Layer 2 Capabilities and Limitations
Ethereum layer 2s (L2) are undoubtedly the most promising resolution to the ongoing Ethereum scalability headache. Yet, they still have a number of limitations - namely caused by lack of interoperability between different L2 platforms, trickling down to a lack of interoperability between decentralized applications (dApps) that use them.
Since these applications are thus incompatible with functioning together, users need to move their funds back to layer 1 (the Ethereum mainnet) from layer 2 before moving them along to another layer 2. This can be incredibly costly in terms of time, gas fees, and missed opportunities.
These complications inevitably affect liquidity providing, making it complicated to transfer assets (particularly the LP tokens representing users’ LP positions) from protocols using one L2 to protocols using another. This is also true for when users seek to move LP positions from one instance of a platform on one L2 to another instance of the platform on another L2, such as from the instance of Uniswap on Arbitrum to the DEX’s instance on Optimism. Users waste time and money trying to do simple LP functions such as maintaining a yield-optimized position, making the move cost-prohibitive.
Yet, it may be much more beneficial for a user to move their LP position to another chain or layer instead of leaving it to stagnate where it is; often higher yields may be found for the same LP token and the position it represents on another platform.
Instrumental is offering a solution to these interoperability problems for liquidity providers, allowing users to move their LP positions (and eventually have this movement be optimized and automated) across various L2s as well as L1.