• Investment firm VanEck predicts Ethereum layer 2 networks to be valued at over $1 trillion by 2030 but remains “generally bearish” on the long-term prospects of several such networks.
  • The firm evaluated 46 layer 2 networks across five key areas and predicted “thousands” of rollups to eventually emerge. Arbitrum is the most extensive ecosystem, with over $18 billion in locked tokens.
  • VanEck said that transaction pricing, developer experience, user experience, trust assumptions, and ecosystem size, could play into the layer 2 networks’ growth.

According to investment company VanEck, it’s estimated that Ethereum layer 2 (L2) networks could be worth more than a trillion dollars by the year 2023, based on their base scenario. However, VanEck expresses skepticism towards the long-term success of many L2 networks.

The company assessed 46 L2 (Layer 2) networks based on five crucial aspects and forecasted that a significant number, estimated to be “thousands,” of mergers (rollups) would arise in the future. Among these networks, Arbitrum currently leads with approximately $18 billion worth of tokens locked in it, as indicated by data, accounting for roughly half of the total $36 billion locked across all 46 networks.

According to VanEck analysts Patrick Bush and Matthew Sigel, Ethereum is projected to hold approximately 60% of the total market share among all publicly accessible blockchains based on the value of assets in its ecosystem.

Secondary networks or infrastructures, referred to as L2s, are constructed on top of primary blockchains like Ethereum to enhance their capabilities in terms of scalability and speed. Rollups represent one type of scaling solution that functions within this framework.

According to VanEck, these are the elements that will influence the expansion of L2 networks over the long term.

  • Transaction Pricing: The cost to users for transacting on L2 networks is a critical factor for attracting users. Differentiation in transaction pricing stems from factors such as data compression, scale, proving costs, and profit margins.
  • Developer Experience: Ethereum Virtual Machine compatibility is paramount for L2 networks to attract developers, ensuring seamless porting of smart contracts and tooling from Ethereum.
  • User Experience: The speed of onboarding assets and withdrawal processes ultimately shapes the user experience.
  • Trust Assumptions: Building trust around data availability on an L2 and steps in place to prevent exploits and hacks.
  • Ecosystem Size: The strength of an L2 network’s ecosystem significantly influences its value. Value locked on an L2 indicates engagement as it indicates money put into the ecosystem to capture opportunities.

Risks remain

At the same time, Busk and Siegel noted that intense competition among L2 companies existed due to the dominance of network effects as the only protective barrier. They expressed pessimistic views regarding the sector’s ability to outperform.

“They expressed a pessimistic outlook on the future value of most L2 tokens, stating that the current top 7 tokens in this category already boast a total market capitalization of $40 billion. Several promising projects are set to join the scene within the mid-term.”

“The analysts estimate that an additional $100 billion in FDV for L2 tokens could enter the market within the next 12-18 months. However, they caution that the crypto market might struggle to handle this volume without significant price discounts.”

Tokens of the Ethereum L2 category are valued at just over $20 billion, CoinGecko data shows.

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2024-04-04 11:03