With more and more 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 income.
In the past few years, Layer 2 solutions on Ethereum have made significant progress. Currently, the Total Value Locked (TVL) in 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 occupy over 90% of the TVL.
Investing in L2 tokens vs. ETH
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 significant technological and usage advancements in L2, the performance of L2 tokens as an investment has been generally poor (although they perform well as risk investments). There are many jokes and anecdotes about the underperformance of L2 tokens compared to ETH.
We have reviewed the valuation of major L2 tokens relative to ETH, and a notable observation is that, despite the increasing number of listed L2 tokens, the proportion of their total FDV to ETH remains 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 L2 projects like Arbitrum, Starkware, and zkSync, their FDV accounts for 9% of ETH’s FDV.
Every new L2 token listing actually dilutes the valuation of previously listed L2 tokens.
The result of investing in L2 tokens has been a significant underperformance compared to ETH. The returns over the past 12 months are as follows:
ETH: +105%
OP: +77%
MATIC: -3%
ARB: -12%
Historically, the FDV of major L2 tokens has been around $10 billion. To some extent, this is quite arbitrary, as market participants do not have a strong reason to explain why it’s $10 billion instead of $20 billion or $3 billion. Ultimately, there is significant supply pressure due to demand for liquidity and large unlockings.
The above-mentioned 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, with an annualized fee of approximately $40-50 million.
Including Optimism, Arbitrum, Polygon, Starkware, and zkSync, the current total FDV of major L2 tokens is approximately $40 billion, with an annualized fee of $40-50 million and a valuation multiple of around 1,000x.
This is in stark contrast to large DeFi protocols, whose valuation multiples typically range from 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. There is an oversupply in the market, making it difficult for the liquid market to sustain.
Conclusion
In the long run, L2 may generate substantial fee income. L2 generates annual fees of $150 million (including Base, Blast, Scroll), and this figure may significantly increase with the growth of L2 activity.
The above content is not specific to any particular L2 project but rather a broad observation of the entire category. It seems challenging to buy a basket of L2 tokens with a FDV of approximately $40 billion and fees of $40-50 million (1,000x) and expect them to outperform ETH in the long run.
Clearly, there is no shortage of block space between L2 and high-throughput chains like Solana, Sui, and Aptos. The limiting factor lies in the applications that utilize these block spaces. I hope that in the future, more attention will be focused on the application layer, 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 earlier. MATIC went public in the liquid market with an FDV of less than $50 million and is now over $5 billion, growing over 100x. However, this is not the case for recent L2 tokens like $OP, $ARB, $STRK, $ZK, and most others that will eventually go public.
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