Analysts from investment manager Van Eck predict that Ethereum's layer 2 scaling networks will achieve a $1 trillion market capitalization within the next six years. They anticipate these networks will consist of thousands of use case-specific chains, capitalizing on Ethereum's "primary challenge" of limited capacity for processing, storing, and computing data, as stated in an April 3 report by Van Eck's senior digital assets investment analyst Patrick Bush and digital assets research head Matthew Sigel.
Bush and Sigel arrived at their $1 trillion market cap estimate by assuming Ethereum would capture 60% of the market share across all public blockchains and then estimating the asset volume within the Ethereum ecosystem.
Currently, there are 46 Ethereum L2s with $39 billion in total value locked, with the largest being Arbitrum at $18 billion, according to L2BEAT.
The analysts noted that Ethereum's dominance in smart contracts faces a significant challenge in scalability. While the network offers high security and decentralization, transaction fees and processing times increase significantly during periods of high usage.
Ethereum's current development focus is on improving its ability to process transaction data on layer 2, as evidenced by its recent Dencun update, which helped reduce L2 transaction fees through the "Blobs" data-saving feature.
Source: Van Eck
The analysts also foresee the potential for "substantially more" revenue to be generated on L2s compared to the base Ethereum network. However, they expressed a "generally bearish" outlook on the long-term value of a majority of L2-related tokens due to intense competition.
They highlighted that the top seven Ethereum L2 tokens already have a $40 billion fully diluted valuation, and the launch of "many strong projects" over the next 18 months could increase this to $100 billion, which they believe the crypto market may struggle to absorb without significant discounts.
The analysts forecasted a future with thousands of use-specific L2s, with just a few major players in the general-purpose L2 market. These networks would be segmented by sector, application, or function, with some chains designed for specific purposes, such as a decentralized social media-specific L2 with accompanying apps.
The analysts concluded that most roll-ups will eventually adopt the zero-knowledge framework (ZKU) due to its numerous advantages.
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