The Layer2 Summer The Most Anticipated of Airdrop Seekers

Summary

Traditional market-making first emerged in early 19th century, and it has now become mature in development, diversified in trading varieties, and relatively stable in business model and return. As critical as it is in the financial market, market-makers have provided unparalleled liquidity and efficiency to the market. As the market continues to expand, more and more institutions and investment banks have joined the market-making business, which has become an irreplaceable revenue stream. The overall market-making business is dense on the top, and the competition is intense. In order to obtain higher market share, market-makers are continuously upgrading algorithms, technology, risk management and compliance, and the scope has been extended to the crypto world.

This trending topic report reviews the status quo of the entire Layer2 ecosystem after the issuance of Arbitrum One tokens, conclusions are as the following:

（1）Arbitrum's airdrop has triggered a boom on Layer2 interactions, especially on zkSync and StarkNet, as the wealth creation effect is enormous. zkSync's gas consumption increased by 82% over the past week. ETH test token prices also increased on Goerli.

（2）Chinese users are obsessed with airdrops, which were ranked the first on Google Trends in the past month.

（3） Other Layer2 testnets, including Scroll, Base, and Linea, will become prominent despite late entry of the market.

（4）Due to the prosperity of BTC NFT on Ordinal protocol, the BTC Layer2 ecosystem started to become noticed; leading projects, represented by Stacks, are beginning to accumulate efforts.

（5）Layer2 is still under-developed that it still has room for technical and ecological improvement, which could postpone the real Layer2 Summer to 2024.

1. The feast during Arbitrum’s airdrop

The unparalleled excitement in March 2022 is undoubtedly the Arbitrum airdrop; the price of $ARB is in line with expectations, stabilized around $1~$1.5. According to the official airdrop rules, 625,143 addresses are qualified for the airdrop, and the supply of airdrops exceeded 1 billion, with each address receiving an average of 1,859 $ARB, valued $24,167, which is undoubtedly a fortune, and the interaction cost will not exceed $10. Since the release of the airdrop rules, the TVL of Arbitrum One has soared all the way to $2.25 billion, accounting for 66.86% of the whole Layer2 ecosystem; the number of unique addresses is over 4 million that the number of weekly active users reached as high as 1.38 million. Even after the airdrop and token offering, Arbitrum's on-chain activity is still higher than other L1 chains as well as the Ethereum mainnet.

Figure 1. Number of weekly active addresses in Arbitrum (source: dune, @Henrystats)

Some interesting things happened during Arbitrum's airdrop:

(1) Arbitrum's airdrop rules did not effectively screen sybil addresses, which means some certain individuals or groups received a considerable amount of fortune: 1007 addresses of this type received airdrops with a sum of 1 million $ARB. Moreover, the airdrop rules were not effective in banning the following four types of sybils:

——Sybils with less than 20 addresses;

——Sybils who access through exchanges, cross-chain bridges, and smart contracts;

——Sybils with obvious NFT or fund sweeping behavior after the snapshot;

——Sybils with obvious bulk processing behavior on other chains, e.g., OP, Ethereum.

（2）Due to the wealth effect, a large number of users flocked to other Layer2 projects that has not yet issued tokens for interactions, especially the remaining of the Layer2 Big Four: zkSync and StarkNet. Even the Goerli testnet has footprints of users, which endows the test tokens with a price.

Figure 2. Goerli ETH price curve (Source: Tradingview)

(3) Layer2 interactions become frequent, ETH are burnt as gas, and ETH has seen stable deflation. Gas consumption of ZkSync has skyrocketed 82% in the past week to 1,003 ETH.

Figure 3. ETH supply and burn (Mar.1-Mar.30, source: ultrasound.money)

(4) Chinese users are obsessed with airdrops. From Google trends, China is ranked number one in the world for zkSync searches in the past month.

Figure 4. zkSync heat map regional ranking in the past month (source: Google trends)

(5) The FDV reached $1.5B after the $ARB token offering, Arbitrum's market cap of mainstream ecosystem dropped, and on-chain activity returned to the level before in this week. The industry is still in the shadow of bear market, and when the positive sentiment of token offering is exhausted, the pessimistic sentiment may be all that is left, and on-chain funds may be transferred to catch up with a new narrative.

Table 1: Changes in market cap of ecosystem after Arbitrum's token offering

Figure 5. Curve of the number of active addresses by public chain in March (Source: nansen.ai)

2. Airdrop opportunities on Ethereum Layer2

The level of decentralization and performance of the underlying technology of OP system (such as node downtime, sequencer problem) is somewhat negligible because users care more about the wealth effect. Optimism and Arbitrum have accumulated considerable market share in the Layer2 segment through ecological retention and airdrops as incentives for user acquisition. Furthermore, as Layer2 becomes more and more mature, and with the help of EIP-4844, which significantly reduced cost on Layer2, other L1 chains have been outperformed by Layer2. Just as the bull market in 2021 was the spring of new L1 chains, the Layer2 Summer carries all the anticipations and fantasies from all users.

Witnessed the success of Optimism and Arbitrum, the remaining two projects of the Big Four in Layer2, zkSync and StarkNet, will have to demonstrate more sincere attitude for better user acquisition. The competition between projects and the wealth effect stemmed from the FOMO sentiment of users have already made the Layer2 Summer almost a reality. Below, the status quo and ecological development of various projects on Ethereum Layer2 is summarized for reference for the sake of airdrop seekers.

2.1 zkSync era

Developed by Matter Labs, zkSync leverages zero-knowledge proofs, specifically zk-Rollups, to bundle multiple transactions into a single proof that can then be validated on Ethereum. zkSync is a promising scaling solution in the blockchain ecosystem designed to address the challenges of costly fees and network congestion on Ethereum. It enables more practical and efficient use of decentralized applications and digital assets by providing a secure, scalable and low-cost alternative.

On March 24, the development team of zkSync, Matter Labs announced the official opening of the zkSync Era mainnet to users. zkSync Lite is version 1.0, and zkSync Era is essentially version 2.0 of zkSync, which allows users to build abstract mnemonic code, by upgrading from externally owned accounts (EOA) to smart contract accounts (CA), to schedule and automate payments and pay gas fees in any token - even on behalf of other users.

Currently, the TVL of zkSync Era network reaches $42.86M, and zkSync Era has risen 47,000% in the past week. According to Dune Analytics, the number of zkSync Era individual addresses has reached 241,765, and 58,554 ETH has crossed to the zkSync Era network. According to Defillama, 9 DeFi projects are archived, mainly DEXs. There have been 34 projects officially announced, including wallets, cross-chains, NFT, etc. However, fewer innovative projects are witnessed; current ecosystem is still somewhat behind the OP system. User interaction can be completed via:

(1) official cross-chain bridge;

(2) interactions with DEX to redeem tokens or become LP;

(3) participation in lending projects;

(4) participation in domain name or NFT minting.

Figure 6. Activeness of Layer2 projects in the last 7 days (Source: L2beat.com)

Figure 7. Projects in zkSync eco (source: defillama)

2.1.1 Reviews of some projects in the zkSync eco

(1) DeFi

(2) NFT Marketplace & Projects

(3) Others

2.2 Starknet

StarkNet is an Ethereum layer 2 scaling network empowered by zero-knowledge proofs, specifically zk-STARK technology. It was developed by StarkWare, a company dedicated on creating cryptographic proof systems to improve the scalability and privacy of various blockchain networks. StarkWare created two projects using zk technology: StarkEx and StarkNet. StarkEx was officially launched in 2020, providing specific Rollup technology services to each application. Projects developed based on StarkEX include Sorare, immutableX, dYdX, etc. StarkNet is capable of deploying a generic Rollup for any smart contract; the mainnet was launched in November 2021, and over 50 ecological projects are active.

Given that StarkWare is currently valued at $8 billion, the value of projects in the ecosystem must be commensurate with the reputation. StarkNet has announced on November 16, 2022 that the deployment of native token $STRK on Ethereum mainnet was completed for voting, staking and processing of fee payment; token allocation is still to be decided.

Figure 8. StarkNet network activeness (Source: L2beat)

2.2.1 Starknet Ecological Part Project Inventory

(1) Defi

(2) NFT Marketplace & Projects

(3) DID

(4) Game

2.3 Young talents in Layer2

Among other Layer2 projects followed by the Big Four, Scroll is the only project that is slightly behind zkSync and Starnet in terms of popularity. Scroll received $30 million in Series A funding in April 2022 and $50 million in July 2023 respectively. Scroll's goal is to build an EVM-compatible zk-Rollup, and the team is mostly Chinese. Currently, the development of Scroll is on track: the alpha testnet is in progress, achieving 1 million unique addresses and 16 million transactions during the pre-alpha release, and the total amount of ETH in the testnet continues to grow recently. The Scroll ecosystem is not yet in full shape, and users have few projects to participate in. For example, users with strong coding skills can deploy smart contracts on Uniswap, but Goerli test tokens must be in place to access.

Figure 9. Scroll Goerli ETH amount (source: dune,@subinium)

Another Layer2 project that is worth some attention is the Base network developed by Coinbase, which was announced by Coinbase on February 23. Base is established on OPStack; the testnet has been released, and the mainnet is expected to be released in two months. In March, Base also saw far more contract deployments than Arbitrum and Optimism. The launch of Base facilitates the development of Coinbase's own decentralized applications, and in the future, combined with the account abstraction technology of Coinbase Wallet and Smart Contract Wallet, Coinbase's customers will be able to conveniently access the financial service protocols on Base.

Coinbase has announced four major directions supported by the Base ecological fund: 1) stablecoins that track inflation rates (flatcoins); 2) on-chain reputation platforms; 3) on-chain limit order book (LOB) trading platforms; 4) more secure DeFi, which includes tools that can prevent loop holes in smart contract code or protocol logic errors, and eventually on-chain insurance and insurance protocols, or any other products that can provide critical support to users in the event of a smart contract failure.

Figure 10. Unique Contracts Deployed (Source: Artemis)

Recently, in addition to the increasing heat of the Polygon's zkEVM mainnet launch, Consensys has also opened a testnet for its zkEVM project - Linea. Last week, Linea saw a record high of over 10,000 Goerli ETH flew in on a single day. There are currently over 110,000 addresses on Linea, with about 115,000 Goerli ETH deposited and over 590,000 transactions completed. Interaction on Linea is similar to that on Scroll, which mandates Goerli test tokens as a prerequisite. Currently, the applications that users can interact with are relatively limited, including hop (a cross-chain bridge), Uniswap and MES protocol (DEX), and ghostNFT (NFT).

Figure 11. Linea Goerli ETH single-day inflow (Source: Dune, @subinium)

Figure 12. Number of unique addresses per day for Linea Goerli (source: Dune, @subinium)

3. Status quo and development path of BTC Layer2

With the prevalence of the Ethereum Layer2, the Bitcoin Layer 2 network has also seen an influx of developers. The Lightning Network was one of the earlier projects: use cases for the Lightning Network include tipping on social platform, cross-border remittances, merchant payments, transfer of funds, etc. that covers most payment scenarios. Since El Salvador monetized Bitcoin in 2021, the number of payments and amount paid by BTC via the Lightning Network rose rapidly. As of March 27, 2023, the Lightning Network has a total of 18,000 nodes and nearly 80,000 payment channels (source: bitcoinvisuals).

However, the Lightning Network is incompetent to carry diverse ecological applications as that on Ethereum. Since the Taproot upgrade, developers are able to embed metadata of assets so that BTC could become a data platform, which makes the BTC Layer2 a promising concept. In February, BTC NFT, which is based on Ordinal Protocol, has introduced the BTC native ecology and ordinal NFT concept to the market. Since then, the BTC ecology is once again under the spotlight. 3 famous projects on the BTC Layers2 are briefly summarized in below:

Table 2: BTC Layer 2 Famous Projects

So far, the BTC ecosystem is still far behind Ethereum, many are optimistic about BitcoinFi for the following two reasons: (1) the decentralization of the BTC network, given that the POS nodes of the Ethereum mainnet are almost all deployed on Amazon, Microsoft and Google Cloud; (2) the Ethereum ecosystem has been excessively exploited, while the BTC ecosystem is still a blue ocean.

4. Conclusion and reflection

Arbitrum's airdrop has started a craze in Layer2, however, a series of problems are also triggered by the FOMO sentiment behind: 1. The progress of projects are usually neglected since the enthusiasm is mostly motivated by speculative activities. Compared to AI, the development path of blockchain has produced too much abnormal return along the way so that users did not indeed appreciate the technological advancement by the product, which somewhat impedes the overall development of the industry. 2. Although it is still a bear market, the game and reave between various capital holders become more intense. 3. Layer2 carries more expectations than Layer1 chains. Too much capital is accumulated on Ethereum, but ZK has seen an extremely slow pace of development, especially on zkvm. 4. The competition of airdrop is unprecedently competitive, which shrinks the profit almost to zero. Powerful projects may choose IDO, which is subjective and justified, for example, Sui.

The other projects on the Ethereum Layer2, such as Starknet, which oversees a much richer ecosystem than zkSync, is not in a hurry for token issuance; the service charge from Starkware is lucrative enough for a positive return. Layer2 projects built with zkevm as the core technology should be more promising, such as Scroll and Linea, but interactions with these projects may be slightly complicated as ETH test tokens must be purchased.

The BTC Layer2 is slow in development and meanwhile controversial. In my humble opinion, BTC could become more realistic when taking the route as payment or NFT collection. Other ecological applications will also face the obstacles of gas fee, and network congestion will also impair user experience, and the Ethereum ecosystem is difficult to be cloned.

Will the Layer2 Summer take place this year? For those enthusiastic airdrop seekers, the answer is trivial, for the cost of on-chain interaction is negligible; but in terms of timing, it is still in a bear market, the entire market and exchanges have seen outflows of stablecoins, and the liquidity of BTC and ETH is also weak, which implies that the summer of 2023 may not be a good timing for projects to initiate token offering. As a result, this summer may not be the real Layer2 Summer, and it is expected to appear next summer. The EIP-4844 upgrade is completed, on-chain applications prosper, ushering in a brand-new start of next bull market.

References：

1. https://mirror.xyz/0x30bF18409211FB048b8Abf44c27052c93cF329F2/DSAO5lW92IWKUNnwoZJwZUpB8M3A8llSdkTN-dmeYyI

2.https://consensys.net/blog/research-development/consensys-zkevm-is-ready-for-public-testnet/

3.https://Goerli.linea.build/

4. https://www.odaily.news/post/5186161

5. https://www.wu-talk.com/index.php?m=content&c=index&a=show&catid=38&id=12865

6.https://www.fx168news.com/article/150875

7.https://www.panewslab.com/zh/articledetails/ws25r0c3.html

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