Thoughts on public chains and Layer2 in 2021

From last August to now, the new public chains led by DOT/AVAX/NEAR have run a not bad yield (three to five times on average). Theoretically, as long as ETH 2.0 is not officially launched, new public chains will have the power and opportunity to catch up. The possibility of catching up, however, is relatively small, so let’s talk about the actual point, marketing hype, and pulling the plate.

Thanks to the general environment of the bull market and the exit of bitcoin profit-making funds, mainstream tokens are the first choice of overflow funds. The new public chain is one of the most suitable mainstream tokens for capital intervention because of its large market cap and good depth. To take a step back, if the new public chain does not pull the plate, how can it prove that it is an Ethereum killer.

The wealth creation effect of new public chains is also worth talking about. You may hear at every turn that someone has made over a billion dollars from DOT single coins, but rarely do you hear that someone has made hundreds of millions in profit from DeFi blue chips like AAVE/SNX. The difference is in the valuation to start with. Nowadays, DeFi blue chip tokens start from tens of millions of dollars market cap and grow to today’s $2 billion valuation. And DOT is a 3 billion dollar valuation once it launched, even if the secondary market intervention of 10 million, held for a period of time, still able to get 30–50 million profits. And AAVE such projects that start with a market cap of several tens of millions of dollars, it is very difficult to establish a position of about 10 million because of the depth.

Therefore, I am still optimistic about the performance of new public chains in the after-market.

DOT and NEAR are the leading and second new public chains, and among the upcoming public chains, FLOW and MINA are also worth looking forward to. FLOW should be the leading public chain of NFT in this round, and its application NBA TOP SHOT has already had the momentum to come out of the circle and has been ranked the first position of NFT trading volume for a long time. At the same time, it has the support of Coinbase A16Z and USV, the top institutions. MINA is a ZK technology public chain, featuring an all-star investment lineup and the use of ZK technology for scaling. And with Layer2 technology bound to stir up a thousand waves in the industry in the 21st year, it will not be surprising to see MINA gaining market attention with ZK as the core technology of the new generation Layer2. It is even conceivable that MINA will provide technical support and consultancy for popular solutions such as Optimistic.

The introduction of Layer2 was the first thing that had to happen as the Ethereum network was very clogged and the average cost per transaction was above $10, which almost isolated retail investors and long-tail assets from trading.

Synthetix was the first to fly the flag, using the Optimistic solution to open SNX staking on Layer2, with staking volume currently reaching 2.75 million SNX or $35 million.

The significance of SNX’s pioneering use of Optimistic is that it fired the first shot at exploring a new generation of Layer2 solutions, and Optimistic has benefited from this by having a first-mover advantage.

Another major advantage of Optimistic is that it is backed by the industry’s headline projects and companies: Uniswap/Synthetix/Coinbase.

In terms of industry appeal, Uniswap is bigger than Synthetix, and once Uniswap announces the third version of its update using Optimistic’s solution for scaling, Optimistic will further consolidate its position as the leading Layer2 solution. Not to mention Coinbase, which represents the most powerful and voicing people in the industry behind it.

Optimistic has no intention to issue tokens at the moment, and I think not issuing tokens, or not issuing tokens at the beginning, is the key for Layer2 to capture the market. Just as Uniswap and Compound, it is only natural to make a token offering once the product has been iterated and the data and users are available. In fact, the line between whether a project needs to make a token or not is very blurred. The precedent of successful projects in the industry tells us that the “product first, token later” is easily accepted by the market.

How to attract liquidity to migrate into Layer2 is also a question that Synthetix has already given an answer to, again using a liquidity incentive scheme.

Users who currently stake into Synthetix Layer2 will be rewarded with additional SNX tokens. As long as the incentive is large enough, it will attract users to migrate to Layer2. After this, when users experience the low cost, high speed and convenience of Layer2, they will generate user stickiness. In this area, Loopering has already taken the lead to start the experiment of Layer2 liquidity mining.

Will Layer2 be able to roll up the second wave of liquidity mining? We’ll have to wait and see. In addition, it also brings up another issue: the fragmentation of liquidity.

For the same project, liquidity is segregated in Layer1 and Layer2, for example, if the ratio of liquidity between the two is 50/50, then it would be a very awkward situation, which means that the liquidity migration is not complete and the confidence of users to migrate to Layer2 is not big enough. Another possibility is that for the same project, the liquidity is segregated between two Layer2 schemes, assuming that a project adopts two expansion schemes, then is this fragmentation of liquidity a good or bad thing.

Layer2 adoption, however, is a long-term process, and we may still have to endure high fees for the next year. After all, Synthetix is only a brave testnet for Optimistic, and it comes in multiple steps, the last of which is already scheduled for mid-year. And Optimistic’s official mainnet will not be released until at least after March of this year.

For a long time to come, Layer2 will be a chaotic state of dominance. Among the other solutions, Matterlabs is more focused on payments, DyDx will soon go live with Starkware’s solution, and Chainlink will give priority to off-chain labs solution. Imagine such a pattern, with Optimistic in the east, Matterlabs in the west, Off-chain labs in the south, and Starkware in the north.

On the other hand, there are different views on Layer2 in the market, for example, Jia thinks that Layer2 is overrated by everyone. “Whether it’s ETH2.0 or other Layer1 technology, it’s a good underlying solution, while Layer2 has to involve too many things; PoS is the underlying solution, while Layer2, as a transitional solution, won’t exist for too long”. But Vitalik in recent days set the tone, Rollup will be a short- to medium-term expansion program, do not rule out becoming a long-term expansion program.

So the possibility of migrating to a new public chain such as DOT/NEAR is not ruled out in case Layer2 fails completely, while ETH2.0 is out of reach. Although this possibility is relatively small. But if so, the valuation of new public chains will rise. Otherwise, new public chains stop at the hype and high valuation is not sustainable.

Article from Real Satoshi

Translated by Yang(Mengyan Finance)

To translate some latest policy and issues on blockchain and fintech happened in China