You will see many L1 chains with low activity but valuations reaching billions of dollars, yet rarely see such L2 chains.
Written by: taetaehoho, Chief Strategy Officer of Eclipse
Translated by: Luffy, Foresight News
By 2025, stop being confused about L1 and L2 blockchains.
You should read these tweets a hundred times over.
For end users, there is no difference in product experience between L1 and L2. There is also no essential difference or limitation in liquidity between L1 and L2. A new L1 chain must attract stablecoins or cross-chain non-native liquidity to itself to initially guide liquidity. Similarly, L2 chains also need to introduce stablecoins or cross-chain non-native liquidity to accumulate initial liquidity. L2 chains are merely connected to L1 chains through a trust-minimized bridging method, whereas alternative L1 chains lack such bridging. We have seen that some whales are sensitive to these trust assumptions, but many ordinary users do not care.
A rather mediocre view (mainly from those developing alternative L1 chains) is that "L2 will fragment liquidity".
L2 only provides a trust-minimized bridging method between L1 and L2, and every L2 launched today is connected to all alternative L1 and other L2 chains.
Every valuable L2 is equipped with other message bridges upon launch. Through L1 as an intermediary, any participant connected to the base layer can transfer funds on a large scale between alternative L1 and L2 chains via Ethereum or Solana. If an alternative L1 is not connected to L2, it might increase the difficulty of capital outflow, but if it integrates message bridges, such a statement would be self-contradictory.
The product nature of L2 is not determined by its relationship with L1. It is merely an execution layer, like other execution layers with different characteristics.
So, why are L1 chains more valuable?
There are two reasons.
1. Are L1 chains more valuable than L2?
Not necessarily more valuable: L1 chains have higher activity. Solana and Ethereum have a market value to revenue (REV) ratio of about 100 times. Mature L2 chains also have a similar market value to revenue ratio, between 10 to 200 times. (Data from October 2024, but this view still holds).
From this perspective, mature L1 and L2 chains have relatively similar multiples (such as Arbitrum, Optimism compared to Solana and Ethereum).
More valuable situation: L1 chains have a higher frequency of unexplainable high valuation outliers. In other words, you will see more L1 chains with low activity but valuations reaching billions of dollars, while such cases are relatively rare in L2.
- L1: Sui, Mantra, Pi, ICP, IP
- L2: Move
In my view, this is an initial positioning mistake of L2. Arbitrum and Optimism positioned themselves as Ethereum extensions, serving as execution layers to help Ethereum scale. Combined with Ethereum's Rollup-centric roadmap, this was a good initial approach.
However, the drawback is that this approach limits the total addressable market (TAM) to the Ethereum user base and sets an upper limit on the potential total liquidity, market attention, and revenue these chains can capture. Arbitrum and Optimism's initial market entry strategy was to promote themselves as Ethereum extensions. Although they have the ability to attract new decentralized applications and participants to their specific ecosystems, including projects not previously on Ethereum, this is also why they have always been viewed as Ethereum subsets (and thus valued only at a certain proportion of the base layer network). To be fair, when they were launched, Ethereum was the only major blockchain in the market.
2. Token Model
L1 chains have a basic network flywheel effect where increased chain activity is directly related to token demand from two different participant groups (searcher users and stakers).
The higher the activity, the more fees searcher users are willing to pay to have their transactions packed into a block. The increased entropy from various activities increases the probability, frequency, and scale of people competing to capture economic opportunities. In terms of staking, the more fees a chain earns, the more people will want to stake the L1 chain's tokens to obtain potential economic returns. Activity is also related to new asset issuance, which is usually linked to the L1 chain's native token: people must buy these native tokens to participate in trading activities. (For example, using ETH to mint Non-Fungible Tokens, using SOL to buy memecoins).
How Should L2 Respond?
1. Mindset Shift
L2 needs to decide whether to be an L2 that remains consistent with a specific L1 or to attract users from any source. L2 construction should fully utilize the unique advantages of L2 technology (trusted/customized block construction, performance optimization).
2. Token Economics Improvement
L2 should improve token economics so that they can also form a flywheel effect where increased network activity stimulates token demand on two sides (searcher users and stakers).
Current L2 chains are trying to use customized gas tokens, but this only solves the issue for searcher users and does not benefit stakers. Theoretically, since most L2 chains incorporate sequencer profits into a decentralized autonomous organization's treasury, and tokens can govern the DAO treasury, this seems equivalent. However, to make token holders have the same perception, they need to be given better governance rights.
