Original author: Ice Frog
Reprinted from: Daisy, Mars Finance
Another wave of traditional giant Layer 2 new chain narratives: Catfish effect or fleeting moment?
Some time ago, Paradigm announced an investment of $20 million in Ithaca to build a Layer 2 blockchain named Odyssey; the well-established DeFi project Uniswap launched Unichain; the exchange Kraken, which raised $120 million, is launching its own L2 public chain, inkonchain; and the traditional giant Sony announced the launch of a new L2 network. As the elimination battle of hundreds of L2s is far from over, a new wave of well-backed L2s has joined the already chaotic battle, facing even greater challenges to Ethereum's fragmented liquidity, raising larger divides on whether L2s are parasitic or symbiotic. However, from a longer-term perspective, the intensification of divides often heralds some form of transformation and adjustment. This article will comprehensively expound on how these new L2 narratives will land and what new changes they will bring. Before sorting out the newly entered L2s, it is necessary to first discuss the positive and negative evaluations of L2s and the fundamental issues behind them.
1. What is the fundamental issue?
Parasitism and symbiosis are not contradictory; they are essentially developmental dilemmas.
The Korean film 'Parasite' sparked huge discussions globally upon its release because it revealed one of humanity's deepest mysteries: the boundaries of human nature depend on the boundaries of wealth distribution. The issue of wealth distribution or interest distribution has historically been the root of all social problems, and this holds true in the real world as well as in the blockchain world. From this perspective, the so-called L2 liquidity fragmentation issue is essentially about insufficient traffic that is not evenly distributed, and the alleged parasitic problem of L2s is fundamentally that they currently lack the ability to generate their own blood and cannot feed back to the mainnet while choosing to lay flat. Economically speaking, the cost side of L2 mainly consists of fees paid to the mainnet for settlement operations, and another fee is for renting Blob space; the income side primarily comes from users paying gas fees. In this economic model, it is equivalent to the Ethereum mainnet outsourcing the execution of transactions to L2, allowing the mainnet to focus on security and data availability while continuously upgrading to reduce costs.
The positive cycle of this economic model is based on L2s being able to attract more users through their own ecological construction, thereby forming a larger scale economy that feeds back to the mainnet. The reality is that, apart from a few strong L2s, most active users have not increased but have gradually fallen into a stagnant state.
From the perspective of the economic model and interest distribution, it is not difficult to understand why so many L2s are rushing into this track. Behind any commercial behavior, there must be clear profit motives, whether it is on-chain margin or the vast traffic built by Ethereum, or the wealth effect after token issuance, all of which make this business highly attractive. However, how interests are viewed divides these L2s into types, mainly distinguished as follows:
Following the trend and lying flat: Since the entry threshold for L2 is low, and I can have a share, why shouldn't I participate? If the narrative fails, it's because the mainnet is not doing well, which has nothing to do with me, but the money that should be shared must not be less. This type is often seen among diligent PUA users, who directly lay their cards on the table after obvious reverse extraction, and you can scold as you want, as long as the money is in hand, for example, Scroll.
Self-reliant and self-improving: I am strong enough, and I want a share of this pie, but the mainnet is not powerful enough. The money I earn cannot be significantly taken by you, so I will do it myself. For example, Optimism, for instance, Unichain.
Finding a new path: I come with traffic, I don't necessarily care about your traffic, but I need to borrow your path. For example, Sony's Soneium.
As analyzed in the article 'L2 in Data: Sudden Growth Stop, Elimination Race Begins', L2 itself has not been falsified. The current reality of challenges is due to not only the poor external environment and stagnation of the Ethereum mainnet narrative but also to the overdraft of user trust by the aforementioned passive L2s. When these factors are compounded, especially since most L2s are purely 'following the trend and lying flat', relying solely on the mainnet without any Build mindset, it is not an overstatement to criticize them as parasitic. More critically, such L2s occupy a large majority, akin to the gut microbiota; when your immunity is strong enough, an imbalanced microbiota won't create waves, but once you weaken, it becomes the last speck of dust that crushes you. We need not deny Ethereum's current weakness, but we cannot doubt Ethereum's long-term future as the cornerstone of the blockchain world. The dilemma of L2 is merely a turning point in the development history. From a longer-term perspective, these passive L2s are likely to become relics of the blockchain, while the Ethereum ecosystem must undergo a cleansing process to rejuvenate.
2. Newly entered L2s
Everyone has their ambitions, but the central idea is user experience and application.
2.1 Unichain Recently, the most talked-about L2 is undoubtedly Unichain launched by DeFi leader Uniswap, which has received both criticism and praise. However, as analyzed above, for a native DeFi leader with inherent traffic, creating its own L2 makes complete business sense. Uniswap, as the largest DeFi on-chain, currently has over 1 million daily active users. In terms of trading volume, it accounts for over 40% of on-chain DEX, twice that of the second place, with annual trading volume on Ethereum nearing $700 billion. For Uniswap, the development challenges it faces are expanding market position and share, as well as increasing protocol revenue and token value. The basis for resolving these two issues lies in how to enhance the user trading experience, save transaction costs, and further strengthen competitiveness. From the structure of transaction costs, there are several main variables and corresponding beneficiaries.
Roughly speaking, traders pay an average cost of about 60 bps, so based on an average transaction volume of $700 billion, the annual cost for just this item is about $4.2 billion. If you are a UniSwap and Uni token holder, you naturally have two thoughts: Can the $4 billion be shared with Uni token holders instead of being distributed to Ethereum stakers? Additionally, can the fees be lowered a bit more and the scale continue to expand? Following this line of thought, Unichain was naturally born. Analyzing the problem from the perspective of interests, the choices of many projects will be quite clear. Unichain specifically builds to achieve the above goals in the following ways: Instant trading: Overall built on the Op Stack, it collaborates with Flashbots to develop a feature called Verifiable Block Building. The main idea is to further divide a block into four sub-blocks (Flashblocks), further accelerating state updates and shortening the effective block time, reducing the overall block time to 0.25 seconds; at the same time, Unichain overall uses TEE (Trusted Execution Environment), separating sorting and block building. On the one hand, it prioritizes sorting, while on the other hand, it taxes MEV and internalizes MEV revenue. The combination of TEE and Flashblocks effectively achieves a relative balance between transaction speed and security, but this also places higher demands on the network and technology. Reducing costs and being more decentralized: Unichain's verification network is composed of a decentralized network formed by node operators, and to become a validator, one must stake UNI tokens and earn rewards based on the amount staked. Each block verification will be selected based on the staking weight of UNI. In other words, Unichain mainly utilizes centralized verification and verifiable blocks to further achieve sorting transparency, while the entire transaction execution process is placed on Unichain, significantly reducing transaction costs. Cross-chain liquidity: At this level, Uniswap is practicing 'intent-centric' interaction building, in other words, through the intention model, transforming users' needs directly into intent, allowing the system to autonomously choose paths to execute and complete the entire cross-chain interaction. True intent-centric operations can effectively reduce liquidity fragmentation and manual operation risks. In summary, as a leader, the launch of Unichain not only demonstrates its understanding of technology but also highlights its ambition to become the center of liquidity for all chain DeFi, further enhancing its value capture capability and the value of UNI tokens. 2.2 Ithaca On October 11, Paradigm announced a $20 million investment in Ithaca, dedicated to building a Layer 2 blockchain named Odyssey. Multiple executives have been dispatched for positions, especially as the project has Paradigm's CEO as chairman and CTO as CEO, indicating a significant level of importance. Odyssey is entirely built on Reth, OP Stack, and Conduit. Reth is an Ethereum execution node client launched by Paradigm, mainly characterized by being written in Rust, offering good memory safety and concurrency performance. Odyssey is built using the Reth SDK, meaning this library's use allows Odyssey to have high throughput and low write latency, while also being more scalable; another relatively bright feature is that it directly incorporates Ethereum's upcoming Pectra and Fusaka upgrades into Odyssey to achieve functionalities like account abstraction, improved operational efficiency, and reduced gas costs. On this basis, in terms of user experience, users can directly create wallets using existing Google or Apple key tools; they can log in to use the testnet without needing a wallet, gas tokens, bridge interaction, or RPC prerequisites. As Ithaca claims, Odyssey indeed feels like a future L2, not only incorporating many functions from the Ethereum roadmap in advance but also achieving a series of functions like account abstraction early. From this perspective, it reflects Paradigm's ambition to accelerate the overall development of the Ethereum ecosystem, attracting participation from the ecosystem and users, especially early involvement from developers. 2.3 Sonic In August of this year, Fantom officially renamed itself to Sonic Labs and launched the S token. The token will be used for airdrops, staking, incentive programs, and so on. Fantom, as an established public chain, primarily relies on a DAG (Directed Acyclic Graph) improved version of aBFT (Asynchronous Byzantine Fault Tolerance) consensus mechanism called Lachesis, initially designed to solve the blockchain trilemma. Because of this mechanism, Fantom's main features are speed and cost advantages. In 2019, it launched the EVM-compatible Opera mainnet, and in the subsequent DeFi frenzy, its characteristics made Fantom a hot topic. Notably, with the addition of Andre Cronje, a leading figure in the DeFi space, to the foundation, Fantom reached its peak. However, as the saying goes, not all wishes come true; with Andre Cronje's exit, the token price plummeted, while newcomers like Solana introduced more impressive technologies, further suppressing Fantom's development. This time, Fantom's significant overall technical upgrade has attracted market attention. On one hand, there is the influx effect brought by the return of Andre Cronje (AC), who is a remarkable figure in the DeFi era; on the other hand, there is indeed significant room for improvement in Ethereum's scalability and performance. AC claims Sonic will surpass parallel EVMs. Specifically, the following upgrades introduce a new Fantom Virtual Machine (FVM): primarily by converting EVM bytecode into FVM format while compressing data through parallel processing, thus significantly reducing execution time. Carmen data storage solution: Previously, smart contract state data on Fantom was stored in StateDB, and EVM executed these contracts and updated the database; this upgrade has redesigned the database, adding an indexing system and not using RPL encoding and MPT pruning, greatly saving both time and space. The change in storage solutions is akin to the virtual memory of an operating system, with overall RPC storage costs dropping by nearly 90%. Consensus mechanism upgrade: Based on the original Lachesis, further optimizations were made to reduce redundant information, improving decision-making efficiency and further shortening transaction confirmation times. According to the test data provided by Michael Kong during a speech, it can process an average of 4,500 transactions per second, an 8-fold increase, with block space usage reduced by 98%. Theoretically, it can handle 400 million transactions per day, roughly four times the current transaction volume of VISA.
If Sonic's upgrade can truly reflect the experimental data, from the perspective of the Ethereum ecosystem, it will become an L2 with high concurrency and top TPS, surpassing most L2 projects. In addition, the foundation will establish an incubator through Sonic Lab, investing a large amount of capital to support ecological projects, with more than 300 projects currently in progress. If the subsequent operations are handled properly, the overall development momentum is worth looking forward to. 2.4 Soneium Soneium is an Ethereum L2 launched by technology giant Sony, mainly built on the Op Stack, and will also join the Optimism Superchain network. From the limited information available, the overall architecture is expected to be similar to Optimism, with DA primarily relying on the Ethereum mainnet, but indexing may be mainly controlled by the project team, and details like execution and settlement are still unclear. After more than half a month of development, the ecological projects are already taking shape, with over 60 projects focusing on entertainment, Web3 gaming, and NFT services. Additionally, due to Sony's prior cooperation with Astar Network, it is expected that the Astar zkEVM will transition to Soneium, with corresponding token migration.
From the project's vision, the main goal is to leverage Sony's global distribution channels and capabilities in Web2 to bridge Web2 and Web3. It is also relatively clear that Soneium plans to develop functionality similar to Story Protocol to protect creators' intellectual property. Considering Sony's strong presence in the gaming sector, such strategic plans are not surprising. However, the key to the market's excitement lies in traditional tech giants like Sony venturing into the crypto industry, which fills the market with anticipation. Currently, the testnet data is growing rapidly, with the accumulated wallet addresses exceeding 2.2 million and a total of 14 million transactions processed, showing a considerable overall data growth.
Overall, this is a traditional giant's attempt. The testnet data reflects market expectations, but it remains unclear whether there are plans for token issuance and a specific roadmap in the future.
3. Summary and Outlook
In the wave of the sand, the true gold emerges; application breakthroughs are the future!
As mentioned at the beginning of this article, the current Ethereum coin price is weak, the ecosystem narrative is lackluster, and liquidity fragmentation exists in reality, especially the continuous decline in coin prices has exacerbated negative feedback in the market. However, even so, it is evident that the newly entered L2s still need to rely on Ethereum as a big tree. From the product layout and intentions of these new L2s, we can roughly see an important trend: there may be divides in the reassessment of Ethereum's value, but changes surrounding value distribution are happening. Newly entered L2s either have disruptive technological strength, have their own traffic support, or have high potential in linking We2 scenarios. They do not intend to replace Ethereum but rather consider how to carve out a bigger piece of the pie through their own strength amidst the current dilemmas. This may also represent a breakthrough approach for the Ethereum L2 ecosystem. Projects need to have a particularly prominent advantage in technology, traffic, or ecology; otherwise, they will hardly create any waves in the market. Additionally, from these projects' focuses, a clear trend is that new projects are more inclined to develop applications with better user experiences rather than simply emphasizing the foundational role of infrastructure. This has significant directional meaning in the current situation of oversupply in Ethereum infrastructure. For many passive L2s, whether these new entrants are catfish or sharks, or merely a piece of fish meat, remains unclear in the current environment. From a longer-term historical perspective, no great undertaking escapes the cycle law; the process of moving from a long valley back to the peak must undergo the test of fire. However, no one knows whether today's market stars will still have a voice in the next cycle. What we can be sure of is that elimination will not stop, nor will development.
