Investment firm VanEck, Ethereum layer 2 It predicts that (L2) networks could be worth over $1 trillion by 2023 in a base case scenario. However, the long-term prospects of such networks generally tend to decline.
The firm evaluated 46 L2 networks across five main areas and predicted that “thousands” of mergers would eventually occur. According to data, Arbitrum is currently the largest ecosystem with over $18 billion in tokens locked and holds the majority of the $36 billion locked in 46 networks.
VanEck analysts Patrick Bush and Matthew Sigel predict that Ethereum will eventually capture 60% of the market share across all public blockchains. They modeled their predictions around the volume of assets in the Ethereum ecosystem.
L2s are known as secondary networks or infrastructures built on top of a main blockchain such as Ethereum. These networks are designed to increase scalability and transaction speed. Rollups, on the other hand, represent a specific type of scaling system.
VanEck noted that certain factors will eventually play a critical role for the long-term growth of L2 networks.
- Transaction Pricing: The cost of performing transactions on L2 networks is critical to attracting users. Differences in transaction pricing arise from a variety of factors, including data compression, scale, proof costs, and profit margins.
- Developer Experience: Ethereum Virtual Machine compatibility of L2 networks is a critical factor in attracting developers. This compatibility allows smart contracts and tools to be migrated seamlessly from Ethereum.
- User Experience: The speed of adding and withdrawing assets is an important factor that ultimately determines the user experience.
- Trust Assumptions: It is important to establish trust in data availability in an L2 network and take security measures to prevent exploits.
- Ecosystem Size: The strength of an L2 network’s ecosystem significantly affects its value. The value locked to an L2 indicates that money has been invested in the ecosystem and reflects participation.
Busk and Siegel stated that the company predicted that there would be intense competition among L2s, and that the industry’s overall expectation of better performance had decreased.
“In terms of long-term value expectations, we have an overall bearish outlook for most L2 tokens,” they stated. “The top 7 L2 tokens currently collectively have FDV of $40 billion, with many strong projects aiming to launch in the medium term.”
“This means there is potentially $100 billion more in FDV on L2 tokens launching over the next 12-18 months. “It seems very difficult for the crypto market to absorb even a limited portion of this supply without huge discounts,” analysts added.
