End of L1 Battle Marks the Start of a New Era for L2 Subdivision

End of L1 Battle Marks New Era for L2 Subdivision

Author: Zixi.eth; Translation: SevenUp DAO

Abstract:

The upcoming cycle may no longer be the L1 public chain war, but a potential L2 public chain war instead. I am very optimistic about General L2 and vertical L2. The following analysis: all L1 has the problem of the impossible triangle, that is, it is impossible to achieve decentralization, scalability, and security at the same time. All L1s from 2018-2020, 2021-2023 want to solve this problem, but no one can achieve these three points, and a trade-off must be made.

When people realize that the direction of L1 is problematic, Israel made the first Layer2 Starkware. L2 is the project party operating the node, making its own “chain”. Multiple transactions are packaged into a single transaction and submitted to L2 in the L1 contract. The contract will be executed on L1, and then the main chain confirms the L2 transaction, so it can be fast and cheap, and security and decentralization can also inherit L1.

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In 2022, Celestia proposed the concept of modular blockchain, that is, the blockchain should be divided into 4 parts: Execution, Settlement, Consensus, and DA data availability. Among them, Execution and DA are the most worthy of attention. These two parts bear the business of the top layer (execution) and the bottom layer (archiving transactions).

Let’s go back to 2017-2018 when the investment targets were mostly Ethereum fork chains. The prosperity at that time needs no more explanation, but why was it so popular? This was related to the issuance of new asset types ERC20, IEO, and IDO. Anyone can issue new assets without permission and let the market subscribe to them. This was the fuse of the bull market at that time. The investment targets that made money at that time were L1 (eth fork) and various new asset trading platforms.

In 2020-2021, investment targets have gradually added defi and gamefi represented by dapps, and new asset types NFT can also be counted as one of the traffic entry points. The investment targets that survived and made money in this cycle were L1 (Eth competitors) and various asset trading platforms (In addition to the aforementioned CEXDEX, NFT exchanges, various derivative exchanges also began to grow stronger)

Let’s look at an interesting phenomenon, thanks to Tang Lao Ban’s inspiration @toyeduck. Let’s look back at the L1 that emerged in the last cycle. At that time, we felt that the last round of financing before they were listed was expensive. But after experiencing a bull market and bear market, compared with the current valuation, we still feel that the valuation at that time was so cheap.

However, this sentence has survivor bias.

Why did L1 make money in the last cycle? Because:

1. Everyone indeed wanted to solve Ethereum’s scalability in different ways;

2. Innovation in various consensus methods;

3. Everyone wanted to establish their own ecological perspective;

4. The flood caused by the epidemic caused funds to rush to the largest and most ambitious track that could be told;

5. At that time, Ethereum’s ecology was not powerful enough to have absolute dominance.

From the perspective of General L1, I define them as a large and comprehensive, most ambitious narrative L1, where everyone is an Eth killer and everyone wants to create their own ecology. Even if it is the last round of investment, or even half a level of investment after the issuance of coins, even if it is placed at the current valuation, it is more than twice the return. If it can be sold at a high point (and can be sold because it is unlocked), the multiple is quite high, which is the best solution.

From the perspective of L1 as a service, this seems to be a bigger and more comprehensive story than L1, but the problem will arise:

1. It tests the team-building capabilities of the ecology more than L1;

2. Token capture value ability is very poor (cosmos’s token is pure air, and polkadot’s slot auction has been criticized for a long time). But it can still earn a lot, and even if you get on the last bus, there will be more than twice the return, but the overall ceiling is relatively small.

From the perspective of vertical L1/L2, this is more subdivided, and indeed it is inferior to the above options from the perspective of ceiling, but the reason why it was not done at the time was:

1. There was no modular thinking at the time;

2. Essentially still did an L1, need to rework vm, funds, users, and development;

3. The performance is still quite bad, and it is completely impossible to support enterprise-level finance or mass adoption in the consumer end.

But when the momentum comes, the return will be extremely obvious.

The next cycle’s public chain battle will be the L2 battle.

But I think there may be a different situation in the next cycle, such as ethstorage and xxxx (selling a hint), one solves the problem of data storage on Ethereum, and the other achieves the ultimate execution layer, thus supporting consumer-level applications and serving high-performance derivatives/spot exchanges for enterprise-level. Has there been no mass adoption so far because blockchain is simply not suitable for mass adoption?

It may not be so, especially from a financial perspective, as blockchain or distributed technology is very suitable for mass adoption in trading. If a fast execution layer, i.e. a fast vertical layer 2, could be created, web2 developers, especially Chinese development teams, could likely create a new paradigm on it.

In these two cycles, Ethereum’s unshakable position has already been proven. Will the public chain war reappear in this cycle? I don’t think so. The reason is:

1. Development (30,000 developers);

2. Users (300-400k DAU);

3. Funds ($30 billion TVL);

4. Sufficient iteration and updates, we have confirmed the direction of Rollup, modularization, and DA in three years. Therefore, the next cycle of the public chain war will be the L2 war.

Currently, L2 is still dominated by General, which is still not cheap or fast, and there is still a lot of room for improvement. The current L2 ecosystem is not that big. The performance of L2 is not much better than other L1 competitors. For example, 2B-type financial projects, let’s take Gravity as an example.

CeDeFi’s on-chain derivatives are naturally designed for large clients, but due to the performance of Starknet, even if an appchain is built, it is still unable to achieve on-chain matching (currently only off-chain matching and settlement can be done), so it still cannot be completely transparent and trustless. If Gravity is moved to xxx, it will be a high-performance fully transparent 2B on-chain derivatives exchange.

Can we take a different approach, temporarily abandoning some of the decentralized capabilities, to create a very high-performance L2 to differentiate with the current General L1? This L2 may not be suitable for defi, but it is very suitable for consumer projects (such as gaming or e-commerce) and some enterprise-level financial projects (orderbook exchanges that match on-chain). This creates possible soil for potential mass adoption of dapps.

Currently, such vertical layer 2s that take a different approach may provide good infrastructure for achieving mass adoption of dapps. However, this may require improvements in hardware storage, parallel MEV, data structures, etc. Let the bullets fly for a while, look at the progress of high-performance vertical L2s after half a year or a year, and see if mass adoption can be achieved on them in two or three years, whether it is for consumption or finance.

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