Three protocols are vying for dominance of the Ethereum Layer 2 market and its $52 billion worth of so-called decentralized finance (DeFi): Arbitrum (ARB), Optimism (OP), and Base.

Bullish investors even see an opportunity for layer 2s to displace some of Ethereum's $220 billion market cap or even the values of alternate blockchains like Solana or Avalanche.

Three protocols are vying for dominance of the Ethereum (CRYPTO:ETH) Layer 2 market and its $52 billion worth of so-called decentralized finance (DeFi): Arbitrum (CRYPTO:ARB), Optimism (CRYPTO:OP), and Base.

Here's a closer look at the three protocols and their respective strengths and weaknesses:

* Arbitrum and Optimism were the two earliest major competitors, and their valuations remain closely matched. Despite wildly divergent approaches, both ARB and OP are trading within 5% of a $3.2 billion fully diluted valuation.

* In contrast to Arbitrum and Optimism, Base is a corporately incubated layer 2 that doesn't have a native token. Instead of an initial coin offering (ICO) or airdrop, Base financially rewarded its corporate founder Coinbase (NASDAQ:COIN) with savings on transaction fees.

* Base also used its social media following to promote a variety of offshoot projects that issued tokens themselves, like Zora (CRYPTO:ZORA) and BaseIsForEveryone.

Optimism's Growth Strategy: Partnerships, Licenses, and Superchain

Optimism's growth strategy has relied on a variety of corporate partnerships, even licensing and white-labeling its technology for partners like Base.

Although many of Optimism's agreements have revenue kickbacks to benefit tokenholders, they contain various contractual provisions that could make planning for the long-term value of OP difficult.

A lead researcher at Delphi Digital described Optimism's main chain as "trending to ghost town." To counteract the decline, Optimism says it's working on Superchain interoperability for apps.

It boasts of major partnerships, including UniSwap, Curve Finance, and Aave.

Despite Base using Optimism's technology, it is now a direct competitor that rewards Coinbase far more than OP tokenholders.

Arbitrum: Retaining Liquidity and Encouraging an Orbit of Chains

In contrast to Optimism, Arbitrum has retained most of its liquidity on its main chain. Unlike Optimism's flashy business partnerships and off-chain transactions, almost all revenue on Arbitrum is directly attributable to ARB tokenholders.

Because Arbitrum keeps its liquidity on-chain rather than in off-chain partnerships, it's easier for DeFi trackers to estimate its total value locked (TVL). Most estimates place the quantity of crypto assets on Arbitrum's blockchain at $2.3 billion.

Arbitrum's bridged TVL, which includes double-counting of various crypto assets across blockchains, exceeds $11 billion.

To continue growing, Arbitrum has also encouraged an orbit of additional chains that operate their own transaction sequencers. These orbit chains keep some assets as liquidity bridged from Arbitrum's main chain.

Base: Transaction Fees Lower Than Ethereum and Solana

The Coinbase-supported Base has about $3 billion in TVL and $14 billion in bridged TVL. Base claims transaction fees of less than one cent, putting it well below Ethereum or Solana.

Even with the low fees it claims, the chain fees collected in a 24-hour period reached millions of dollars for a few days in late March and early April 2024.

With founding ties to Optimism's OP Stack, the apps that build on Base somewhat overlap with Arbitrum's competing liquidity Aave and Uniswap.