L2 in the data: Growth came to an abrupt halt and the knockout round began

Author: IceFrog Source: X, @Ice_Frog666666

It has been proven that Layer2 has not been falsified, but L2 of expected PUA users through airdrops has been falsified.

With the overall poor performance of the Ethereum ecosystem and the imbalance between Infra and Application, L2 has to face a brutal market elimination competition. The liquidity segmentation problem that the market is worried about will also disappear in the elimination competition. Looking forward to the future, on the basis of solving interoperability, once the Ethereum application side has achieved a breakthrough, L2 may regain its former glory.

1. Overview of L2: From capacity expansion and cost reduction to PUA users

L2 as infrastructure: low threshold, flourishing; homogeneity, weak narrative

After Ethereum switched to the POS mechanism, the competition of Layer2 (L2) has become the most anticipated field in Ethereum and even the blockchain world. In essence, the L2 solution reduces transaction costs and increases throughput by sacrificing a small part of security. In the main network roadmap of Ethereum, this is a key link towards the ultimate sharding.

After Optimism open-sourced OP Stack, one-click chain launch became a reality, and the technical threshold of L2 was reduced to the lowest. There are endless layers of various projects. According to incomplete statistics, there are more than 60 active L2s on the market. On the one hand, this shows that Ethereum is still very attractive, but on the other hand, it makes people wonder whether so many L2s are really necessary, especially the increasingly serious liquidity fragmentation problem caused by the high degree of homogeneity of each L2. This also led to the introduction of EIP-4844 in the Ethereum Cancun upgrade in 2024. Although the transaction fees of L2 have been greatly reduced, the Ethereum and even the L2 ecosystem have not prospered as imagined. Homogeneity, weak narrative, and oversupply of infrastructure, the market's criticism and pessimism continue.

L2 development model: Ecosystem wins or PUA users

When L2 was still highly expected by the market, the four king projects (Arbitrum, Optimism, ZkSync, StarkWare) have been concerned by the community and even the entire market. They have become the leaders of the L2 track with huge financing, super high valuations, extensive ecology and technical strength. However, in today's L2 track, some have gone from being the king to "death", while others have basically maintained their position as the leader and continued to widen the gap with their competitors. The difference between them needs to start with the development model of L2.

L2's business model is relatively simple, that is, the second landlord model, which makes profits through income from the Gas price difference between L2 and L1. Under this business model, L2s face groups on both ends of the developer and user sides, requiring developers to continue to build and users to continue to trade. Under this simple logic, the operational ability of the project itself is tested. This has also led to the development differentiation between projects. Some continue to lower the threshold for developers and expand the ecological alliance; some focus on cultivating native applications and strengthening core advantages, while others continue to attract users to participate in interaction and increase TVL through airdrop expectations.

Under the same profit model, different development paths and emphases have also led to different results today. At least market data proves that projects that focus on ecology have higher activity and stronger risk resistance, while projects that continue to PUA users through airdrop expectations have become outdated and no one cares.

2. Market data: From the king to the dead, only one airdrop is needed

Market data: Some daily active users are as low as single digits, while others are steady

In the blockchain world, issuing coins means that the harvest period has arrived to a certain extent, but whether it can still attract users after the harvest period is an important indicator to test the quality of a project.

If we look at the timeline of coin issuance:

The main projects that have issued coins are: Arbitrum, Optimism;

The ones that have recently issued coins are: Zksync, Starknet, Blast;

The ones expected to issue coins in the near future are: Linea, Scroll.

The data are shown one by one as follows:

Arbitrum

As the leader of L2, Arbitrum has a huge TVL of 13 billion. From the data, the average daily data is basically stable, and the ETH bridge can reach an average daily transaction of 1000E, with high activity, large transaction volume, and high protocol income.

Even if other L2s use all means to divert TVL, Arbitrum's activity remains unchanged, truly reflecting its leading value.

Arbitrum's daily average bridge funds, data source.

Optimism

As an old L2, Optimism has a gap in data compared to Arbitrum, but from the perspective of data stability, its activity and stability are still relatively good.

Chart: Optimism's average daily bridge funds

Data link:

https://dune.com/queries/3626332/6108345

https://dune.com/queries/784244/1399124

ZKsync

As the leader of zero-knowledge proof, it has leaped from the "king" level public chain to the "death" level with only one airdrop. Although both Vitalik and the industry believe that ZK technology is forward-looking, its market performance and controversial airdrops have made its market performance unsatisfactory.

The overall activity of ZKsync is currently very low, especially after the project TGE and the airdrop on June 7, its on-chain activity has dropped precipitously. It is common for deposits to be less than 1E per day and the number of depositors to be less than 10. The daily income of the protocol is barely maintained at around 1E, and the protocol is basically operating at a loss.

Zksync protocol income and daily activity after airdrop

Data link:

https://dune.com/gm365/era

https://dune.com/peyha/sequencer-profit-on-l2s

https://dune.com/queries/3813897/6414359

Further checking the recent data, the activity is close to 0, the number of depositors is in the single digits, and the deposits are only tens of dollars. For a project with an FDV of 2 billion and financing of over 100 million, the data is so bleak that it is unbearable to look at.

Starknet

Starknet also uses zero-knowledge proof technology, but its data is slightly better than ZKsync. The average daily bridge deposit is about hundreds of thousands of dollars, but the overall active users are still small. The number of daily transactions has dropped to an average of 70,000 transactions per day since the beginning of this year, and the average daily transaction volume of DEX is less than 5 million US dollars. For a public chain with an FDV of 4 billion, the activity performance is still very poor.

Starknet Daily Average Bridge Funds & Daily Depositors & Dex Trading Volume

Data Link:

https://dune.com/queries/831568/1453718

https://dune.com/tk-research/starknet

Blast

Blast has very low daily active users, and its TVL has dropped sharply from the peak of $3.5 billion at the beginning of this year to $1.5 billion, a drop of 60%. The outflow of funds from the project is very serious. From the data, it can be clearly seen that this year, only on the day of the airdrop did the daily active users exceed 3,000. At present, it has been three months since the airdrop was applied, and the average daily active users are less than 100.

Chart: Blast TVL data & Daily activity data

Data link:

https://dune.com/alec/blast-the-new-eth-l2

Linea

Linea's initial performance was good, but due to the lack of a clear coin issuance plan and airdrop expectations, user activity has declined significantly recently. The daily bridge funds are sometimes less than 1E, but the number of users is large, with an average daily bridge number of about 150 people. The comparison of the two data indirectly shows that the wool users have contributed many small tx. In general, due to the lack of obvious expectations for Linea's coin issuance, DAU has declined. Currently, there are only more than 1,000 new users per day, far less than the previous daily increase of 100,000 new users.

Chart: Linea daily active data & daily new users

Data link:

https://dune.com/linea/linea-overview

https://dune.com/queries/2733739/4549682

Scroll Daily Activity Data & Average Daily Revenue of Protocol

Data Link:

https://dune.com/queries/3626340/6108370

Reasons behind the data: L2 competition is fierce, and airdrop expectations are a double-edged sword

The myth of wealth created by airdrops has made users' expectations for airdrops higher and higher, which has also become an important means for project parties to control users. However, through the above comparison, it can be clearly found that the project party can indeed continuously increase TVL through airdrops, thereby increasing valuations and obtaining large amounts of financing. However, if it is not possible to continue to invest time and money in user experience, ecological construction, and airdrop expectation management, but instead continuously raise user expectations, resulting in "loud thunder and small raindrops" or the results cannot be relatively fair, then the market backlash will still come quickly.

Zksync is a typical example. The Mao Mao Party has supported a market value of 10 billion. However, the four-year airdrop waiting has only brought community criticism of "rat warehouse". The reputation has plummeted and the market data has plummeted. As of now, it is difficult to restore the past glory.

Although Arbitrum and Optimism have not reached new heights in terms of currency prices, they have continued to work hard on ecological construction and have tried to be "evenly distributed" and relatively fair in airdrops. At least the data has been maintained stable, ensuring the continued stable operation of the project. Perhaps the lessons learned from Zksync have prevented Scroll and Linea, which have not yet issued coins, from giving clear signals on airdrops and coin issuance, using time to exchange space to win a chance to survive and wait for the next suitable opportunity.

3. Breakthrough of L2: Integration or elimination, the dawn is on the application side

Since the beginning of this year, the voice of pessimism about Ethereum has continued. The main reason is that the Ethereum ecosystem is not only facing the failure of L2 growth expectations, but also Solana and other external shocks. Coupled with the poor market conditions, the expected prosperity and sharp rise in coin prices have not arrived. From the perspective of L2, its core income comes from the price difference of Gas fees. However, when the main network Gas is as low as single digits, even the main network does not have a more sexy narrative, and a sharp decline in protocol income is foreseeable.

If only from the perspective of Ethereum's technology and performance, L2 is undoubtedly successful and valuable. At least it has solved Ethereum's congestion and Gas problems in stages. However, as mentioned at the beginning of this article, the performance solution also brings about liquidity diversion. The internal competition between rollups has exacerbated the division. The interoperability problem is the first problem that L2 needs to overcome. Founder Vitalik is obviously aware of this problem. In August this year, he announced on social media that this problem will be solved soon. In this process, what is bound to be faced is the integration or elimination of L2. After all, from the current level of activity, there is no need for more than 60 L2s.

If you look at it from a long-term perspective, the most important thing in L2's business model is the gas fee, which is highly dependent on C-end users. What is counterproductive is that most L2s with high financing and high expectations have chosen to continue to build dolls on B-end infrastructure. New narratives such as RAAS, DAAS, and AVS as a service continue to emerge. This is equivalent to each project building a main road or a tool for building a road, but the entrance to the road is overgrown with weeds and no one cares. Infra is popular, and Application is rare. After all, the former is faster and can get more financing, while the latter is slow and not sexy, which has led to the imbalance of Ethereum development today.

In July this year, at the Ethereum Developer Conference, the biggest highlight of Vitalik's speech on the theme of "The Next Decade of Ethereum" was that he made it clear that the biggest theme of the Ethereum ecosystem in the next decade is application. If interoperability is resolved, some L2s are further integrated or eliminated, and the next round of killer applications are launched, the L2 track can still be rejuvenated, but it is still unknown which of the L2s mentioned in this article will survive the test of time.

Fourth, Summary

Through a comprehensive review of the basic pattern, development model, market performance data and future breakthroughs of the Layer2 track, we can see that:

Some projects rely on airdrops to expect PUA users. Once the coin issuance is completed, they will instantly return to their original form and basically no one cares about them, such as ZkSync and Blast;

Some rely on the original accumulated ecological niche and user base, and continue to occupy the forefront of the market through technological innovation and good operations, and are expected to win the game in the fierce competition, such as Arbitrum and Optimism;

Some have luxurious backgrounds and unprecedented financing, and can only rely on airdrops to expect coins, struggling to support, such as Linea and Scroll.

The data and facts prove that L2 has not been falsified, but L2 through airdrops expecting PUA users has been falsified.

Further analysis shows that with the overall poor performance of the Ethereum ecosystem and the imbalance between Infra and Application, L2 has to face a brutal market elimination competition. The liquidity segmentation problem that the market is worried about will also disappear in the elimination competition. Looking forward to the future. On the basis of solving interoperability, once the Ethereum application side has achieved a breakthrough, L2 may regain its former glory.