[Part 2] Layer 2’s Incentives War

You should read Part 1 before continuing this article. In this post, I continue to analyze Airdrop possibilities and how to obtain them and point out the benefits of Layer 2.

INCENTIVES WAR BETWEEN LAYER 2

Wen Layer Token?

Out of the 4 projects, we have confirmed that 2 of them definitely have Tokens that are Optimism with OP and ZkSync through the photo below.

The question now is whether the other 2 projects (Arbitrum and Starware) have Tokens or not. With the main competitor Optimism already launching the Token, there is no reason why Arbitrum should not do the same.

In addition, the tweet below from the Co-founder of Off-chain Labs has implicitly confirmed that there is a high possibility of a Token coming from Arbitrum, just when and how to take advantage of that Token?

https://twitter.com/sgoldfed/status/1516896690019647488

Regarding Starkware with StarkNet Token, I have not seen any signs of having a Token. However, with the above pressure, sooner or later StarkNet will have its own Token.

In my opinion, you guys do not need to be too focused on StarkNet at the moment because they are still in the process of completing the infrastructure, so there are not too many opportunities to “skin in the game” deep.

WHAT ARE OUR INVESTMENT OPPORTUNITIES?

Locate The “Gold Mine”

Based on the context of the current Layer 2s that I have analyzed above, the opportunity will probably lie more in the Optimistic Rollup solutions:

• Both Arbitrum and Optimism already have a full ecosystem built on them, the infrastructures are quite mature.
• Deploying Token is a card to capture market share in the context of fiercely competing ecosystems.

And this will be very beneficial to those who understand the game. Surely you still remember a lot of Case Studies of other L1s when implementing Incentive programs, which are investment opportunities with ROI up to dozens of times and huge Yield sources from Liquidity Mining. 

Going back to Zk-Rollup, with Stakware’s $2B valuation and “certainly not inferior” to ZkSync, I think it’s inappropriate to launch Token at this time.

The reason is, these solutions are still in the infrastructure construction phase, not ready to integrate Dapp and expand the ecosystem. Therefore, when issuing Tokens, they will not be able to design a strong enough Use Case to retain users and investors like Optimistic Rollup.

At the same time, this will also hurt their Backers, relative to current valuation, Zk-Rollup is much larger than Optimistic Rollup. Indeed, Starkware’s $2B is still larger than Optimism’s $1.65B even if Optimism already has an ecosystem and is ready for an economy around it.

⇒ Launching Token without a strong enough Use Case ⇒ Cash flow is not sustainable ⇒ Backers are unlikely to be happy. Since then, the reputation of the project has also declined, affecting future development.

In short, Arbitrum and Optimism in the near future will be where we look for major investment opportunities. 

Looking For Ways To Mine

After locating the “gold mines”, the next question is How to exploit them effectively? Currently, I see there are 3 main ways: 

• Retroactive Hunting.
• Invest in Layer 2 Token as well as the Tokens in that ecosystem.
• Yield Farming.

1. Retroactive Hunting

Under the above assumption, I see that you will need to pay special attention to “skin in the game” with Arbitrum to be able to increase the ability to receive Retroactive as well as get the earliest profit.

Although Optimism has Tokens, there will still be more Airdrops in the future ⇒ Of course, the conditions will be much stricter ⇒ You need to pay attention to becoming a real “real user” of quality.

As for Zk-Rollup projects, we should still do Retroactive as soon as possible. However, if this takes too much time as well as your “capital detention” for a long time, I think it is completely possible to Pending.

2. Token Investment 

For Layer 2 Token like OP or Arbitrum, I think you can speculate in a short time when they are just Launching, because the current Layer 2 Token is still quite vague about the Use Case (I will talk about it later in the article. ).

In 4 Optimistic Rollup development projects (Boba, Metis, Arbitrum, Optimism), Boba and Metis already have Tokens with FDV at ATH of $4B and $3.2B respectively. With a valuation of up to $1.65B for Optimism, I think OP and Arbitrum can completely reach the FDV mark of $6B – $10B at ATH.

This number could be even more optimistic as we have seen FDV at IMX ATH (using Zk-Rollup) approaching ~$20B.

⇒ You can base on this relative valuation to get the right Entry.

3. Yield Farming

It is also a pretty safe way if you are Farming in Pool 1 (don’t take the risk of Impermanent Loss as big as when Farming Pool 2). 

However, this way will be more useful for those who have a certain amount of capital. In my experience, if the capital allocated to your Layer 2 is only a few thousand dollars, the more optimal way is still Token speculation.

SOME POINTS TO NOTE FOR LAYER 2 TOKEN

The launch of Layer 2 Tokens is an inevitable trend, but I have not seen the ability to design Use Case effectively to maintain demand in the long term.

Usually, in L1s, the platform coin will be used for the purpose of transaction fees, staking for network security or administration, etc., but for Layer 2 on Ethereum, this is completely unnecessary:

• In terms of fees and security, the nature of transactions on Layer 2 will be sent to Ethereum and Layer 2 will also have to pay ETH to the main Chain for the above Validators to approve.
• This fee will be covered by Users ⇒ Therefore, it is quite expensive and unnecessary to apply an additional fee of Coin Native (eg OP).
• The Governance feature is applicable to adding Incentives to Tokens, but I find that this is not a strong Use Case.

Therefore, current Layer 2s are having trouble designing Use Cases to make sense when launching Tokens. Boba, Metis or even Aurora in the Near ecosystem, due to not being able to find a solution to this problem, had to suffer a serious decrease in the project coin’s price (even with AURORA although the ecosystem TVL is still in uptrend). 

This is why buying Layer 2 Tokens in the near future is speculative (unless there is a sensible use case design). 

Thus, the design problem of Use Case and Incentives of Layer 2 currently does not have a satisfactory solution. We will have to wait for an answer from Optimism and Arbitrum. On the side of the Coincu team, we will also conduct research to find the answer to this topic in another article in the near future.

VERDICT

I hope the article has provided you with useful insights about the recent warming of Layer 2 solutions on Ethereum. Information and analysis I will try to update it continuously and send it to you as soon as possible.

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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