transaction fees through improved scalability.

Special Report: The crypto market has experienced significant volatility over recent years, not to mention recent weeks, with sentiment fluctuating between periods of enthusiasm and caution.

Amid this, adoption of digital assets continues to evolve, with both individuals and institutions exploring decentralised assets and applications as part of their financial strategies.

Throughout crypto’s volatile cycles, a consistent challenge has been ensuring sufficient capacity for users to efficiently operate onchain.

While the crypto markets have weathered various storms, the underlying technical challenges of blockchain scalability remain largely unchanged. High transaction fees and network congestion during periods of increased activity continue to create friction that can deter users from exploring the benefits of DeFi protocols, potentially limiting broader adoption.

Layer 2 (L2) solutions have since emerged to address these persistent challenges.

Looking underneath the layers – what are L2s?

Simply put, L2 blockchains operate as a distinct network on top of Ethereum’s mainnet – a ‘layer 1’ blockchain.

L2s allow transactions to be processed off of Ethereum before they are packaged together, finalised, and shipped back to Ethereum in bundles.

Think of an L2 like a high-speed motorway that runs parallel to a congested street, allowing more traffic to arrive at the destination without requiring changes to the main street (and ensuring pain of roadworks that often follows).

In doing so, L2s allow onchain ecosystems to accommodate substantial growth without incurring frictions and costs that reduce efficiency and complicate user experiences.

The Australian context and emerging layer 2 developments

Australia has established itself as a notable participant in blockchain innovation, particularly in the development of layer 2 solutions.

The Australian-based Immutable, for instance, integrated a leading L2 solution specifically designed for NFTs and blockchain gaming projects, demonstrating Australia’s continuing contribution to specialised scaling solutions.

The Australian regulatory landscape, while still evolving, has provided a framework where technical innovation can develop alongside consumer protections. This balanced approach has allowed for continued infrastructure development despite market fluctuations.

Within this context, Kraken recently unveiled Ink, a DeFi-focused Ethereum L2 scaling solution built on Optimism’s technology stack. As an established player in the crypto space, Kraken recognises that periodic increases in crypto activity can place strain on blockchain systems, potentially creating barriers to wider adoption.

Since its launch, Ink has processed more than 13 million transactions from 253,000 accounts. In January, it reached key upgrades to its decentralisation architecture, while also seeing integration from industry participants like Securitize, enabling its clients to issue and invest in tokenised assets on Ink.

Ink’s privacy-focused approach

Among the various L2 solutions in development, Ink was released with cypherpunk values in mind – an aspect that resonates with many Australians, as 67% of Australians surveyed by Kraken consider privacy to be very important to their lifestyle.

Through engagement with users and developers, the team behind Ink identified a recurring concern that affects onchain crypto adoption: the transparent nature of public blockchains, which allows for close monitoring and tracking of activity.

While transparency represents a fundamental characteristic of blockchain technology, it inevitably creates trade-offs with privacy. This can create situations where onchain data might be connected to other information sources, potentially affecting user privacy and security.

The creators of Ink plan to introduce privacy-enhancing functionalities later this year that draw from this philosophical background while addressing client preferences for comparable financial privacy when navigating DeFi.

By incorporating privacy considerations, Ink positions itself as a potential bridge between centralised exchanges and DeFi applications, aiming to make the ecosystem more secure and accessible to privacy-conscious users.

The future of finance is onchain

The potential of crypto technologies continues to develop within the broader financial services landscape, with many of the most innovative applications emerging in the onchain environment. The realisation of this potential, however, depends on addressing fundamental technical challenges.

As the global crypto ecosystem continues to mature, Ethereum’s scalability will remain an important factor in determining the pace and scale of blockchain adoption.

Australians have demonstrated interest in early crypto adoption, and this pattern extends to the development of L2 solutions.

As L2 implementation develops, Australia’s contributions to blockchain innovation may help position it as a participant in the ongoing evolution of decentralised finance, particularly if supported by appropriate regulatory frameworks.

This article was developed in collaboration with Kraken, a Stockhead advertiser at the time of publishing.

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.