The days of L1 as a rotating trade seem to be a thing of the past. With L2 solutions effectively solving Ethereum’s scalability challenges, it becomes important to question the value proposition of other L1 blockchains such as Near, Avalanche, Solana, Fantom, etc. #ETH #op🔥🔥 #BTC
A key difference is the ease of launching Total Value Locked (TVL). L2 enjoys an advantage in this regard because users and developers are already familiar with the tools on Ethereum. They only need to bridge their assets to the L2 chain to take advantage of the reduced transaction costs. In essence, the initial TVL on Ethereum is just looking for a more cost-effective transaction environment.
However, it is important to recognize that other L1 solutions still serve specific purposes and offer unique features that may appeal to certain use cases.
Diverse ecosystems: Other L1s foster their own ecosystems, often with different communities, projects, and innovations. These ecosystems may meet the needs of specific markets or specific industries.
Specialized features: Some L1s prioritize features such as high throughput, low latency, or specific consensus mechanisms. These properties may make them more suitable for certain applications, such as high-frequency trading or gaming.
Diversification: From an investment perspective, diversification across different L1s can reduce risk. While Ethereum remains dominant, other L1s may offer diversification opportunities. For example, investing in Solana could serve as a way to combat the dominance of the EVM (Ethereum Virtual Machine) (imagine a scenario where a zero-day vulnerability is discovered in the EVM).
Those L1s that bring unique value to the ecosystem (such as Solana, Monad, etc.) will survive. It is no longer enough to just provide an EVM-compatible chain with lower gas fees. This seems obvious now, but in the past, there have been many examples where EVM-compatible chains with lower gas costs have reached overvalued valuations. Take Moonriver, an EVM-compatible chain on Kusama (Polkado's canary chain), which reached an all-time high of $494 in Q4 2021 and is now trading at $4.
L2 reduces the need for L1 rotation transactions. While other L1 blockchains still serve unique purposes, L2 have an advantage in terms of total value locked (TVL) because they offer familiar tools and lower transaction costs.
However, the diverse ecosystem, specialized nature, and diversification make other L1s still attractive for specific use cases and risk mitigation.
Surviving L1 will bring unique value beyond EVM compatibility and lower gas fees
Key Takeaways
Traditional valuation methods are more suitable for L1, with transaction fees as revenue and token issuance as expenses. L2 brings unique challenges to valuation.
While cryptocurrencies and stocks are structurally different, the basic investment logic still applies - investing in assets with long-term growth potential can be an attractive strategy.
L2 operates by capturing price differences, a model that is reinforced when implicit revenue sharing agreements are formed with other chains, such as Base allocating 10% of fees to the Optimism treasury.
ETH can be viewed as an “index” asset, and L2 functions like personal “stock picking.” Regardless of which L2s are most active, ETH holders and Ethereum validators will benefit from increased Rollup activity.
One way to look at this is that EIP4844 will significantly reduce the cost of L2, while its revenue will grow over time. The difference between the two is the profit margin of these L2s. As this gap widens, the likelihood increases that they decide to start sharing those profits with token holders. If you're willing to wait for the pieces to fall into place, thinking about this logic ahead of time is a sound approach.
As we chart the path for the future of Rollup governance tokens like $OP or $ARB, it’s clear that the space is poised for transformation. The rise of EIP4844, ERC4337, and the emergence of RaaS (including SDKs and codeless deployment services) herald a wave of Rollup adoption.
This wave of adoption could see the rise of thousands, perhaps even tens of thousands, of Rollups. However, investor views on the value of these governance tokens are divided. On the one hand, challenges like the lack of traditional value capture mechanisms and the impact of a high interest rate environment may limit the potential upside for Rollup tokens. On the other hand, some investors may liken these tokens to non-dividend growth stocks like Google, Amazon, and Tesla, recognizing their potential for higher valuations due to their long-term growth prospects.
As we enter a more competitive space, it will be critical to remain adaptable, given the changing dynamics and unique qualities of Rollup governance tokens.
