Overview
The significant advancements in technology that Rollup solutions have made in recent years cannot be ignored. Since the advent of Rollup technology in 2018, a large amount of talent and research investment has brought significant technological progress, including a Rollup implementation equivalent to the Ethereum Virtual Machine (EVM), bridging technology based on fraud and validity proof, and batch data compression breakthrough, and the launch of the Rollup Software Development Kit (SDK). It is worth noting that multiple Rollup solutions such as Optimism, Arbitrum, Base, zkSync and StarkNet have entered the market, promoting the formation of a thriving ecosystem, leaving other Layer 1 solutions vulnerable and exposed in the battle for market share s position.
While the current adoption rate is in line with expectations and proves the feasibility of attracting the next generation of users, the growth trajectory of Layer 2 solutions (L2) will accelerate in the coming months. With the upcoming EIP-4844 and the launch of new chains such as Scroll, Linea, and Base, L2 is now in the spotlight.
There are two major challenges in the current Rollup implementation. First, since L2 processes millions of transactions every day, aggregating them and submitting transaction proofs to Ethereum, there is a data storage bottleneck. Second, transferring transaction data from L2s to Ethereum will incur transaction costs.
At the heart of EIP-4844 is the concept of "Blobs" (Binary Large Objects). Essentially, blobs are blocks of data associated with transactions, distinct from regular transactions. These blob blocks are stored exclusively on the Beacon Chain and incur minimal gas fees. They allow Ethereum blocks to add more data without increasing their size. In simple terms, utilizing blobs allows the amount of data stored to increase by almost 10 times compared to the average block size.
The main purpose of blobs is to significantly reduce data availability (DA) costs, especially for Rollup's L1 releases. Unlike traditional approaches, where all Rollup data is stored in Ethereum’s calldata space, blobs provide an efficient and cost-effective alternative. Since the consensus layer manages blob storage, blob transactions impose no additional requirements on validators. In addition, blob data is automatically deleted within the recommended 30 to 60 days, in line with Ethereum’s goal of pursuing scalability rather than indefinite data storage.
Before the implementation of EIP-4844, L1 release costs accounted for more than 90% of the total Rollup expenses. Going forward, EIP-4844 introduces the concept of "data gas", a new fee category for blob transactions. This separates the cost of publishing L2 data to Ethereum from the standard gas price. With dynamic pricing based on blob supply and demand, L2 can achieve significant cost reductions when submitting its data to Ethereum, with potential cost reductions of up to 16x, or 90% of current gas fees.
Blobs are like blocks of data that make Ethereum run more efficiently. They are stored separately, do not interfere with validators, and disappear when they are no longer needed. This means lower costs and more space for data, making Ethereum faster and cheaper.
The Economics of Rollups
In order to understand the significance of EIP-4844, it is key to grasp Rollup’s business model. The upgrade results in significant cost reductions, while revenue expectations are likely to remain stable or increase as on-chain activity increases.
In order to fully understand the impact of EIP-4844 on the Rollup economic model, their revenue sources must be analyzed in detail. Rollups earn revenue from network fees and Miner Extractable Value (MEV), and currently MEV capital is controlled by a centralized sequencer that has a monopoly on MEV.
In terms of costs, Rollup faces fixed and variable fees. Fixed costs come from operations such as publishing state roots to Rollup smart contracts, ZK Rollup validity proofs, and Ethereum's basic transaction fees. Variable costs include L2 gas fees and L1 publishing fees required to store batches of data to Ethereum.
EIP-4844 introduces a dynamic blob fee system, which is determined based on blob supply and demand independently of block space demand, which is different from the traditional fee model. Therefore, the fee market of Ethereum after EIP-4844 includes two dimensions:
Regular Transaction Fee Market Based on EIP-1559: This dimension retains the existing EIP-1559 fee market for regular transactions, with its unique dynamics including a base fee and a priority fee that conforms to the principles of EIP-1559.
Blob fee market: The second dimension introduces a blob fee market, where fees are determined entirely by current blob supply and demand. This creates a separate ecosystem from the regular transaction fee market, ensuring that blob fees are not affected by fluctuations in block space demand.
Analysis of the EIP-4844 fee market reveals several notable results:
As the number of application chains and generalized L2 increases, blob demand is expected to gradually rise. In the event that demand exceeds the blob target, the price discovery mechanism of EIP-4844 may cause data gas prices to rise.
Data gas costs are expected to increase exponentially as demand surges. If blob demand exceeds target levels, data gas costs will increase rapidly and exponentially, potentially by more than tenfold in a few hours. Once blob demand reaches the target price, data gas prices will increase exponentially every 12 seconds.
EIP-4844 changes the way Rollup makes and spends money. With dynamic blob fees, part of the fee market follows the normal rules, while the other part adjusts based on blob supply and demand. As blob demand grows, gas costs rise.
Rollups as a Service
As the number of application-specific chains increases, the Rollups as a Service (RaaS) business model becomes increasingly important. For example, Ethereum Layer 2 has a clear advantage over application-specific chains on platforms like Cosmos, mainly due to the emergence of RaaS solutions.
A major reason for this advantage is the reduction in infrastructure overhead. In the context of Ethereum Layer 2, this process is significantly simplified thanks to RaaS solutions. These services simplify the deployment, maintenance, and management of customized Rollups, effectively solving the technical complexities that developers often encounter when developing mainnets. Therefore, RaaS enables developers to focus on application layer development, improving their overall productivity.
RaaS also offers a significant degree of customization. Developers can not only choose their preferred execution environment, settlement layer, and data availability layer protocols, but also gain flexibility in key aspects such as orderer structure, network fees, token economics, and overall network design. This adaptability ensures that RaaS can be customized to the specific needs and goals of a wide range of projects, enhancing the versatility of Ethereum’s second-layer solutions.
We can distinguish two main types of services:
SDKs (Software Development Kits): These serve as development frameworks for Rollup deployments and include notable options such as OP Stack, Arbitrum Orbit for L3s, Celestia Rollkit, and Dymension RollApp Development Kit (RDK).
Codeless Rollup Deployment Services: To simplify the design, these services make it possible to deploy rollups without deep coding knowledge. Solutions such as Eclipse, Cartesi, Constellation, Alt Layer, Saga, and Conduit belong to this category. They lower the barrier for developers and organizations to take advantage of Rollup technology.
We could also include a third class for shared set of sorters that serve multiple rollups simultaneously, like Flashbots’ Suave or Espresso.
While the current market landscape suggests little demand for custom Rollup creation, it is widely expected that RaaS could inspire the emergence of hundreds to thousands of rollups as macroeconomic conditions improve and product-market fit becomes clearer.
RaaS makes developers’ work easier, faster, and more flexible. This gives them more time to prioritize and focus on the core logic and business model of the application.
Questioning the usefulness of L2 tokens
The success of Rollup solutions like Optimism, Arbitrum, Mantle, zkSync, etc. is unquestionable. However, when looking at Rollup governance tokens like $OP or $ARB from an investment perspective, the situation becomes more complicated.
Bear Market: Limited Upside
In traditional financial markets, shareholders enjoy a range of rights, including dividends, voting rights, and claims on assets, which provide shares with intrinsic value and make them attractive investments. In contrast, tokens that represent only governance power lack these guarantees and are limited to voting on governance proposals. Since Sequencer revenue generated by transaction fees does not flow to token holders, the growth of the network does not necessarily translate into an increase in the value of the token. This raises legitimate questions about the value proposition of Rollup tokens.
While governance rights have inherent value, especially in second-tier solutions where token holders have significant influence (as seen with Optimism’s RPGF and Arbitrum’s STIP), the lack of dividends or other revenue streams makes them a different forms of investment.
In today's high-interest environment, assets that do not provide real yields may be less attractive to conservative investors. Rising interest rates increase the cost of capital, making the opportunity cost of holding non-yielding assets more important. In this context, ETH with its stable staking returns may be a better choice for risk-averse investors, despite the growth potential of Rollup tokens.
Bull Market: Growth Narrative
In financial markets, a company’s value is not tied to just profits or dividends. For example, the valuation of growth stocks depends on their long-term growth potential and reinvestment strategy. Investing in Rollup governance tokens can also be similar to investing in non-dividend growth stocks. Historically, companies like Amazon have chosen not to distribute dividends, but instead reinvest profits in expansion and innovation. Investors in such companies are not necessarily seeking immediate returns through dividends; instead, they expect long-term growth and appreciation in value. In the case of Optimism and the $OP token, there is a clear commitment to reinvest profits into ecosystem growth, promoting a virtuous cycle of increased demand for its native dApps, sorter revenue, and RPGF. In addition, with initiatives such as Superchain on the horizon, the bandwidth of the OP Stack continues to expand, ultimately creating a strong moat that is difficult to ignore due to network effects.
Industry Outlook
L2 is developing into a highly competitive space, and the implicit expectations of airdrops can significantly affect user behavior within any given L2. However, it is important to recognize that the valuation of a particular L2 is intrinsically linked to the value of the L1, with network effects being the differentiating factor.
This connection becomes apparent when we examine how current Rollups operate. They charge gas fees in ETH, and must pay data availability fees to Ethereum in ETH. Essentially, these rollups cannot enforce their own monetary policy; Ethereum dictates how much they must pay to the underlying chain.
Therefore, there is no unique monetary premium for L2s. Still, the way L2 tokens are currently traded does not always align with this reality. However, as long as they can build a strong ecosystem and promote network effects, these L2s have the potential to become sovereign entities in the future, and the market may seek to anticipate and preempt this opportunity.
Airdrops can indeed influence user behavior. But here’s the thing: the value of L2 is closely tied to Ethereum (L1). L2s are charged and paid in $ETH, so they don’t have their own monetary rules. In this context, the current L2 operating model is clear: they charge fees to end users and keep a portion of those fees to cover settlement and data availability costs on Ethereum. Owning the relevant governance tokens is effectively equivalent to holding a portion of the profit difference generated by L2.
Things get more interesting when multiple instances can be created, as is the case with Optimism. In these scenarios, the difference in profits generated by these instances can flow back to token holders. For example, Base allocates 10% of its fees to Optimism.
This model unlocks greater potential for the scalability of L2 assets, setting a precedent for sharing a portion of fees with other chains as an implicit delegation agreement. This dynamic not only adds depth to the L2 ecosystem, but also strengthens the value proposition of L2 tokens as they continue to evolve and adapt in the competitive landscape.
But even if we can expect the base layer to increase in value, L2s generally have higher beta values compared to $ETH. In addition, investors may view their tokens as a bet on the entire ecosystem. We advise caution with this approach, as it is not uncommon for individual projects to move to the latest and most popular L2 at any given moment.
Furthermore, L2s are positioned to attract more users, thereby increasing the value flowing back into Ethereum. This dynamic may follow a power law distribution, although not as pronounced as observed in liquidity staking. Therefore, it is possible that, in turn, ETH is the asset that investors may prefer to hold. As more L2s enter the market, dApps eventually proliferate on multiple L2s, and choosing the ultimate winner chain becomes more complex. However, no matter who the ultimate winner is, ETH holders and Ethereum validators will benefit from increased Rollup activity.
all in all:
The value of Ethereum rises with the growth of Rollup technology, and Rollup as a Service (RaaS) will bring a wave of Rollups to the market.
L2’s volatility is different from ETH, and projects can quickly switch between L2
L2 will attract more users, thus benefiting $ETH holders and validators, but picking winners in L2 becomes complicated
Ultimately, holding ETH may be the safest bet.
Do we need other alternative L1 solutions?
The days of L1 as a rotating exchange seem to be a thing of the past. With L2 solutions effectively solving Ethereum’s scalability challenges, it becomes important to question the value proposition of other L1 blockchains such as Near, Avalanche, Solana, Fantom, etc.
A key difference is the ease of launching Total Value Locked (TVL). L2 enjoys an advantage in this regard because users and developers are already familiar with the tools on Ethereum. They only need to bridge their assets to the L2 chain to take advantage of the reduced transaction costs. In essence, the initial TVL on Ethereum is just looking for a more cost-effective transaction environment.
However, it is important to recognize that other L1 solutions still serve specific purposes and offer unique features that may appeal to certain use cases.
Diverse ecosystems: Other L1s foster their own ecosystems, often with different communities, projects, and innovations. These ecosystems may meet the needs of specific markets or specific industries.
Specialized features: Some L1s prioritize features such as high throughput, low latency, or specific consensus mechanisms. These properties may make them more suitable for certain applications, such as high-frequency trading or gaming.
Diversification: From an investment perspective, diversification across different L1s can reduce risk. While Ethereum remains dominant, other L1s may offer diversification opportunities. For example, investing in Solana could serve as a way to combat the dominance of the EVM (Ethereum Virtual Machine) (imagine a scenario where a zero-day vulnerability is discovered in the EVM).
Those L1s that can bring unique value to the ecosystem (such as Solana, Monad, etc.) will survive. It is no longer enough to just provide a chain that is EVM-compatible and has lower gas fees. This may seem obvious now, but there have been many instances in the past where EVM-compatible chains with lower gas costs reached inflated valuations. Take Moonriver, an EVM-compatible chain on Kusama (Polkado's canary chain), which reached an all-time high of $494 in Q4 2021 and is now trading at $4.
all in all:
L2 reduces the need for L1 rotation transactions. While other L1 blockchains still serve unique purposes, L2 have an advantage in terms of total value locked (TVL) because they offer familiar tools and lower transaction costs.
However, the diverse ecosystem, specialized features, and diversification make other L1s still attractive for specific use cases and risk mitigation.
The surviving L1 will bring unique value beyond EVM compatibility and lower gas fees
While cryptocurrencies and stocks are structurally different, the basic investment logic still applies - investing in assets with long-term growth potential can be an attractive strategy.
L2 operates by capturing price differences, a model that is reinforced when implicit revenue sharing agreements are formed with other chains, such as Base allocating 10% of fees to the Optimism treasury.
ETH can be viewed as an “index” asset, and L2s function like personal “stock picking.” Regardless of which L2s are most active, ETH holders and Ethereum validators will benefit from increased Rollup activity.
in conclusion
One way to look at this is that EIP 4844 will significantly reduce the costs of L2s, while their revenues will grow over time. The difference between the two is the profit margin for these L2s. As this gap widens, the likelihood increases that they will decide to start sharing these profits with token holders. If you’re willing to wait for the puzzle pieces to fall into place, thinking about this logic ahead of time is a reasonable approach.
As we chart the path for the future of Rollup governance tokens like $OP or $ARB, it’s clear that the space is poised for a transformation. The rise of EIP 4844, ERC 4337, and the emergence of RaaS (including SDKs and no-code deployment services) herald a wave of Rollup adoption.
This wave of adoption could see the rise of thousands, perhaps even tens of thousands, of Rollups. However, investor opinion on the value of these governance tokens is divided. On the one hand, challenges like the lack of traditional value capture mechanisms and the impact of a high interest rate environment may limit the potential upside of Rollup tokens. On the other hand, some investors may compare these tokens to non-dividend growth stocks like Google, Amazon, and Tesla, recognizing their potential for higher valuations due to their long-term growth prospects.
As we enter a more competitive space, it will be critical to remain adaptable, given the changing dynamics and unique qualities of Rollup governance tokens.
