Layer 2 solutions (L2s) are a crucial element of the Ethereum ecosystem’s development plan, with airdrops fueling interest. But is this strategy justified, and does it truly attract new active participants to the segment?
Coinpaper examined the statistics of four leading L2 projects and found evidence to the contrary.
How It Started
Thanks to the personal efforts of Ethereum founder Vitalik Buterin and the support of venture funds Pantera Capital and Andreessen Horowitz (a16z), a network effect for the development of L2 solutions was created in 2021. The peak of launching such blockchains occurred in 2022-2023, coinciding with the trend of airdrops as a form of token distribution.
Buterin proposed a fundamental technical and theoretical justification for L2 development, calling it a key element of the roadmap for the second-largest cryptocurrency by market capitalization. In turn, the funds helped direct financial flows in the right direction.
A16z presented an airdrop launch guide in January 2020, including a complete guide for venture companies and projects.
It was mainly an instruction on how to avoid regulation and ”cash out” funds without selling coins to the general public. It turned out that L2s and the release of a governance token through a ”free” distribution fit perfectly into the recommendations from a16z.
In a simplified version, the main stages included early funding and centralized management solely by the project team. The next task was to create network effects and involve the community in both the development and operation of the L2. Retrodrops came to the rescue — the pursuit of profit by users created the necessary informational background for the token launch.
The problem is that retrodrops turned out to be artificial network activity, the goal of which is to maximize profits with a subsequent exit from the project. This may be due to the level of technology adoption, which is limited to speculation. On the other hand, there is too much competition in the segment, erasing even the most powerful network effects.
As the authors of a Fidelity report noted, the market for second-layer solutions is oversaturated, and the methods for creating value for their governance tokens are very uncertain.
”L2 tokens are not even basic money in their own ecosystems,” the analysts wrote.
Although experts saw the potential for the sector to grow to $1 trillion by 2030, they pointed out that the market is simply not able to accommodate such a number of protocols.
According to L2BEAT data, as of mid-September, there are approximately 80 operating L2 networks, with about the same number preparing to launch in the near future. There are more than 50 projects with their own token, with a total capitalization approaching $18 billion.
What After the Airdrop?
The problem with L2 is that there are no universal means of maintaining interest in the token after it enters the open market. However, there are problems with fundamental errors in the formation of the project’s tokenomics, with an excessively high FDV (fully diluted valuation) at the launch stage.
This practice involves a small number of tokens at the start, within a dozen percent, and a gradual increase in supply over several years.
According to Binance Research estimates, tokens worth approximately $150 billion will be unlocked by 2030, which will create enormous pressure on prices.
In addition, a portion of the active user base, gathered through the retrodrop, simply leaves the project. To solve this problem, attempts were made to create incentives through multiple seasons of airdrops, as Optimism did. But it soon became clear that users did not appreciate this strategy.
This is evidenced by the experience of the most well-known L2 solutions that entered the market through retrodrops: Optimism, Arbitrum, Starknet, and zkSync.
The main metric of community interest in L2 is not active addresses, but deposits into the network from the main Ethereum blockchain. This is the main indicator of liquidity for second-layer solutions because it is the only source of capital that comes in the form of ETH coins.
Optimism
The graph below shows that the peak range of unique deposits into the network occurred precisely at the time of the airdrop in May 2022 — it amounted to about 2000 transactions per day.
The indicator remained in this position for only a year and began to stagnate in April 2023. Currently, the number of deposits has decreased to several dozen per day.
Arbitrum
The ARB airdrop took place in March 2023, after which activity immediately fell from several thousand deposits per day to several dozen.
Although the TVL (Total Value Locked) of both networks (Optimism and Arbitrum) has a different graph, close to positive, this is a product of ”old money” within the network, not funds from new active users.
Starknet
Of the projects under consideration, Starknet behaved most interestingly, losing activity even before the actual distribution of tokens. Peak values in the second part of 2023 disappeared long before the airdrop.
The number of new investments fell from tens of thousands of transactions to several dozen. And on September 17, 2024, an anti-record was set — one deposit per day.
ZkSync
As in the case of Starknet, zkSync lost a new user even before the drop in June 2024. According to data from mid-January, there were days when no one wanted to bring money into the network at all.
Statistics and Conclusions
According to Token Terminal data, the total number of active addresses in the weekly calculation as of mid-January was 1.9 million.
Such activity with almost zero fresh liquidity inflows into L2 networks may indicate a crisis in the segment — both from a technological and innovative point of view, and from a psychological one. While some of the old participants still remain to ”work” in the network, new ones are simply not interested in doing so.
If the trend continues, the opinion of CryptoQuant CEO Ki Young Ju about the ”dopamine” nature of the crypto market will be confirmed. The analyst believes that digital currencies constantly need new narratives that support the excitement of participants, as the old ones are suppressed by the influx of more conservative players and the actions of regulators.
If Fidelity’s forecasts come true, L2 will simply have no advantages or incentives for users, and high competition will dilute the already low liquidity that old projects like Arbitrum and Optimism have managed to master.
Who needs zkSync with $500 million in venture investments when Binance can list the meme coin NEIRO with a capitalization of $16 million, raising the figure to $500 million in two days instead of several years of complex development.
This article was originally Posted on Coinpaper.com
