Another month, another couple of Layer 2’s are announced. We’re beginning to see a trend here and going through “Layer 2 Szn”. The problem? Layer 2 Season has not drawn outside capital into the crypto ecosystem. Currently, macroeconomic circumstances are forcing the market to be priced accordingly.

If you recall, Layer 1 chains have had a pretty organized playbook until now; you have some “awesome ability,” whether it’s “faster,” “ZK,” or “gaming-focused,” the result is always the same. A layer one chain that copies DeFi projects over and adds bridges hoping funds from Ethereum’s ecosystem come in someday. The other problem? Installing new wallets. Everyone has wallet fatigue right now, and it almost seems like a losing proposition for user adoption if you aren’t using Metamask.

The solution? Use Metamask! Creating a Layer 2 chain creates an Ethereum-compatible ecosystem that can use the same wallet you’ve always been using. How clever, right?

The problem here is that Layer 1 chains at least had “gas” tokens, meaning you needed the token for something. With Layer 2, these are technically just using ETH as gas. This means it’s pretty questionable where the valuation of the token comes from. It also means that “governance” is the only use case here. The way these chains make money are the following:

1. Announcement for a Layer 2 chain, quickly type a few commands to spin off a chain from OP Stack

2. Proclaim the new chain as impressive, either because of speed, zkEVM roll-ups, or interoperability

3. Add bridging and make sure it efficiently works with ETH

4. Add support or apps that are usually DeFi staking and trading apps, and try to build an ecosystem

5. Announce an airdrop to speed up adoption

6. Airdrop tokens to the public while owning a lot of the governance tokens

7. Keep hoping people use the chain while collecting fees on transactions

8. Spin up the following Layer 2 Chain

So all skepticism aside, now with Optimism Stack minting new chains left and right, we are seeing some significant names emerge. In the last few months, we talked about Coinbase launching Base Chain and a16z even launching a new chain. This month? Some major Layer 2 chains have been getting the spotlight next.

One is Linea, the chain we have been mentioning for a few months now, which has gone mainnet. Consensys, the company behind Metamask, started Linea, so you’d expect this to make a big splash. Linea benefits from having a big team behind it to boost its ecosystem and interoperability. I would be surprised if they didn’t make some exclusive integration with Metamask, or at the very least, make it one of the prime Networks it defaults to. They have released their “Mainnet” bridge at https://bridge.linea.build/. If you can get this bridge to work, I encourage you to since it would likely qualify you for an airdrop. You have to select the Automatic button because it is a one-way ticket, but it does not currently work as of typing. Just for a few more facts about Linea, it’s a zkEVM, which means it can do ZK rollups while maintaining Ethereum’s latest advancements. It also is structured with a “sequencer” and “prover” architecture. It has a series of smart contracts to carry messages throughout each use case (they call them Postbots), a Coordinator to ensure that this message can get through other chains in the ecosystem, and a sequencer that puts these in order and writes them on-chain. Finally, you can batch or take traces of these messages and convert them into a zero-knowledge proof. This means I can take the entire state of the blockchain into a small file and prove the state in the whole network. It just means it can take minimal data per block to track and communicate between chains. This same architecture is going to come up over and over again with these new chains.

The other is Mantle (which we made a Top 5 coin last month under BIT, which converted all to MNTL). Mantle went live in July as well, backed by BitDAO. If you’ve followed their actions, they’ve swapped over to the Mantle branding; there is no BIT token anymore. However, Mantle does not seem to offer anything special; it’s still using Optimistic Rollups, it’s not zkEVM, and to be honest, it looks to be a very generic chain. What does Mantle have? With a massive treasury of $2.3B, this might be the only project that proudly displays its treasury on the front page. Knowing this, we know Mantle will surely do some “cheats” to make their ecosystem successful. It’s hard to bet against that much money, but it’s also not impressive to keep up with technology.

Starknet is also making waves. Like the others, Starknet is a Layer 2 and a ZK rollup. However, it uses a niche programming language called Cairo. Starknet takes pride in this and claims this stack type is more performant than any EVM L2. Last month, Starknet announced the ability to spin out chains that all can roll back to Starknet. This enables chains to have application-specific performance that would not clog the leading network. While starknet is one of the few legitimate standalone chains, it’s hard to see them gaining traction with a standalone programming language. The strategy of spinning out chains has already been done with OP Chain, Polygon, and Avalanche.

In summary: I’m not saying Layer 2’s won’t succeed, but the repetition of Layer 2 chains emerging has me a bit exhausted. We seem to have more chains than actual applicable or highly adopted applications. However, one thing to mention is two coins consistently benefit from this, one is Ethereum (ETH) since it will boost its ecosystem (although usage may be spread to other chains reducing gas fees), and the other is Optimism (OP) because it’s the Layer 2 many projects are spinning off of. With this crypto narrative, I think ETH and OP are worth holding right now. Also, if you can, do as many transactions and activities on these Layer 2 chains as they come out because they will likely have airdrops.

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Crypto Narratives: DeFi’s Next Killer Use Case

It’s been widely accepted that Decentralized Finance (DeFi) is perhaps Web3’s most valuable use case. The upside potential is massive if you take the total market size of anything related to payments, trading, custody, or banking in general. That doesn’t mean, though, that DeFi should be worth many billions; it just means that the total addressable market is way more significant than any other problem crypto is trying to solve.

That being said, back in 2020, DeFi went through a wave of hype. When automated market makers (AMMs) allowed users to swap between different coins, and lending pools like Aave and Compound allowed users to borrow or leverage their assets, crypto went wild. However, it’s been three years, and arguably the only new major use case with widespread adoption has been Perpetuals, which we have covered heavily. Is there anything left in the tank for DeFi? Cue Uniswap V4, perhaps the most significant advancement in DeFi since Perpetual. With the main feature being “hooks.” Think about it in Web2 terms as a webhook, something you can hit that triggers some logic. Again, remember this section is the narratives section; the hype could be greater than the usage, but let’s examine it closer to understand where that hype could come from. Hooks allow actions to execute throughout the flow of Decentralized Trading. To get everyone else up to date, Uniswap is where DeFi blew up. Uniswap was a decentralized exchange that allowed users to pool two assets together. With a large pool of ETH and a large pool of LINK, for example, people could request to swap one coin for the other. That meant I could come in with ETH and trade it for LINK at the market rate. If the pools became imbalanced (for example, if ETH became way more valuable), people would be incentivized to fill up the pool with more ETH via sharing in the trading fees because their position would be much larger %-wise. Uniswap V3 would also allow different-sized pools to be created but notice that this setup only allows for one coin in, one coin out, at one trade.

Okay, great, so how do hooks come into the picture? A hook is just a contract that can be inserted into this flow. That means you could have a contract before a coin enters—meaning, I can say I’ll buy LINK with my ETH, but only at a specific price. Wait a second; that means limit orders are finally possible on Uniswap! This feature has been missing for YEARS. But what else? The other example could be entering a position slowly. For example, if you had a significant position to enter but didn’t want to time the market, you could have a contract saying, “Enter this position slowly through the day.” However, a large order like this could also be front-run in theory. Some controversy arose; for example, what if someone created a hook to steal all your funds? You enter a position, and the hook says, “Send to x wallet.” Worse yet, this could be sitting on Uniswap’s main page! I am hopeful they will have some safeguards about this.

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