Discussing L2 economics and business models: Will Ethereum usher in a "bandwidth" moment?
Original title: "Layer 2 Economics》
Original compilation:
Original compilation:The way of DeFi
The way of DeFi
This week we will revisit layer 2 scaling solutions in the Ethereum ecosystem.
Topics covered:
Why do we need L2?
Layer 2 Extends the Solution's Capabilities
Economics and Business Models
Impact on Ethereum, the base layer of the tech stack
Why do we need L2?
Anyone who has used Ethereum during 2021 knows that the chain is likely to become very congested. It's a classic problem - too much demand and not enough supply. Therefore, gas fees (transaction fees) become quite expensive. At the height of the bull market, it cost nearly $200 to send a transaction using the Ethereum blockchain. This is not scalable. But it tells us something.
The first is that Ethereum block space is very valuable. Some say the Ethereum blockspace is the "New York City" of ecosystems today. This is a great question.
The second revelation is that Ethereum’s product roadmap is still in a very early stage. It cannot support a billion users today. To support more users, applications, and use cases, Ethereum must scale on layer 2.
It is worth noting that the demand for block space may always exceed the supply. Why? Because that's true of all significant computing resources throughout history. CPU, GPU, memory, storage, and wired and wireless bandwidth can all provide useful evidence.Chris Dixonas
As noted, the computing movement often has mutually reinforcing feedback loops between applications and infrastructure. Smartphones, for example, have improved dramatically over the past decade. At the same time, most of the value we get from our phones comes from the apps on them. As apps improve, more users flock to smartphones, which frees up manufacturers to invest in the underlying infrastructure of the phone - powering the phone (infrastructure) and the stuff people use (apps) An enhanced feedback loop between them.
We can observe this happening on Ethereum today.
As Ethereum applications improve, more users flock to Ethereum. As more and more users flocked to the blockchain, we ran into scalability issues. This drives the need to reinvest in infrastructure to support more users, better applications and improved user experience.
Ethereum is gearing up for its "broadband" moment. Layer 2 can be seen as the broadband for blockchain applications. As the infrastructure improves, so will the applications. This should drive user demand, which should lead to better applications and further investment in more scalable infrastructure.
Layer 2 functionality
We can think of layer 2 blockchains as "dealers of block space". Essentially what they do is buy block space on Ethereum, make it more efficient (compress data), and then resell it to users and applications looking for lower transaction fees and higher throughput .
Quick Mindset: We can think of this as similar to how zip (compressed) files are used when sharing information. Sometimes we want to send a very large file or many files at once. However, our computers often don't have the storage space needed to send these files, so we create a "zip file". This compresses the data and allows it to share data more seamlessly.
Another way to think about it is how credit card transactions relate to our bank accounts. Credit cards are an extended solution for bank transfers. Similar to L2 on the blockchain, credit cards such as Visa can conduct transactions in batches, and then settle with banks on the base layer. This reduces overhead and increases throughput/scalability.
Likewise, Ethereum's layer 2 scaling solution is to batch transactions from the L1 main chain, compress the data, and then anchor it back to Ethereum for transaction security and proof. This increases throughput and reduces costs — without sacrificing the functionality and security of Ethereum smart contracts.As a result, applications originally deployed on the base layer of Ethereum are moving up the technology stack to be deployed on layer 2 solutions such as Optimism and Arbitrum. If you're curious, you can find theview here
There is currently a total of $24 billion in value locked in the Ethereum ecosystem. Of this, $4.38 billion is locked in applications that leverage layer 2 scaling solutions. Optimism currently has 79 projects and Arbitrum has 128 projects.
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Source: L2 Beat & DeFillama
Economics and Business ModelsOptimism and Arbitrum are the leading layer 2 solutions on Ethereum today. In fact,They ranked 6th and 7th in terms of transaction fees among all cryptocurrency projects in the past 6 months.
Here are Optimism's daily costs (green) and daily active users (purple) over the last 180 days:
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Here are layer 2 transactions as a percentage of total ETH gas fees (representing total transactions):
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Claiming they've saved users over $1 billion to date.Optimism charges users slightly more than what they end up paying for block space on Ethereum. This difference is their profit. Additionally, Optimism's "Sequencer" is responsible for ordering, batching, and submitting transactions to L1. Since the "sequencer" completes the role of determining the order of transactions, it can also extractMEVs get revenue
Optimism costs are incurred when batch transactions are recorded to Ethereum's base layer. These costs are passed on to their users - users are happy to pay cheaper gas fees compared to Ethereum.
Token Economics
Token Economics
Optimism released its token in June 2021 (Arbitrum has not yet).
Having said that, users of Optimism do not pay fees in OP tokens. Instead, they pay in ETH. Here are the current fees per transaction:
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Source: L2fees.info
Because fees are paid in ETH, there is no mechanism to burn OP tokens. Instead, the activity happening on Optimism actually facilitates the burning of base layer ETH. Also, since Optimism's orderers (where transactions are sent, validated, and ordered) are currently centralized, there are no distributed validators or standard protocol inflation rates like we see in layer 1 blockchains like that. In other words, Optimism has outsourced its validators (security) to Ethereum's base layer.
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source:source:
Optimism Community Documentation
Conclusion: With only 5% of the token supply in circulation today, and with no clear or set inflation rate, it is difficult to predict an appropriate value for the OP token. The float market capitalization is currently $214 million, or $4.7 billion on a fully diluted basis.
We think there is clear value here due to product/market fit, usage, transaction volume/revenue, and early ecosystem development - especially partnerships with DeFi apps like Uniswap. However, today's valuation of $4.7 billion seems quite high given the uncertainty surrounding the accumulation of the token's value.
Nonetheless, Optimism Labs, the development company behind the protocol, raised a $150 million Series B round last March at a $1.5 billion valuation. Here's how we think about it in relation to the protocol's (and token's) value: Investors in Optimism equity receive a prorated allocation of tokens when they sign a subscription document. Why? This is where the value is expected to arise.
Optimism Labs and its investors received 36% of the tokens. So if we value Optimism Labs at $1.5 billion and divide that by 36%, we get a valuation of the protocol (fully diluted value of tokens) of $4.1 billion. How often does the retail industry get such easy access to Series B investment opportunities at similar valuations invested by Silicon Valley insiders? Here are some questions to ponder.
Impact on Ethereum
We think scaling solutions are positive-sum for Ethereum. Layer 2s will bring Ethereum its "broadband" moment. We think this will ultimately open up many use cases that may not have been thought of yet. Does anyone think YouTube is possible when we use AOL? Maybe not. This is achieved by the throughput created by the increased bandwidth.
This should lead to more users as more applications are deployed on L2. This creates more demand for block space and creates more transactions, which causes more ETH to be burned, bringing scarcity and value back into the ETH asset.
The key takeaway here is that L2s leverages Ethereum for security and functionality. They pay Ethereum for these services. If these solutions had their own set of validators securing the network, they might not need to anchor data back to Ethereum — and thus be seen as competitors rather than admirers.
in conclusion
in conclusion
While the mainstream media focuses on Sam Bankman Fried’s (SBF) apology tour, the signal of the crypto winter so far has been the growth of Ethereum scaling solutions. L2 is quietly becoming the "execution" layer of the tech stack, with Ethereum serving as the "settlement" layer. The application layer of the Ethereum technology stack will ultimately be built on Layer 2 (and possibly L3). We see this as Ethereum's "broadband moment" and expect to see a surge of new use cases and applications in the next cycle - all enabled by the new scaling layer.
