With the increasing number of L2 projects going public, the FDV (Fully Diluted Valuation) of L2 tokens may continue to face pressure and dilution. However, in the long run, L2 may generate substantial fee revenue.
In the past few years, Layer 2 solutions on Ethereum have made significant progress. Currently, the Total Value Locked (TVL) of Ethereum L2 exceeds $40 billion, compared to just $10 billion a year ago. On L2BEAT, you can find over 50 L2 projects, but the top 5-10 projects account for over 90% of TVL.
After the implementation of EIP-4844, transaction fees have significantly decreased, with fees on platforms like Base and Arbitrum even lower than $0.01.
Despite the technical and usage advancements of L2, the performance of L2 tokens as investment assets has been overall poor (although they have performed well as risky investments). There are many jokes and anecdotes about the underperformance of L2 tokens compared to ETH.
We reviewed the valuation of major L2 tokens relative to ETH, and a notable observation is that despite the increasing number of listed L2 projects, the total FDV ratio of L2 tokens to ETH has remained unchanged.
Two years ago, the only listed L2 tokens were Optimism and Polygon, which accounted for 8% of ETH’s FDV. Today, with the addition of projects like Arbitrum, Starkware, and zkSync, the ratio has increased to 9%.
Each new L2 token listing actually dilutes the valuation of previously listed L2 tokens.
The result of investing in L2 tokens is a significant underperformance compared to ETH. The returns over the past 12 months are as follows:
ETH: +105%
OP: +77%
MATIC: -3%
ARB: -12%
The FDV of major L2 tokens has been around $10 billion in the long term. It is somewhat arbitrary, as market participants do not have strong reasons to explain why it is $10 billion instead of $20 billion or $3 billion. Ultimately, there is significant supply pressure due to demand for liquidity and large unlocks.
The above L2 tokens generate monthly fees of $20-30 million. Since the implementation of EIP-4844, the fees have decreased to $3-4 million per month, resulting in an annualized cost of $40-50 million.
Including Optimism, Arbitrum, Polygon, Starkware, and zkSync, the total FDV of major L2 tokens is currently around $40 billion, with an annualized cost of $40-50 million, resulting in a valuation multiple of around 1000x.
This is in stark contrast to major DeFi protocols, which typically have valuation multiples between 15-60x (based on last month’s annualized fees).
With more L2 projects going public, the FDV of L2 tokens may continue to face pressure and dilution. The market is oversupplied, making it difficult for the liquid market to sustain.
In the long run, L2 may generate substantial fee revenue. L2 generates $150 million in fees annually (including Base, Blast, Scroll), and this figure may significantly increase with increased L2 activity.
The above content is not specific to any particular L2 project but rather a broad observation of the entire category. Investing in a basket of L2 tokens with a FDV of around $40 billion and annualized fees of around $40-50 million (1000x multiple) and expecting them to outperform ETH in the long term seems challenging.
Clearly, there is no shortage of block space between L2 and high-throughput chains like Solana, Sui, Aptos, etc. The limiting factor lies in the applications utilizing these block spaces. I hope that more attention will be focused on the application layer in the future, and the liquid market will reward the application layer rather than the infrastructure layer in the coming years.
In the previous cycle, it was more common for projects to go public significantly ahead of their listings. MATIC went public with an FDV of less than $50 million and has now exceeded $5 billion, a growth of over 100x. However, this is not the case for recent L2 tokens like $OP, $ARB, $STRK, $ZK, and most others that may eventually go public.
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