Original author: Jocy, founder of IOSG
L2 summer or dilemma?
I recently heard several friends who are engaged in hairdressing studios complain to me that in the past many studios invested huge resources and transaction flow on zkSync and Linea, but found nothing in the end. Instead, they helped several major L2s and contributed tens of millions. US dollar fee income. Therefore, when these studios saw the new L2 coming online, they became less active in creating deals.
We originally expected a prosperous L2 Summer that did not require a studio, but now we find that as the studio gradually fades out, the transaction volume and TVL of several major zkEVMs have not met expectations. When speculators in the market no longer participate in L2 and no longer create vitality and vitality for the ecology, the dilemma of weak growth and ecological shrinkage appears.
L2 competition in the eyes of investors
From an investors perspective, the investment logic for laying out L2 infrastructure lies in our belief that these teams will launch ecological competition in different dimensions with the support of sufficient capital, and encourage the flourishing of applications within the ecosystem. However, most of the current L2 arms races do not focus on ecological construction, and still spend a lot of money on recruiting ZK and technology experts from PSE at high prices (of course, strategically speaking, L2’s investment in technology research and development and talent competition There is nothing wrong with it), but I think that high concurrency compatible Rollup without application is of little value and will only be a castle in the air.
The growth dilemma of L2 ecology
Waiting for the natural growth of the ecology will be a long process. If this arms race cannot help Ethereum usher in the explosive growth of the application ecosystem, and if it still over-invests and duplicates investment in underlying technologies such as share sequencers/Bytecode/underlying design, then we are unlikely to see the emergence of a prosperous ecosystem.
At present, L2s competition in ecological applications is very fierce. If an application has interests bound to an L2 chain, it will become extremely difficult to obtain the support of other L2s, and the application is not available at this stage. Dare to migrate to other L2 chains easily, because once migrated, it will mean that it will be more difficult for them to obtain the Grant originally bound to L2.
Therefore, choosing the right partner has become a difficult problem for applications. For this reason, each L2 wants to have exclusive applications, and then the applications will be divided into different L2s. Of course, when the application becomes larger, application chains or multiple L2 deployments will appear. Then the problem lies with L2. When they don’t want to They dont want to invest too much for the time being when they know whether future applications will stay on their L2.
We also often see that L2 applications that have not yet grown up cannot get grants or incentives from some L2s, causing them to wander around different L2s seeking financial support to survive. So which L2s have not yet disclosed their own ecology? What about the Grant program?
One way to break the situation: Leading L2 projects take the initiative to take on the important task of ecological construction
Of course, we don’t want to see a situation where L2 is on top of each other, which has resulted in a relative fragmentation of the Ethereum ecosystem. Maybe this is a product of the competitive market, but in our opinion, with the help of the L2 application portfolio solution, to incubate and support the emergence of more diversified application products, eventually there will be bundled and scaled applications that will have a great impact on the entire L2 Ecology is necessary.
Unicorn companies worth more than one billion US dollars should shoulder the heavy responsibility of ecological construction, which is very important. There are many ways to build the ecosystem. For example, Starkware and Optimisim have focused on supporting the Dojo and Mud engines in the FOG game. Incentives from Arbitrum Grant, they have done a very good job in supporting ecological investment. In a short period of time, they launched the GMX transaction exclusively on Arbitrum. The scale and user experience are comparable to dydx, and they have also jointly invested in TreasureDAOs gaming platform with IOSG (known as 4399 on the chain in the industry); Optimism and Coinbase launched the Base chain based on Opstack, and the Base chain can appearFriend.techFor such a phenomenal application, the agreement revenue has exceeded 20 million US dollars in less than two months, and the TVL has reached over 20 m...
What they do is very simple, attracting developers within the ecosystem based on network effects, and stimulating more diversified innovation and investment through protocol tokens in various ways. Of course, I recently discussed with some zkEVM L2s that many founding teams believe that giving airdrops and incentive expectations, including how to support ecological projects internally, cannot encourage the emergence of innovation. They prefer to do nothing and let the projects in the ecosystem naturally compete. At this level, I think that instead of investing heavily in funds and tokens to build an ecosystem, more radical strategies will create advantages in future market capacity and card positions. Platforms that do not implement a certain level of investment will also encounter development difficulties. bottleneck.
The second way to break the situation: competition should focus on the art of combining vertical and horizontal lines
Theoretically, L2 competition is different from L1.Ethereum pays attention to equality and open cooperation. Everyone has different technical routes, and they are all challenging different technical implementation difficulties, and all expansion protocols are helping Ethereum build a more powerful network effect.
After Ethereum transitioned from the ETH 2.0 roadmap to Rollup, the ecological technology responsibility fell to L2. The industry’s prospects lie in the entry of super applications and large-scale users. Capital always executes the Ethereum roadmap as soon as possible. Then get Should capital-backed L2 launch an arms race based on ecological application construction? How can the valuation of tens of billions of dollars and the capital investment of more than 5 billion dollars be transmitted to the downstream of the industrys user-oriented application innovation?
I believe that in addition to allowing capital to continue to invest heavily and support the application ecosystem, zkEVM represents the hope of the industrys innovative power and should shoulder the industrys mission to reposition the ecological development plan. L2 should learn from DeFi Lego. Entrepreneurs and developers should not just repeatedly build similar technical service stacks, but should explore different ideas to generate more new perspectives and directions, and try more ideas and possibilities. In some open source technology protocols and directions, the same standards should be used as much as possible to reduce the duplication and waste of resource investment. Competition requires a combination of vertical and horizontal techniques to deploy more financial resources in breakthrough applications. On the pioneering application track, we should strive to support applications like GMX/Friend.tech at all costs on every platform.
The end of the ecosystem where a hundred flowers bloom - L3 and application chains begin to grow
The industry is currently in a tortuous innovation process. We have witnessed too many sighing moments in the bear market. Many first-time founders encountered various difficulties. To get out of the predicament, L2 project founders need to truly understand them. The importance of the industry, and in such difficult times, competition should not be considered only, but there should be more cooperation to encourage and support the blooming of the Ethereum ecosystem.
Mainstream VC and L2 projects can do some construction for the developer environment and developer ecology. The industry must dare to support some projects that are not listed on the currency and the key is to provide values to other projects, build up the open source community, and bring developers together. Start building experience, build application front-end, and start developer education training. I firmly believe that L2 Summer based on the explosion of applications can lead us out of the bear market!
When dydx chose to leave Starkware, they decided to deploy application chains in Cosmos. More and more application projects began to break away from the mainstream L2 and rebuild their own infra+ application valuation logic and product architecture. At the same time, we have seen the large-scale emergence of Rollup as a Service projects such as Conduit/Caldera/Gelato based on opStack deployment, and increased efforts to support the game and application ecosystem.
Caldera, for example, helps protocols and games build small ad hoc features. Each feature requires 2 to 5 engineering days, provides high-touch and tailor-made application features (options for monthly and feature payment), and Gelato. They help Astar complete the issuance of zkEVM on the Polygon chain, and according to the Raas press Monthly fee. Emerging projects such as Arbitrum Orbit/Risc 0/Nil foundation are all competing and building ecological protocols under this new Raas landscape.
In the past year, IOSGs investment strategy has reduced the proportion of investment in infra from 80% to the current 60%, and the proportion of investment in applications has also increased to more than 40%. We are very optimistic about the Asian teams investment in product user interaction/AI-driven applications/ Innovation in social gaming and other tracks. And we will also support these application teams to cooperate with various L2 companies to obtain broader ecological support.
This article only represents my personal views and does not constitute any investment advice. Thank you Jiawei/Weikeng for your revision suggestions. Based on interest disclosure, IOSG is currently an investor in most L2 protocols (including but not limited to Arbitrum/Optimisim/Starkware/zkSync/Aztec/Scroll/Risc 0/Linea/Taiko, etc.).
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