Arbitrum

zkSync

<p><img src="https://academy-public.coinmarketcap.com/optimized-uploads/7f8cdaddfb664d079bbeb21cb2e95d21.jpeg" /></p><h2 id="header-0"><strong>TL;DR</strong></h2><ul><li><strong>High Competition and Fragmentation</strong>: Over 40 L2 chains on Ethereum compete to enhance scalability, but many fail due to interoperability issues and varying fee structures.</li><li><strong>Life-cycle Challenges</strong>: Most L2 projects follow a similar life-cycle of initial hype, ecosystem building, testnet phase, mainnet launch, and airdrop, but often fail to maintain user engagement post-airdrop.</li><li><strong>Need for Balance</strong>: Successful L2 projects must balance ecosystem development and token launches, addressing the challenges of maintaining user interest and ensuring long-term viability in the competitive L2 landscape.</li></ul><h2 id="header-1"><strong>1. Introduction</strong></h2><p><img src="https://academy-public.coinmarketcap.com/optimized-uploads/da3bec7f7dbb421ca61c3ebe6d198892.png" /></p><p>Layer 2 ranking. Source: L2Beat</p><p>Layer 2 (L2) projects are designed to enhance the scalability of Layer 1 (L1) networks, alleviate congestion, and reduce transaction costs. <strong>Only a handful of L2 projects have achieved significant success. A discernible pattern of failure among L2 projects suggests inherent complexities without straightforward solutions.</strong> According to <a href="https://l2beat.com/scaling/summary" rel="noopener noreferrer nofollow">L2Beat</a>, there are currently over 40 L2 chains on Ethereum, which further complicates their ability to maintain sustained user engagement post-launch. In light of these challenges, this report aims to analyze the typical life cycle of L2 projects and assess the current state of the ongoing &#34;Layer 2 wars.&#34;</p><h2 id="header-2"><strong>2. The Hidden War of Layer 2 Dominance</strong></h2><p><strong>The ongoing development and competition among Ethereum L2 solutions can be likened to a hidden war.</strong> While many L2 projects are being built on Ethereum, each project rarley percieves the other as direct competition, collectively aiming to benefit Ethereum. In reality, these L2 chains are indeed competing with each other, whether they acknowledge it or not.</p><p><img src="https://academy-public.coinmarketcap.com/optimized-uploads/4aa1b34f82e44eddb463c73822dd80c0.jpeg" /></p><p>Greater Tokyo Railway Map, Source: JR-EAST</p><p>This competition can be described as a &#34;war&#34; driven by the presence of over 40 L2 chains vying for the investment and attention of a limited user base. <strong>To understand this dynamic, consider an analogy where L1 represents the railroad tracks and L2 solutions are the trains operating on them.</strong> This scenario is akin to multiple train companies competing for the same infrastructure.</p><p>This complexity and fragmentation make it difficult for users to navigate and choose between L2 solutions. Consequently, users are likely to gravitate toward the solution that offers the most convenience and accessibility.  L2 solutions are fiercely competing to become the leading choice in this competitive landscape.</p><p>In such an environment, it is anticipated that a small number of dominant solutions will eventually emerge, similar to how one or two major train companies dominate the railroad market. Meanwhile, other L2 solutions will likely adopt niche strategies to survive and serve specific user segments.</p><h2 id="header-3"><strong>3. The Life-cycle of Layer 2 Projects</strong></h2><p></p><p><img src="https://academy-public.coinmarketcap.com/optimized-uploads/952b816a1beb4a74b6a60bd6c338fe0f.png" /></p><p>Source: Tiger Research</p><p>After a series of disappointing airdrops in recent Layer 2 (L2) projects, users are starting to realize how the life cycle of these projects typically work. Historical analysis has shown that most L2 projects follow a common trajectory, with only a handful of projects surviving and thriving as top L2 chains. This life cycle can be divided into four main phases:</p><h3 id="strong-3-1-introduction-phase-strong"><strong>3.1. Introduction Phase</strong></h3><p>Most L2 projects start with announcements that hype the project. These announcements often include backing from large venture capital firms, endorsements from high-profile influencers, and high valuations. This stage is characterized by significant news coverage, extensive discussion on social media platforms, and endorsements from key celebrities (KOLs).</p><p>In recent years, KOL rounds have often preceded venture capital funding rounds to ensure that projects get a lot of attention early on. In the blockchain ecosystem, endorsements from KOLs are a powerful marketing tool and have a high level of credibility among general investors. Getting investments from KOLs helps improve the initial visibility and credibility of a project.</p><h3 id="strong-3-2-growth-phase-strong"><strong>3.2. Growth Phase</strong></h3><p>Some L2 projects then launch a testnet phase to allow users to test the platform and developers to experiment with the product. During this phase, there are often posts promising rewards for participating in the testnet, which can be a great way to get users involved.</p><p>The length of the testnet phase varies, but it eventually leads to the mainnet launch, where the ecosystem begins to take shape. During the mainnet phase, the ecosystem becomes more active as news of upcoming token airdrops circulates. The total value locked (TVL) and trading volume increase, and capital starts to flow in from other chains. Users become interested in the project and active in the ecosystem in anticipation of the token airdrop.</p><p>After anticipation builds, the project officially announces its airdrop plans. An airdrop is a free distribution of tokens to early users, allowing projects to attract more users and revitalize their ecosystem. The conditions for participating in an airdrop vary from project to project and may include wallet usage or participation in community activities.</p><h3 id="strong-3-3-maturity-phase-strong"><strong>3.3. Maturity Phase</strong></h3><p>Typically, tokens are listed on a major centralized exchange (CEX) shortly after the airdrop. However, this initial enthusiasm is hard to sustain. As interest in the project wanes after the airdrop, so does user engagement. Some investors sell their tokens to take profits and look for new investments.</p><p>This is when the project&#39;s true value and growth potential are tested. <strong>Projects must continue to convince investors by demonstrating that they are solving the problems they set out to address and launching meaningful services.</strong></p><h3 id="strong-3-4-decline-phase-strong"><strong>3.4. Decline Phase</strong></h3><p>Many L2 projects that don&#39;t make it through the maturity phase enter the decline phase. The initial momentum of airdrops and CEX listings fades, and users gradually lose interest. Users leave the chain to find new investment opportunities, and trading volume and user activity plummet.</p><p>Declining projects share common characteristics: development activity decreases, roadmaps are delayed or canceled, and key developers leave. Community activity shrinks, and negative public opinion spreads. The token price crashes and even long-term investors take stop-losses.</p><p>During the decline phase, most L2 projects eventually disappear. Some are absorbed by other projects, but most quietly fade away. <strong>This shows how important it is for L2 projects to create meaningful services in order to survive and continue to grow.</strong></p><h2 id="header-4"><strong>4. Future challenges</strong></h2><p>With more than 40 Layer 2 (L2) chains competing to improve Ethereum&#39;s scalability, many projects face high failure rates and short lifespans. It turns out that initial hype and airdrops are not enough to drive sustainable growth.</p><p>To overcome these challenges, innovation at the application level is critical. Developing meaningful services that provide real value to users is essential for user acquisition and long-term sustainability. Initial promotion, airdrops, and technical advantages alone are insufficient to attract and retain users.</p><p><strong>Expansion into Asian markets, where application development is strong, has emerged as a key strategy for L2 projects. Several L2 solutions, including Arbitrum and zkSync, are actively entering the Asian market to acquire real-world users. Additionally, Hong Kong&#39;s HashKey Group is preparing to launch its own L2 network, HashKey Chain.</strong></p><p>The future of the L2 ecosystem depends on meeting these challenges and increasing its long-term viability. The emergence of innovative applications that deliver real value to users is crucial. Improving interoperability between L2 solutions and building a standardized development environment are also critical challenges to address.</p><p>While the L2 wars are in full swing, the ecosystem is constantly evolving, which is expected to increase stability and bring greater benefits to the Ethereum network and its users. Rather than getting caught up in short-term competition, it is time for cooperation and innovation to foster a healthy ecosystem for the long term.</p><p>By focusing on these areas, the L2 ecosystem can address its current challenges and pave the way for a more robust and sustainable future, ultimately benefiting the broader Ethereum network and its users.</p><h2 id="header-5"><strong>&#x1f42f; More from Tiger Research</strong></h2><p>Read more reports related to this research.</p><ul><li><a href="https://reports.tiger-research.com/p/what-is-meme-coin?utm_source&#61;publication-search" rel="noopener noreferrer nofollow">Meme coins: What’s all the rage?</a></li><li><a href="https://reports.tiger-research.com/p/2024-asia-cryptocurrency-market-report?utm_source&#61;publication-search" rel="noopener noreferrer nofollow">2024 Asia Cryptocurrency Market Report: A closer look</a></li><li><a href="https://reports.tiger-research.com/p/koreas-cryptocurrency-listing-and?utm_source&#61;publication-search" rel="noopener noreferrer nofollow">Korea&#39;s Cryptocurrency Listing and Delisting Trends</a></li></ul><p><img src="https://academy-public.coinmarketcap.com/optimized-uploads/4af5760893ba44e5bae2b116a96b9e31.jpeg" /></p><h2 id="header-6"><strong>Disclaimer</strong></h2><p>This report has been prepared based on materials believed to be reliable. However, we do not expressly or impliedly warrant the accuracy, completeness, and suitability of the information. We disclaim any liability for any losses arising from the use of this report or its contents. The conclusions and recommendations in this report are based on information available at the time of preparation and are subject to change without notice. All projects, estimates, forecasts, objectives, opinions, and views expressed in this report are subject to change without notice and may differ from or be contrary to the opinions of others or other organizations.</p><p>This document is for informational purposes only and should not be considered legal, business, investment, or tax advice. Any references to securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or an offer to provide investment advisory services. This material is not directed at investors or potential investors.</p><h2 id="header-7">Terms of Usage</h2><p>Tiger Research allows the fair use of its reports. ‘Fair use’ is a principle that broadly permits the use of specific content for public interest purposes, as long as it doesn&#39;t harm the commercial value of the material. If the use aligns with the purpose of fair use, the reports can be utilized without prior permission. However, when citing Tiger Research&#39;s reports, it is mandatory to 1) clearly state &#39;Tiger Research&#39; as the source, 2) include the <a href="https://drive.google.com/file/d/1Hxmq1OHnEWkHZbeNeGo5VHN-Wjz10Uj_/view?usp&#61;drive_link" rel="noopener noreferrer nofollow">Tiger Research logo</a>, and 3) incorporate the original link to the report. If the material is to be restructured and published, separate negotiations are required. Unauthorized use of the reports may result in legal action.</p>

L2 Wars: The Hyper-Competitive Life Cycle of Blockchain Layer 2s

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Tiger Research

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