On March 3, VanEck released a report predicting that the valuation of Ethereum Layer 2 (L2) would exceed $1 trillion by 2023, and it also predicted the emergence of thousands of Rollups targeting specific use cases. However, VanEck also expects fierce competition among L2 and holds a pessimistic view on the long-term value prospects of most L2 tokens.
In terms of the quantity of Ethereum L2, it has grown significantly compared to the past, according to the latest data from L2beat. There are currently 47 online L2s, with 35 more coming soon, and 11 L3s under construction. The average transactions per second (TPS) of L2 is 11.33 times that of the Ethereum mainnet. Can we really foresee a bull market led by various L2s and imagine the height of the valuation and quantity of L2 in the next 1-2 years?
To answer this question, VanEck, the US asset management giant, has provided its own answer.
On March 3, VanEck released a report stating that the valuation of Ethereum Layer 2 (L2) network might exceed $1 trillion by 2023 under the base case, and it predicts the eventual emergence of thousands of Rollups (a type of Ethereum scaling solution, with most L2s being Rollups).
VanEck’s valuation methodology applies the Free Cash Flow (FCF) terminal multiple to future expected cash flows. The prediction process includes several key steps:
1. Analyzing the overall Total Addressable Market (TAM) size of public chains to estimate transaction revenues.
2. Predicting Ethereum’s market share on the public chain (estimated to be 60% under the base case) and determining the extraction rate in the market revenue for settlement and transactions using the Ethereum ecosystem, as well as how these transaction revenues will be distributed between Ethereum and its L2.
3. Estimating the total value of MEV and further distributing these values between Ethereum and its L2.
In the analysis of L2, VanEck states that they use the following five key variables to measure its potential success or failure:
1. Transaction costs: The cost of transactions for users on the L2 network is a key factor in attracting users. The difference in transaction costs comes from factors such as data compression, scale, proof costs, and profit margins.
2. Developer experience: Compatibility with the Ethereum Virtual Machine (EVM) is crucial for L2 networks, ensuring seamless porting of smart contracts and tools from Ethereum.
3. User experience: The convenience of asset deposit and withdrawal processes is the foundation of a good user experience.
4. Trust assumptions: Building trust around data availability on L2 and measures to prevent vulnerabilities and hacker attacks.
5. Ecosystem scale: The strength of an L2 network’s ecosystem significantly affects its value. The Total Value Locked (TVL) on L2 indicates participation, as it represents funds invested in the ecosystem to capture opportunities.
At the same time, VanEck expects fierce competition among L2s and holds a pessimistic view on the long-term value prospects of most L2 tokens. They state that while some L2 tokens may have value in the future, the path to value discovery is more difficult to predict compared to other crypto areas, especially considering that L2 tokens are not even used as Gas tokens for transaction fees within their own ecosystems.
Looking ahead, VanEck states that besides a few dominant general-purpose L2s, they foresee the emergence of thousands of Rollups targeting specific use cases, which will be segmented based on sectors, applications, or functions.