[Part 1] Layer 2’s Incentives War

Looks like Optimism’s OP Airdrop has started a trend. What is that? Join Coincu to learn about the Incentives war of Layer 2 projects.

After the Optimism OP token airdrop to users, the development team immediately announced the Incentives program with 230M OP for the above development projects. In my view, this will make the market pay attention to Optimism in particular and Layer 2 Token in general. This promises to be a hot spot for Crypto and a place to receive cash flow in the near future. What is this trend? How will we take advantage of the opportunity? Without making you wait any longer, let’s get started.

LAYER 2 IS GETTING HOTTER

Why Is The Market Moving Towards Layer 2? 

Layer 2, the scaling solution for Ethereum with security inherited from the network itself, is getting a lot of attention from the market. Especially since Optimism launched OP (Governance Token of the project).

In fact, there are quite a few Layer 2 solutions deployed on the market and have developed their own ecosystem. Boba, Metis, ImmutableX, Arbitrum, ZkSync, Optimism, etc. can be mentioned as typical examples.

However, according to my observations, there are only 4 prominent names at the moment that are Arbitrum, Optimism, ZkSync and StarkWare. So why these 4 names?

That’s because they haven’t launched Tokens yet. For Optimism, even though the Token is OP, it is still not tradable ⇒ Therefore, the market will keep an eye on these Layer 2s as an investment opportunity in the context of the battle between the L1s (Avalanche, Solana), Terra, Near,…) are saturated and The Merge of Ethereum has not taken place yet.

Besides, Layer 2 also received a lot of attention because the scale of capital raising as well as the valuation of these projects is not small, a few examples:

• Optimism closed its Series B funding round with $150M raised and a $1.65B valuation.
• Off-chain Labs (the developer of Arbitrum) is no less with the $120M raised in Series B.
• On the side of Zk-Rollup solutions, ZkSync raised $256M alongside StarkWare with a $2B valuation after Series C.

So we will have a lot of opportunities from hunting Retroactive (like Optimism), and Yield Farming to investing in Layer 2 Tokens.

Current Layer 2 Situation

Regarding TVL, the total amount of value locked on Rollup solutions is around $1.72B. Which, Optimism and Arbitrum account for more than 90%.

Specifically, at the time of writing, Arbitrum’s TVL is $1.13B which 2 times more than Optimism (only about $554M). 

Other ecosystems such as Metis and Boba seem to have passed their peak and have only a fairly limited share of the TVL market share (these two ecosystems when TVL peaked accounted for 19% and 18% of TVL respectively in the overall the Layer 2 ecosystem).

In terms of the number of Protocols, Arbitrum and Optimism also proved to be superior to their competitors.

With the number of Protocols of 107 and 60 respectively, far exceeding the number of 26 of Metis and 21 of Boba, it can be said that these are the 2 most prominent and concentrated ecosystems in Layer 2s at the moment.

What about Zk-Rollup solutions? 

Among Ethereum scaling solutions, it can be seen that Zk-Rollup has the greatest potential (which explains the rather high valuations of Starkware and ZkSync). However, because it is currently not compatible with EVM, plus has to use other programming languages, the development of the above ecosystem is still quite difficult.

In fact, Stakware already has products that use Zk-Rollup for Trading only (Specific Layer 2), including ImmutableX, DyDx, Sorare and DeversiFi. However, a mature version of Layer 2 (where projects can deploy contracts on it) is Starknet which has not yet come into operation.

⇒ That explains the inferiority of Zk-Rollup compared to Optimistic-Rollup (Arbitrum, Optimism) today.

INCENTIVES WAR BETWEEN LAYER 2

Vampire Attack Will Break Out?

Looking at the data on TVL and the above ecosystem context, you must have envisioned the goal of Optimism’s Token launch. It can be seen that this move will help the Optimism ecosystem: 

• Create attention in the market.
• Bootstrap ecosystem by Incentives packages.
• Attract Builders and Users.

⇒ Since then, it has become the focus of the market, capturing market share from Arbitrum as well as sucking cash flow from other Sidechains for long-term development.

https://twitter.com/optimismFND/status/1521577143364427777?lang=en

And right after the Airdrop announcement, Optimism launched the Incentives package with the spending of ~230M OP Tokens for the above development projects.

Up to now, both Arbitrum and Optimism have not launched any Incentives program yet, but still, attract a large amount of TVL (approximately $1.68B) ⇒ This shows the need to use solutions This is quite “Organic” rather than “Synthetic” like some other ecosystems.

⇒ The launch of Optimism’s Token will be an impetus for the upcoming growth of the entire Layer 2 as a whole. At that time, Layer 2 projects will be more “aggressive” in deploying Tokens, and designing Incentives to compete with each other.

In addition, from the perspective of Builders, the launch of Layer 2 Tokens with a reasonable model design will also increase the security of the network.

⇒ We will most likely see a vision of the Layer 2 War with Vampire Attack and ongoing Incentives shown in 2022 like the way the L1 War was last year. 

However, there is a problem with Incentive programs on Layer 2, such as the Case Study of Boba and Metis, which is the Pump Dump situation both in terms of ecosystem TVL and Token price ⇒ Short-term money.

Metis’ TVL has split more than 12 times since peaking, and the price of METIS tokens has also dropped by 85.5% since ATH.

Boba suffered the same fate as the ecosystem TVL even split 89 times.

The reason this problem occurs is due to problems related to the design of the application for Layer 2 Token ⇒ Unlike L1 or Sidechain, Layer 2s on Ethereum inherit security from the main Chain, so it is not necessary to use it. Use Native Token as transaction fee as well as for security. 

⇒ This greatly reduces the Use Case of Layer 2 Token, making it difficult to create a sustainable Flywheel ⇒ Incentives programs will be difficult to be effective and keep cash flow in the long term.

VERDICT

In the next section, I will analyze the Airdrop capabilities of Layer 2 projects and a few highlights from these projects.

If you have any questions, comments, suggestions, or ideas about the project, please email ventures@coincu.com.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your research before investing.

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