The Ethereum L2 Token Thesis

Are L2 tokens worthless governance coins? Will they accrue value? Are L2 tokens bullish? Ryan and David dive into the details in this week’s episode of Bankless Takes.

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TIMESTAMPS & RESOURCES

0:00 Intro
3:03 L2s Numbers
https://www.growthepie.xyz/fundamentals/daily-active-addresses
https://l2beat.com/scaling/summary
https://defillama.com/chains
16:55 Tokens Worthless?
https://x.com/RyanSAdams/status/1745919415604883725
32:30 P/E Ratios
36:05 Token Valuations
38:40 Alt-L1 Bull Case
44:40 Summarizing
47:00 Closing & Disclaimers

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Not financial or tax advice. See our investment disclosures here:
https://www.bankless.com/disclosures⁠

Why are L2 tokens bullish that is the topic today on bangl Stakes bangl Stakes is an episode where David and I just speak our mind on whatever we want to talk about and today we decided to talk about we want to talk about layer 2 tokens yeah are they bullish are they

Bearish I mean that was kind of a question a few things we’re going to take on the question of are L2 tokens worthless governance tokens that is narrative going around will they acrew any value or are they actually bullish Ryan before we get into the conversation uh why why are we having this

Conversation where where did this come from well you were out mountain climbing David there was uh some robust discussion in the bankless citizen Discord as there always is by the way so if you are a bank been cring you should join big way great discussions anyway the question was posed exactly as I

Stated like are L2 tokens going to go up are they bearish are they bullish are they just worthless governance tokens how should we think about them how do you guys think about them and so this is essentially my answer to this and I want to see how much you

Agree with that answer and uh we may as well record it as an episode sound good I think we should do it and we’ll get right into that conversation but before we do a moment to talk about some of these fantastic sponsors that make this show possible especially Kraken our

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Banlist or click the link in the description below all right David so the first place and if we’re going to talk about L2 tokens we have to see if there’s zombie chains or not like is anyone actually using these things and it’s been uh a few days since I’ve

Looked at some of these metrics but in depth probably you like a few weeks and it’s maybe maybe worth a review to look at some of the core metrics so I’ve got a website pulled up yeah let’s set the table it’s uh called grow theie doxyz

And uh fun fact David you can get a lot of L2 metrics Layer Two metrics on the internet these days all right there’s a series a great place I know it’s a a series of fantastic sites that put this out the first is grow the pie and let’s

Take a look at daily active addresses so you can think of a daily active address almost like a bank account it’s true that like single account yeah a user can have multiple uh addresses that is also true so it’s like a one to many US probably have like I don’t know

Thousands probably um but uh this gives you a sense of uh you know the number of addresses on the Chain ZK sync era is right now leading in daily active addresses so these are kind of bank accounts as it were using the chain 428,000 daily arbitrum right behind that

185,000 Linea right behind that 88k op mainnet 66 base 63 scroll 40 44k on down Zora polygon are also in there immutable X Etc polygon POS is not in there because uh not technically a layer two a side CH yeah it’s a it’s a side chain

But that is in the process of being converted to a layer to I expect we see that sometime in 2024 anyway that gives you a sense of some of the activity and it’s um it’s kind of up only David if you look at sort of the maximum look at

This right I mean it’s growing now we I should probably say not all of this activity it corresponds to one like user I think some of these chains are like air drop hunting air drop farming as it were the chains that have not issued tokens have a probably a significant

Premium of activity from people who are just using the chain uh to hunt the token and you can probably see that both in the daily active addresses and also the transaction counts for some of these chains and which ones would those be like ZK uh ZK syn era is the big one

Lanaa also very big um base is probably not being airdrop hunted because I don’t think people are really like think about a base token uh and so there’s opportunity cost to hunt the base token when you could be hunting like ZK Sync has been talking about their token for

Like 20 2019 or something like they’ve haven’t been shy about that yeah and so probably base is more or less above 95% organic so good numbers uh on that and uh certainly up only on the transaction count we’re seeing kind of up only numbers as well so you’ll notice some

Massive spikes here too like see this arbitr those got to be in scriptural inscriptions right inscriptions oh that was the that was the spike that took down the arbitrum chain exactly this was uh but also was the number one largest daily transaction volume of any Layer Two yeah um so really stress tested

Arbitr stress tested so this is definitely a metric of for usage but it can be gamed in like all various ways that we’ve sort of seen one transaction is does not equal one transaction not all transactions are the same but still I mean you want to see an uptrend line

Over time and you’ll see spikes for volatility it’s also a good stress test of how many transactions these networks can actually uh handle before falling over so ZK sync era right now is the current lead with 1.3 million transactions on a daily basis arbitrum is second with uh 720,000 right now did

You hear the report as to why arbitrum um toppled over when the inscription attack got it um a little bit yeah I don’t recall all the details though I think it it was something like super trivial it was like an out ofd prism client and once they once they updated

It it’s was like oh it’s done we fixed it that’s the problem you just have one sequencer as well right which multiple sequencers can start to fix liveness failures um op main net is next uh 369,000 uh and then Bas and immutable X is on there uh lanaa is on there as well

Uh congratulations to arbitrum for passing 500 million transactions I don’t know if that makes them number one in total like raw transaction count it could be they could be number one in that foray so that that’s pretty cool for Lay for layer twos yeah that’s pretty cool and arbitrum like probably

Has the highest ratio of total transactions to Total organic transactions because they’ve had like a decent amount of activity post token launch yeah they’ve been around for a while too um stable coin metrics as well so arbitrum has about2 billion dollar worth of stable coins on chain uh op has

610 uh million and then base all right this is is one to watch for stable coins you know that coinbase is going to send some love bases they’re going to put the usdc on the base chain that’s where it’s gonna go and then Circle which coinbase

Owns 25% of is gonna go public and then base is going to be the Visa competitor that’s my prediction that feels like a a good a solid prediction so this is at 300 million right now but I expect that to like 10x you know 50x I don’t know

Something like that it’s going to uh be pretty large then a total lock value locked this is a pretty astounding statistic so yeah so if we look at the total arbit chart 22 billion across all layer twos all right but so um arbitrum has about half that at 10 billion op has

About six billion and then base 750 million uh so pretty respectable ZK sync era I I really like having base metrics here because they feel so pure opt uh optimism and arbitrum probably pure pretty damn pure too arbiton I think recently has some uh liquidity incentives going on that are kind of

Juicing some numbers but like the base they’re not going to juice liquidity they’re not launching a token so like the base just feels like it gives us um like a control to compare against yeah uh I think really useful like metric to have I agree and by the way this is

We’re talking about the the big ones but there’s this massive longtail of layer twos that aren’t even listed on this website right that are kind of like trying to compete like we haven’t even talked about mantle that’s been a massive grower lately then there’s another metric which I think is useful

Which is onchain profit okay so this is kind of the punch line that we’re getting to right I think so this is going to be part of like how we talk about L2 tokens and why they’re valuable but this says arbitrum yesterday was about 60k in onchain profit and you

Could see like look at these massive spikes so there was a day where uh base was making let’s see uh 380 K per day uh that was July 30th so this must have been friend Tech must been like launch yeah yeah launch around that like uh

Series so it’s spiky this is these these a these averag smooth yeah yeah these daily averages are not necessarily kind of like the annual averages which would be this is a seven sday rolling average it says okay seven-day rolling average so one still spiky by the way seven days

We should explain what profit is okay so what profit basically is why don’t you explain it David well the grow the pi website has it actually pretty laid out strong pretty strongly here because they have this economics section of the tabs that we’re looking into and page number

One in the section is fees paid by users AKA Layer Two gas fees the next page is rent paid to the layer one aka the gas fees paid by the layer two to the layer one and then the third page is onchain profit and if you take the first fees

Paid to users to the layer two subtract the second which is feeds paid by the layer two to the layer one you get get the third on chain profit the difference uh and so I’m pretty sure if we just go through these Pages you’ll be able to calculate the numbers yesterday Arbitron

Pocketed a difference of $615,000 between the difference of what the users pay to arbitrum versus what arbitrum paid to the layer one let’s go check how much arbitrum uh was collected revenue from users yesterday so arbitrum if you could click on that tab arbitrum collected $188,000 yesterday from users who paid

For arbitrum Block space and then yesterday arbitrum paid ethereum how much let’s go to that tab arbitrum paid ethereum $126,000 and so if you subtract those that number from the from the first you get the profit which is $61,000 and this is the profit in a pre-pro sharding pre full D sharding

State where uh a lot 95% of the costs for these layer twos are data availability uh and that goes down with Proto dang shart which is coming in March and then we’ll like almost approach a very low number I don’t want to say zero but a very low number with

Full dank charting which is coming 20 25ish maybe no one knows and and they’ll pass these savings onto the user right so what what I love about this is it’s such a simple model it’s a it’s like a value added reseller type of model right

So you have a a supply of block space that ethereum sells wholesale it’s like hey who wants my block space I’ll sell it to you and a bunch of layer twos are bidding on that block Spas what do they do they buy that block space from

Ethereum and then they resell it who do they resell it to users daps they resell it they add their bit of value on top of it which is execution layer value and then on that Delta they make a profit so they have Revenue they have expenses and

They have profit it’s a p&l business this is something Larry fin could understand okay this is like it’s like it’s not hard and the the interesting thing about this is they’re all profitable now we’ll talk about where that Reven by default they’re profitable by default yeah now of course we’re not

Taking into account like how much it costs to run the sequencers we’re not taking into account how much it costs to like develop the software do the marketing for these chains all of that is additional cost that is outside of this type of a p&l right but you can

Clearly see profits are being made and like if you turned off everything else you would have a profitable business right here as long as you kept the sequencer running so one last thing to show you and then we’ll get to the question of are layer 2 tokens great or

Do they suck uh and what what do we think about this this is a total value locked across all chains so this is kind of one metric that’s kind of important because what I think you want to do is you want to start benchmarking layer twos and you know how much value that

They are uh accreting right now and managing right now versus maybe alternative layer ones or ethereum itself so right now ethereum is over 50% uh let’s see it is about 55% in total value locked right next the ethereum layer one ethereum layer one next is Tron all right and this is

Because hilarious I never not laugh at that David there’s 50 uh billion dollars worth ofct primarily on Tron there sta $ 69 billion nice in Stables on ethereum and there’s $50 billion on Tron and Tron doesn’t even have defi it just has payments exactly uh so that’s an

Interesting of uh I I guess like Edge case but is real utility for some people binance smart chain let’s see binance smart chain is next with about 6% and then arbitrum 4% uh 4.6% salana about 2 and a half% optimism 1.5% polygon 1.5% Avalanche 1.5% on down okay so arbitrum

Is about double the size of salana okay and in the same ballpark as uh optimism right now and Avalanche is you know roughly the size of polygon from you know total assets under management so all told alternative layer ones if you disclude Tron and binance smart chain

It’s primarily going to come from salana and Avalanche right now and it’s about 4% of total uh value locked in in the market right now so that’s to kind of Benchmark the size that that we’re looking at and certainly the layer 2 ecosystem is probably what like this

Looks like about seven or eight % of total value locked so it’s about double the size of alternative layer twos right now that Mak sense yeah the way I would perceive tvl on chain uh on chains is um a little bit like potential energy just having tvl on chain doesn’t actually

Natively produce any economic activity like you can just hold you know all your Stables on arbitrum and not do anything with it and you actually won’t make arbitrum any money because you won’t be spending any gas fees but having tvl opens up doors for reasons to have

Economic activity so it’s not a perfect one to one uh it’s a correlation not a causation but just if you have a bunch of tvl you have a bunch of opportunities for economic activity uh and so that’s there’s like a loose coupling I would say for sure it’s it’s a game bu metric

It’s a metric you can’t fully rely on when the native token goes up like it’s going to spike in terms of tvl right we’ve saw that with Sal are we counting native tokens in tvl here I don’t think we are oh heck yeah we are yep oh okay

Um it’s all like total value locked on these change so like Soul token goes up you’re going to get a massive increase in uh that makes sense that makes sense for the native asset of a layer one on a layer one um does but like if op goes up

And there’s op on optimism I guess tvl I guess yeah tvl and optimism goes up okay sure uh all right so that’s kind of the the Baseline setting of you know state of the l2s from a metric perspective so the big question that we’re trying to

Answer here is um are two tokens going to go up in price or are they just worthless governance tokens this was the question posed in the in the bankless Discord that I mentioned earlier and I I want to give you uh some takes here David and see how much you kind of agree

And maybe we’ll take this in pieces here but just to set the stage um I do have a bias I would say Okay and like everyone hopefully if you’re an investor in the space you’re not just being whipped around by The Winds of like whatever the most popular narrative is hopefully you

Have a bias AKA a thesis like you have some sort of conviction concept for understanding the world yeah and so my biases let’s call them are um one long-term time Horizons right so I’m not a narrative Trader I’m talking when I’m in the context of this two to sevene

Intervals okay this is different if you’re doing narratives you’re doing like 3 to 12 month time Horizons so for the listeners this may not be your time Horizon you want to do narrative there’s a different play what I’m saying probably is just like not relevant to you because you know it’s a different

Time Horizon the second thing I would say is I weigh something called fundamentals highly in my investment and I I don’t want to like sound um how do I put this I have a specific yeah high and mighty I I fundamentals what you my is fundamentals yeah okay because because

There’s holes with the idea of fundamentals right so I have your fundamentals are not everyone else’s fundamentals exactly and fundament are just like a consensus technology at the end of the day and right so what I’m trying to do is get everyone else to agree to my fundamentals my my

Fundamentals are better than your fundamentals yeah exactly but mine are better dude no that’s why that’s why we talk about them my specific definition of fundamentals is for chains that sell blocks right this would be an alternative layer one or a layer two uh long-term profitability that’s the

Fundamental ey look which we just talked about what that means it’s the revenue that the chain brings in by selling blocks less its costs which are the amount that it pays for for gas to the parent chain or the amount that it issues like remember alternative layer

Ones they have to pay for their security they don’t pay ethereum for their security so what do they do they issue block rewards they issue new supply of their token to pay for that security okay that to me is the most UNG gameable metric profitability is the most UNG

Gameable metric for proof of value creation for a chain all right now this may not money flows from into your Vault and you can measure that that is fundamentals I mean this is kind of how equities like are valued right it’s like I you know of course the perceived growth ratios discounted cash

Flows over time right that is at least some utility value consensus that the market kind of believes right so but this may not be the way the market decides to Value blockchains anytime in the near future or even in the fullness of time I don’t know maybe there’s some

Other fundamental that becomes more important right maybe active addresses become kind of the the metric or something else becomes more important so I’m looking at this from a p&l perspective so caveat asde my take on um l2s is that they are positioned incredibly well for their tokens to ACR

Value all right so are L2 tokens bullish are they going to go up in price my take is when I look at this yes all right and here’s why three reasons for this one and this is is probably the most important David they have a 100x more

Advantage in the block space profit game because they don’t have to pay for their security through issuance of the base token all right it is a cheat code for they’re just value added resellers right instead of like doing the hard work instead of bootstrapping their own military and you know Court service and

Police force and all of these things Ryan means security and smart contracts and ecosystem exactly uh uh they just take all of that and then they resell it and they can resell both layer one block space and data availability block space so they could go take Celestia and

Resell it they could go take eum just started doing yeah they could go take aan da and resell it and that’s what they’re doing and so they’re always going to be more profitable than somebody who is issuing their native to like just look at the p& just look at

Cost going so they have an advantage there that I think is hard to compete with now this is a caveat and this is where the kind of the second comes in right it it is dependent on their ability to attract users and capital to their execution environments so if they

Get out played by an alternative layer one or some layer one that is better able to capture users and capital okay mind share adoption uh trust brand it won’t matter an an L2 zombie chain is just still a zombie chain and it’s not producing revenue or profits and if an L

Alternative layer one is able to kind of capture that value then they now I I would just say what have we just seen I mean we looked at the numbers uh we’ve seen traction for arbitrum for op for polygon for bass for ZK sync and they

Have uh shown that their rates of of occurring uh users and and traction are even exceeding their L1 competitors so I I don’t think you can say alternative layer ones are just going to attract users and capital at a far faster rate I think that’s already been disproven at

This point in the market like n you’re saying it’s being disproven as in it’s the only stry that can do that it is it’s still it’s still happening it’s still in the mix for sure and there for people who are valuing uh layer ones who are negative in economics as in they’re

Issuing more uh tokens than they are acing in fees the market is assigning a growth premium a a PE ratio for layer ones who are like uh operating at a loss in order to incentivize growth which is a tried andrue strategy that we’ve seen for decades and so yeah this and people

Generally I would say ascribe high PE ratios to layer ones exactly and so I’m just making the case that um l2s are not positioned to be uh valueless governance tokens not necessarily that they will exceed uh alternative layer ones but you can you can see that they’re doing a lot

In terms of traction the last piece on this kind of worthless governance Stakes is I am not bearish on governance tokens okay so if you think about equities David what are equities governance tokens with cash flows certificates with paper exactly but they have some sort of legal guarantee to cash flows right so

Long as the governance token has a code-based guarantee eventually to cash flows to me that is a value acing uh device okay we’ll contrast this with something like um the uni token right now does not have a fee switch there are transaction fees and value C mechanisms

That can happen out outside of the protocol it is closer to like a a worthless governance token although I do think the fee switch will be turned on uh I think for for layer twos it’s going to be much closer to layer ones in that you have a sequencer which ACR all of

The profit you basically and that profit is just going to be passed on in the form of staking let’s say or in the form of like a work utility token right this is what madic is is moving towards for for pole and I think we see other ch is

Kind of moving to this type of model to uh essentially enable the token holder to participate in that onchain cash flow so it’s a governance token with cash flows I think that’s what we’re seeing emerging here and that’s why I would say it’s different so what’s your what’s

What or that’s that’s why I would say L2 tokens are actually bullish as long as they continue to have this these positive revenues new user base um you know usage uh and that number goes up then I see the tokening value what’s your take on that yeah you you said L2

Tokens are governance tokens with cash flows I would just amend that just a slight am in a slight way just to L2 tokens are governance tokens over cash flows that’s the thing that they govern over right and so like the base case is what I would say arbitrum currently is

Which is you can go look at the Smart contracts of arbitrum and you can see ether flowing into the arbitrum sequence vault which is governed by the arage from Dow and so if you are an ARB token holder you have some amount of say over where that money goes and I think it’s

Really the next phase of the value capture conversation is like well it’s up to governance to apply that capital in value added ways in the most uh in the highest Roi possible and so sitting in the treasury is one thing but you know let’s take Amazon for example what

Did Amazon do with it its money it just sent it right back into the company it incentivized growth which was a good strategy uh is that arbitrum strategy uh I don’t know arbitrum governance will have to determine what is the best way to incentivize growth using the capital

That is receiving but the thing is like arbitrum is cash flow positive and so now it’s kind of up to arbitrum treasury management and just like Dow governance which is you know what crypto is to apply that Capital uh in a way that grows is a creative to arbitrum even

More and we’re so early into crypto what is it 20 it’s 2024 arbitrum is how many years old uh five actually wow five years um in the grand scheme of things we’re at the very beginning of these things uh and so we still have um I

Don’t know 98% of the world left to capture 99% of the world left to capture and get on chain uh and so these treasuries these positive treasuries that are uh being accured by layer twos need to go to capture the remaining 99% of people that are not on chain yet I

Mean when it’s in treasury uh you can uh distribute it vi vi almost like a dividend to those who are staking those token holders this is kind of I think the the the convergence of this is we will have a kind of a network type Equity or an internet type Equity that

Returns funds to the holders of these tokens in the same way that like equities in uh you know traditional Capital markets are a right for governance over cash flows uh and so like that’s similar to me and the last thing is listeners might say well but like none of that matters right

Now like p&l don’t matter no one’s actually looking at it like this here’s a reason I think people might start to listen like look at it like this block space fees David they’re going to commoditize and collapse to zero that that is my belief l or two fees are

Going to zero yes for all chains except master settlement chains like ethereum okay because ethereum is doing a different service it is providing sement it’s taking its block space and it’s selling it to a whole bunch of chains but the chains themselves right the rollups the layer tws themselves their

Fees will collapse to zero you just see it right now look at the da layers we we’re just talking about Li we just at the very beginning of the da Wars it’s getting it was like what 99% cheaper or 90% 95% cheaper yeah and then IG layer

Da comes in that’s going to make it another like you know 90% cheaper uh again we’ve got paralyzed vmms which are going to increase our transaction throughput we’ve got massive advances in compression vitalic has talked about this we’ve got ZK Tech the bottom line is I think block space execution layer

Block space is going to turn into a complete commodity product and so if you’re an L1 and you’re trying to generate profitable block space in this environment or you’re trying to differentiate yourself on low fees I don’t think that’s going to be a differentiator for you anymore right and

Like it is true that block ordering me can be a source of revenue and I think that that could be a source of Revenue in the future for alternative layer ones but it is also a source of revenue for layer twos and if you have too much me

Extraction and block ordering users are going to leave your chain they don’t want the slippage cost they don’t want the sandwich attack they’re going to go to somewhere where they don’t have those types of hidden let’s call them transaction fees so that is like the

Last point I would say on how this I see this game evolving from a you know blockchain commodity perspective I think everything we’ve talked about Ryan is the bottom of the pyramid if you will the fundamental uh Foundation that all value future value capture of layer TW

Stands upon uh the long the reason why these layer twos work at all over the longest amount of terms is what we’ve talked about so far in this episode I call that the bottom of the pyramid because then there’s another uh layer of uh why will tokens go up which is a more

Of a medium shortterm narrative narrative trade The Narrative right so the reasons why people are going to buy these Tok tokens now in the cycle the short-term Amnesia that crypto has when it’s a ball market and so I think there’s plenty of reasons uh which are valid Reasons by the way like

Brand is one of these reasons and so I want to talk about that middle section The Narrative trade I’m not I’m not a Trader you’re not a Trader I don’t look at charts so that’s not what we’re going to talk about but I want to talk about

Like kind of the next shorter term phase of like what happens when you have fundamentals so we’re going to talk about that as soon as we talk to some of these fantastic sponsors that make their show possible like man which is a layer two which is what we’ve been talking

About all today but it’s also Layer Two with a liquid stake token me eth so you can stake your eth with mantle you can also use the mantle layer too let’s go he from mantle right now mantle formerly known as bit Dow is the first Dow Le web

3 ecosystem all built on top of Mantle’s first core product the mantle Network a brand new high performance ethereum layer 2 built using the op stack but uses I layers data availability solution instead of the expensive ethereum layer 1 not only does this reduce mantle

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Communities from around web 3 onboarded like game s for web3 gaming and bybit for tvl and liquidity and onramps so if you want to build on the mantle Network mantle is offering a grants program that provides Milestone based funding to promising projects that help expand secure and decentralize mantle if you

Want to get started working with the first dowed layer 2 ecosystem check out mantle at mantle. XYZ and follow them on Twitter at zerx mantle cell is the mobile first evm compatible carbon negative blockchain built for the real world and now something big is happening introducing the cell layer 2 it’s a

Gamechanging proposal that’s going to bring cell’s rapidly growing ecosystem home to ethereum vitalic has shared its excitement for the cello layer 2 on the cello Forum so has Ben Jones from optimism but why the cello layer 2 will bring huge advantages like a decentralized sequencer offchain data availability and one block finality what

Does all that mean Rock Solid security a trustless bridge to ethereum and more real world use cases for ethereum without compromise and Real World Adoption is happening active addresses on cell have grown over 500% in the last 6 months with the cello layer 2 gas fees

Will stay low and you can even pay for gas using erc20 tokens but cell is a community governed protocol this means that cell needs you to weigh in and make your voice heard join the conversation and the C Forum follow sorg on Twitter and visit c.org to shape the future of

Ethereum Ryan we talked about in the first half of the episode for a little bit uh PE ratios growth metrics go growth multipliers that I think the market uh perceives upon many chains uh layer one is interesting right you call that a growth metric that is basically

The amount that investor is paying for like future growth that’s kind of like a metric because it’s price that you’re paying over earnings which is profit in the future and that could be be applied to layer 2os right so is a perceived metric as to like what is the premium

That the market is paying for a particular asset and if it’s a high premium it’s implied that there’s a lot of growth baked into these things and so for layer ones that are negative economics as in they’re issuing more than they’re capturing in fees technically they have like infinite PE

Ratios um as soon as it turns positive then PE actually turns into a number but the idea is like there’s a premium here and different I think different all different assets that have cash flows will all have this PE ratio um what factors impact a layer two tokens or

Layer one token PE ratio I think one of the big ones is brand um and I think uh the very high PE ratio that salana has currently comes from the brand of salana which is growing in strength growing in mind share uh the uh Universal composability uh idea is in being

Incepted into people’s heads and so people are paying a very high premium for salana because they think that salana has a lot of growth potential so it has a very high PE ratio um optimism for example I think has the brand of a the op stack which has been forked you

Know like a hundred times now and we we’ll we’ll talk about actually um the op Collective fee that uh the op Collective charges op stack chains that are part of the super chain but really I would say the forking of the op stack and the adoption of the op stack by

Companies as large as coinbase which is a huge vote of confidence is a huge plus one to the brand of optimism to the trust of optimism and humans place a lot of value on trust uh and so there’s this one there’s a narrative that like oh well if coinbase has selected the op

Stack to spawn the base chain a fortun 500 company that’s public then they are leading the way for other large companies who also use the op stack and that is a narrative that could over time morph into fundamentals if it comes true but these are these are kind of the Mind

Share metrics brand and awareness conversations that I think people will be paying attention to as the bull market continues and the price of attention the value of attention is like at a 100x premium in a bull market I think these are kind of some of the things to pay attention to in the

Short-term uh speculative nature of the ball Market what say you about this yeah I think there’s tons of narratives to kind of latch on to if you want to do sort of that that shorter time Horizon uh type of trade right including like what like what happens if um Black Rock

Launches like a side chain that you know like tokening based side chain starts as a side chain and on the path to they would never join the collective though right uh you know maybe they would you like who knows what could happen I’ve I’ve been constantly surprised but I

Mean that that type of thing can happen I also think layer twos are in general kind of having a a Renaissance from a narrative perspective because people have watched an alternative layer layer one run up and they’re like well layer twos are looking pretty good now from a

Valuation perspective I mean just look at this David um this is let’s go to coin gecko actually and let’s see what the valuations are I’m going to turn this is fully diluted valuation right so can you go to arbitrum um so arbitrum is here 21 billion for arbitrum and

Arbitrum recently reached all-time highs um this is not my analysis but it makes sense to me is like Traders have started to purchase arbitrum on the hype of Proto sharding EIP 4844 that is coming in March I think that’s a plausible narrative for sure and I think it’s a totally plausible narrative and

Anytime I find myself like aligned with Traders I’m like huh weird but like this is one of the things that happens like they are Traders have decided that there is a shelling Point around the growth of a narrative about the growth of a f of a fundamentals and

So sometimes like the Pyramid of the Traders on top the narrative layer in the middle and the foundation fundamentals at the bottom like aine in stars and I always think that’s like a funny time in crypto when like everyone’s like lined up nice yeah it’s nice when your fundamentals very fleing

For very long that’s already in the rearview mirror yeah it lasts a few weeks and then you get sad again at least that’s my experience but um okay so arbitrum is the number one highest value Layer Two right now at 21 billion next to that value yes yeah next to that

Would be optimism 15 billion they have a ton of tokens that are locked up right and so that’s why market cap is so different than fully diluted valuation because fully diluted is like the full market cap that um all that exist yeah yeah and so and like those are the top

Two and notice that they are um well where’s madic on this list they they should definitely make a presence here it is madic is mad hasn’t pumped billion yeah 8.4 billion M’s been lagging behind so this less than half um arbitrum and also uh look at salana 55 billion so it

Takes two arbitrum to premium a salana right which is interesting just how the the market is is valuing all of this at this point in time and so to I guess zoom out to say I do think that there are some narratives that might uh shift

This a little bit and there could be an L2 season Renaissance and I’m not sure exactly what those like narratives might lead to that that’s someone else’s specialty but um Bank sharding could like Bas using a layer two more traction in general for these layer twos or or

Just price pumps can just cause narratives to be told for why the price is pumping right and the prices don’t need a reason to pump sometimes they just do it’s just time for that specific asset or token um one thing though I want to say David is and I I want to

Actually now give uh the case to you for why I think alternative layer ones could be more bullish than it first appears under this thesis right so okay so this is still within the bounds of the framework and I want to give you a bull case for alternative layer ones um okay

So so far we’ve said from a fundamentals perspective profitability of block space is the thing that matters right in our armchairs okay so um layer ones alternative layer ones like salana and Avalanche remember they always have the ability to become layer toos if they want okay so look I don’t know all of

The like technical engineering behind this but we we know we’ve already seen um wasel Network which was an alternative layer one now starting to use ethereum for settlement right it’s not a large technical lift to be switch from being a layer one to a layer two

All you do is post data elsewhere yes and so here’s what that means it means every alternative layer one already has an option the fact that ethereum exists they have an option to become a layer to at any point in time if they choose to exercise that option and they will

Choose to exercise that option game theoretically if it will increase the value of their token and their ecosystem but they can done being Amazon and want to start being Apple you mean like once they are done growing and they are trying to then turn into profit yes so

You know Amazon the story famously bezus was like hey I’m not going to return any profit we’re going to lose money we’re going to Fantastic we’re going to lose money all the shareholders who said but profitability beos it’s not even profit doing you’re driving this this

This chain into the ground or this they left they left all of those kind of winers left and what he had B was probably like sick get out of here yeah cuz what he had was a whole bunch of people who were along the ride for unprofitable block space okay and so

Like here here’s a way salana could win for instance right if something like salana if their their model is just grow and grow and grow un M share users just like we’re just gonna acquire users I don’t care about profitability the market yeah just acquire users acquire apps get network effects dilute Soul

Holders along the way Soul holders won’t care because numbers going up in the in it’s a bull market everything’s going up and then when it becomes an issue like when the market starts to say huh you really need to solve that issuance problem because Soul holders are getting

Deluded who aren’t staking well then has succeeded so well that they’ve captured 2third of the internet and there’s no longer very that many more people to capture and all of a sudden they’re like oh we’ve we’ve won we’ve captured the the users let’s become profitable we’re saying salana because that’s had the

Like a big run over the last six months but it could be manad it could be suie it could like it could be any of these Avalanche who knows it could be any alternative layer one well then all they have to do is oh it’s about the game is

Now profitable block space okay hey yo we’re Layer Two now we’re just going to sell on ethereum and they no longer have to issue their token so from that perspective that’s what’s always so genius about the ethereum like fundamental model it’s just like yeah fees bro High fees we High Fe well like

I do think that so okay this is you know like the ethereum fundamental kits it it seems likely that ethereum will win in any case now you like salana and alternative layer one may to play the settlement chain game too they could start to launch they could try to

Compete as a money okay the last chain to compete with eth as a money do you know what that chain was David uh Terra Luna oh that that was the last chain to actually try to compete with Ethan Bitcoin is money sure okay so a chain could do that and look what

Happened a chain could do that be a settlement layer compete with eth’s money or it always has the option to like pivot into to profitable block Space by uh starting to use ethereum as a settlement chain so that’s in my opinion if your chain wants to be money

You must also be a settlement layer for other chains I think that’s going to be true I also think that’s going to be true that that feels like a like a a core kind of first principles ground up doesn’t me don’t even have to say the words ethereum if your train is money

Other chains settle to your chain but do you see how like under this lens you can actually start to be like like okay the value of salana or Avalanche at 55 billion for salana all right that that’s definitely assuming that it outco competes a whole bunch of the layer twos

And becomes like a dominant player an execution layer but like the block space p&l thing it doesn’t matter because salana still preserves the opt option to always switch and and start settling on ethereum so it may as well recycle all of the so-called profits and Goodwill and brand narrative and all of these

Things back into growing the chain and if it can Marshall that Capital to acquire users apps and network effects then it has a path to winning and maybe out competing all of these layer twos that kind of quote unquote did it the right way right right right yeah what do

You think about that I I think that is a crazy scientist theory that I’m totally on board with I yeah anyway I I think I think probably I’ve missed that sort of component of this for a while and I think a lot of um you know fundamentals analysts

Like or eth Maximus and maybe missed that that vantage point but like very much could be the case so um I’m on board super on board that’s what I got man anything else so so what where do we summarize all of this right so we’ve got

Um we’ve got L2 tokens out there uh and the question was posed where are they worthless governance coins um I don’t think they are um it seems like yeah how would you summarize all this yeah maybe before I summarize all this I’ll say a little bit more about the layer 2 upside

Case I think we’ve presented the vanilla layer 2 upside case the the case that is true for all layer 2 tokens but I think in addition to that every single layer two token will also adapt a more specific strategy uh the optimism Collective strategy is to spawn the

Super chain create a shared standard for what it means to be a part of the super chain create some sort of ecosystem benefits a union for why you join the super chain and then being a part of the super chain requires a 15% of your sequencer fees to the optimism

Collective that’s the optimism upside case um the polygon upside case is different they have the the work token Medallion model about the um this the interoperability chain that they have in addition to other mechanisms as well which is completely different from the optimism upside case uh arbitrum orbits

I think still has some fleshing out to do with its upside case but it has a similar 10% fee to join the collective uh type of model um Stark net has gas fees SP paid in the Stark token and that’s a ZK evm or uh not a zkm it’s

Chyo based but it’s a ZK uh chain um a stark Stark chain and what is what is the upside model for that it is a different flavor and so in addition to just like the value added reseller case which is true for all chains there’s also more specific chain specific

Strategies businesses for what they are actually doing and why they’re capturing Val each one will kind of develop its own way of navigating the the world right it’s this own business model mantle for example has M eth uh there their because they the mantle treasury is just absolutely massive and so they made

Their own liquid staking token they’re probably also going to do a liquid reaking token calling it why wouldn’t you that’s a that’s a mantle strategy and so in addition to just the fundamental case that we laid out in this episode each layer two has the opportunity to kind of make their own

Additional way of capturing Val value yeah I think that’s what’s so exciting uh about the space right now is all of this is emerging and maybe the place I’ll leave us is kind of the opening for another set of questions that are questions in my mind for 2024 and I know

They’re in your mind as well which is okay now we have kind of this new block space thing that we’ve created in fact I would say that’s like that’s the core Innovation that um cryptos created is a TR trustless censorship resistance block space what can you do with block space

Banking system you could do sound money you could do store of value you could do property rights online all of these things right you can do all of these things with this commodity that we’ve created called block space now we have separated out the block space uh supply

Chain in kind of three different levels of like value accur tokens if you will there’s the consensus settlement layer right which like ethereum is is trying to dominate very much and the case for like ether or some asset as a money or as an internet Bond right there’s that

Layer and then there’s the data availability layer which ethereum is also a player it’s trying to sell its block space as a DA provider but then you also have Celestia in there and you have igen layer da which takes its cut and then there’s a veil from from uh

Formerly polygon Founders like taking its cut near is competing for the da layer and then you have the execution layer which is where the majority of these layer twos are really competing that’s where users come that’s where states are that’s where you can create like super chain is where it’s an app

Acquisition game salana is playing full stack but also very much on the execution layer yeah 100% execution and so the question there is is now in my mind and I think a major topic for 2024 is okay where’s the value going to acrel and the answer is all three okay all

Three are going to ACR some value but are we going to get more fat protocol are we going to get more value acral at the at the bottom of this pyramid or is it going to be an upside down pyramid that’s what some people think where like

Value AC is actually tiny at the settlement layer and it’s like bigger at the da layer and even bigger at the execution layer and that in my mind is the major fundamental question for this asset class as we move into has always been the the big question one of one of

The questions that we started banlist to try and answer and it is four years later and still asking the question is better defined but the answer is still just as opaque yeah well now the question has three parts to it right we have three different components uh so bankless

Nation we’re going to be exploring this uh this year and um thanks for hanging with us on the bank list takes we should mention a couple hot episodes uh that are coming down the pipeline on this uh John sharbono and Neil somani from Eclipse doing an episode titled uh is Da

A good business model so we’re attacking one of those points on the triangle um head on followed by an episode uh co-hosted by John Sho replacing you Ryan bye uh with s ROM from from Igan Lair and Nick white from Celestia comparing the differences between Igan da and

Celestia as a DA construction layer so we’re doing some exploring let’s go figure it out it’s as always Bank list we’re trying to bring you guys to the frontier uh should disclose before we end this episode we’re investors in a whole bunch of the l2s another tokens

That we mentioned today we also hold uh some eth as you’ll know you can access all of our closures bank.com disclosures and got to end with this we have no idea what prices will do in the short run crypto is just generally risky you could

Lose what you put in but we are headed west this is the frontier not for everybody but we’re glad you’re with us on the bankless journey thanks a lot