The issue with L2s

And more on the state of the L2 ecosystem

Originally posted Aug 16, 2023 (tweet)

• L2 scaling comes from batching transactions and submitting the end state to ETH L1. This is an explicit trade-off between security/decentralization <> cheaper gas and higher TPS

  • ETH L1 security and decentralization remain. The L2s still benefit from this since they periodically post their state (think of it like a "save game") to the L1

• L2s don't magically smooth out demand. If there's an airdrop claim happening on Arbitrum, gas will spike on Arbitrum. Optimism existing doesn't solve the problem

  • Optimism does present an alternative to transact on but then you run in into the fragmented liquidity problem. Specifically, the Arbitrum airdrop isn’t available on Optimism

• The average L2 is overvalued, VC exit liquidity. Just as not every alt-L1 chain did well, neither will the average L2

  • This isn't to say there will be no winners in this space. L2s will likely follow the 90/10 rules -- 10% of L2s have 90% of activity

  • Are there opportunities in the public markets for enormous returns on L2s? Likely not. Why? Every VC saw the alt L1 print in '21. The L2 space is the consensus equivalent. As a result, it is now crowded beyond belief

• Airdrop farming activity is often mistaken for the elusive product market fit, but it is actually quite the opposite -- resulting in high customer acquisition cost and high churn. It is a good way to bump up metrics, allowing founders / early investors to get exit liquidity and VCs to mark up their books to their LPs

• Fragmentation of liquidity is kryptonite to the d'app developer -- not only do they have to focus on building a great product, they need to play the guessing game of which L2s will have the most traction x months from now + spend time figuring out multiple programming interfaces for the L2s they want to build on

  • Bridging as a solution? It remains that bridging is an unsolved problem from a technical / security standpoint and more importantly, from a UX PoV

• An existing issue for d'app developers is a prerequisite understanding of blockchain infrastructure. Product devs should not have to worry about the security and smart contract problems. The ongoing hacks and/or poor UX among d'apps is likely a symptom of a poor separation & abstraction. L2s make this situation worse

  • Small teams short on resources trying to move fast just aren't adept at thinking through the security / smart contract concerns on 10 different L2s + bridges

• Every major upgrade involving ETH L1 is like "fixing an airplane mid-flight". The ETH core devs have incredible rigor in their execution. However, many of these upgrades require time and are often delayed